Terrain matters, both in wine and in markets. Many of the world’s best vineyards cling to hillsides or follow natural contours (like the famous Pewsey Vale vineyard shown here).
While wine people seem to appreciate the challenges and opportunities that complicated terrain presents, economists are drawn (at least metaphorically) to tabletops. We think of the world in competitive terms and seek out “level playing fields” where our favorite theories are most applicable.
The Difference Between Vineyards and Soccer Fields
As a wine economist, I can appreciate the flat and the steep of the wine world and I have come to upon a particular irony. Wine market reforms in the European Union are intended to create a level playing field and to encourage, induce and sometimes force winegrowers to compete. The days of big subsidies and routine “emergency” distillation are gone, or will be soon, we are told.
But wine markets are as complicated as the vineyard shown above and establishing a flat competitive arena is not a simple matter. Wine markets are more like vineyards than we like to think. Tariffs, quotas, subsidies and selling regulations can be brought into line, of course, but that is just the beginning. The uneven contours of the market run very deep.
Whither/Wither the Vines?
I was reminded of this by a recent post on the Tablas Creek Vineyard Blog titled “Whither inexpensive, artisanal California wine?” (Tablas Creek is a well regarded maker of Rhone-inspired wines in California’s Paso Robles area.)
The question that the article posed was whether it made economic sense for the winery to develop a new vineyard property to produce high quality reasonably priced wine (the $20 price point plus or minus a few bucks). The answer? Probably not, but with a rather thorough cost analysis provided so you can see how the various factors (land cost, debt service, planting cost, operating cost, even opportunity cost) factor in.
It’s a really good article for anyone who thinks that the decision to start of vineyard or a winery is an easy one. (The sommelier in the video above would do well to read it!)
At the end of the day, the single most important factor was the cost of the land. Even in a depressed market, land costs create a hurdle too high to overcome in Paso Robles.
(Note: I was also struck by planting and operative cost differences associated with dry farming the vines. Much lower cost, somewhat lower yields — worth serious consideration where feasible given the growing water shortage.)
Why are vineyard land prices so high that they make the vineyards themselves uneconomic? Well, the land has many uses aside from the obvious one of growing wine grapes. Speculators might want to buy it to hold and resell, not operate for the long run. Lifestyle investors push up the price because they consider the amenity value of a vineyard home more than the economic value of its grape crop. These alternative demands can push the price above the level growers can afford.
Tilting the Playing Field
This distorts the playing field on which international wine markets operate. Land costs are a big factor for many expanding New World wineries because those costs are so recent that it is difficult to ignore them.
Land costs are often ignored for Old World producers, I am told — especially the thousands of small winegrowers who have owned their land for several generations. Ignoring the cost of capital allows them to sell for less, depressing prices (and therefore, ironically, the value of their land, too). Poor economic choices in the Languedoc tilt the playing field against Paso Robles.
But the loudest cries I have heard in this regard are from Australia, not California, where vineyards that produce grapes for bulk wine find themselves more directly in competition with those economically untutored Languedoc vignerons. The low prices that result when French winegrowers ignore the cost of vineyard capital are not the only or even the biggest source of Australia’s current crisis, but they are certainly a contributing factor.
Brilliant article. Must read for all potential vignerons here in British Columbia as there is the additional factor of punishingly high taxes on wine imposed by the provincial government.
Is there any futher talk in Washington about culling the Government run liquor stores?
Some talk, but that’s probably all it is!
“At the end of the day, the single most important factor was the cost of the land.”
One of the oldest jokes in the business: “The key to success in Napa is to make sure your grandparents bought the land.”
I wonder if the opportunity cost of many of the Languedoc-Roussillon vineyards (especially in the interior) is in fact not as high as Paso Robles coastal vineyards. The last time I looked at Paso/San Luis Obispo real estate, the “intrinsic” value of the land for second homes, retirement or hobby vineyards rendered almost any parcel under 40 acres uneconomic as a vineyard business, if you used Paso Robles average grape prices. Just as in Jason’s analysis. Do old time L-R vignerons face this kind of demand for their property?