Malbec Boom … and Bust?

Malbec is hot and Argentinian producers are harvesting the benefits of a boom market. The Nielsen Scantrack multi-vector retail sales data reported in the April issue of Wine Business Monthly tell the story.

Total U.S. table market sales up 3.0 percent in dollar value over the last 12 months and up 3.5 percent in the quarter.

Argentinian wine sales (mainly but not entirely Malbec) are up 41.4 percent for the year and 36.6 percent in the last quarter.  That’s a rate of growth unmatched in the current wine league table —  much higher than other New World producers like Chile (5.2 percent growth for the year), South Africa and Australia (falling dollar volume sales).

Only New Zealand is remotely in the same sales growth ballpark with an 18 percent increase in the last quarter.

That’s Why They Call It the Dismal Science

Only an economist would look at this picture and wonder if Argentina’s Malbec boom might foreshadow a coming Malbec bust. Sorry to be so gloomly … can’t help it. That’s why they call it the dismal science. When economists see silver linings they start looking around for the dark clouds that come with them.

Personally, I hope the boom continues for a while at least. It has to come to an end some day, of course, since 30+ annual percent growth quickly compounds its way to All The Wine in the World.  Only someone named Ponzi could sell that vision of Argentina’s future.

The idea that bust follows boom isn’t just my dismal side talking, it is a persistent feature of agricultural markets. High prices are great, but when everyone expands production the result is a collapse. Low prices convince producers to invest elsewhere, so supply fails to keep up with demand the prices rise again. Rinse and repeat.

World Wine Wheel

I learned about this cycle back in Econ 101 in the form of the cobweb model of market dynamics. The Turrentine Wine Business Wheel of Fortune (click here for the pdf version) applies this idea to the U.S. wine market in particular.

The 2007 version of the wheel shown above predicted that the U.S. wine industry would be deep into the Emerging Shortage zone in 2010. This obviously didn’t take into account the Great Recession, which has created substantial surpluses of wine today, but I think the general logic still holds.

Data suggests that vineyard plantings are down (at least one major grape vine nursery has shut its doors).  My sense is that wine producers have scaled back supply to the level of current demand and that the persistent overall market surplus is mainly the overhang from previous years. Once that is dealt with (easier said than done!) and demand begins to come back, that “emerging shortage” situation could come to pass.

Having a Good Crisis

Meanwhile, Argentina is having a good crisis, at least in terms of wine, as their good value Malbecs have benefited from consumer trends to trade down and trade over.  WineSur (a great source for Argentinian wine news) reports new vineyard plantings and winery expansions, calling it “a risky supply and demand game.” Risky and high stakes.

The Catena Family group exported 12 million liters of wine in 2009, according to the article, but has expanded its capacity so that it can produce 19 million liters this year to sell in 2012.  “We are running a risk and investing according to our estimates,” chief winemakers Alejandro Vigil reports, “We also continuing buying vineyards … This year we’re planning to implant around 200 hectares … 75% of which will be implanted with Malbec.”

You’ve got to think five or six years ahead in Argentina’s dynamic Malbec market. New vineyards today, more grapes in three years or so when the vines have matured, market-ready wine a couple of years after that. I wonder what the wine market will look like then? No wonder they say that the only person crazier than a winery owner is his banker! Easy to get caught leaning the wrong way under these circumstances.

Will Argentina’s Malbec boom lead to bust? Possibly, but there is reason to think it might not. Nicolás Catena, head of one of the largest firms, is a recovering economics professor (he taught at UC/Berkeley at one point). He  came back to wine and Argentina at his family’s request.  If, as I think, skepticism is hardwired into the economist’s brain, then perhaps Catena’s big investment in the future is more cautious than it seems and will pay off handsomely.

Conventional Wisdom versus Mark Twain

The decision to expand output and exports forces a second risky choice: focus (on Malbec) or diversify? It is conventional wisdom not to put all your eggs in one basket. But Mark Twain once advised the opposite:  Put all your eggs in one basket and watch that basket!

A new article on WineSur addresses this question and the majority viewpoint seems to be with Mr. Twain but this is perhaps understandable since it is Malbec that has put Argentina on the world wine map. Malbec has established Argentina’s identity and reputation and winemakers are understandably reluctant to bet against their own success.

But it must be said that rapid export expansion focused on a single varietal does magnify the risks. I would advise Argentinian wine industry leaders to watch that basket very carefully — invest in their markets so that Malbec becomes a durable phenomenon with good length and not a short sharp boom/bust fad.

6 responses

  1. The recent Aussie Shiraz bust casts a long shadow on investing in massive expansion of Malbec plantings. The Californian experience suggests that growers normally overplant in response to successive years of double digit growth, even when the variety attains a large, stable base of demand.

    There are a couple of additional kinks to the cobweb model for the wine industry. Vineyards don’t tend to get ripped out except in severe crises (unlike the carrot example). And the wide range of quality/price tiers can make the price adjustment process quite opaque.

  2. The other aspect of a boom is that quality suffers. Supply can’t keep up with demand, so the existing supply gets ‘stepped on,’ i.e. diluted by producing more tonnage per existing acre of vineyard.
    Hence as supply catches up six or seven years down the road, consumers have begun sneering at the variety (cf: the bad-mouthing of Merlot in the movie “Sideways”) which, in turn, exacerbates the bust.

  3. Australian Shiraz tanked because of the shear amount of wine that Yellowtail and others at low price points filled the market. That hasn’t happened yet as there is no brand that has cracked 500,000 cases. Gallo is trying with both Alamos and Gascon, but not yet.

    In addition, most of the Malbec planting is happening in areas that are set up to produce great quality with relatively low risk and effort. These areas tend to be cooler then the traditional areas where Malbec was planted so the sites regulate yields. It could be argued by many that Malbec grows in Argentina better in terms of a varietal in its favorite place, then any other varietal in any other place.

    The Malbec boom is here to stay for at least another 3 – 4 years if not longer because it is nowhere near the mature part of its lifecycle like Australia hit a couple of years ago when it started contracting.

    That said, given the consolidation of the 3 tier system in the U.S. we will have a turn-over of brands as the established brands will be in a much better position to ride this boom then newcomers thanks in part to established channels of distribution.

  4. Some good comments from some serious people on this. I’d like to add that there are some certain potential parallels to the Australian Shiraz boom/bust and I have brought this up with several Argentine producers, including Laura Catena and several of her managers. Australia got branded (or did it themselves) as Shiraz=Australia or Australia=Malbec. Compare this to how Russian River Valley, Chablis, Champagne and Napa have branded themselves. Almost all wine consumers understand that a Napa Valley Cabernet Sauvignon will and should be more expensive than a California (or Lake County) Cabernet Sauvignon and that a Champagne will cost more than a Sparking wine from (oh let’s say Anderson Valley…maybe even use Roederer themselves).

    With Australia Shiraz, all three ‘tiers’ of the wine industry were complicit in the bust. The producers happily sent their wines to the critics for the big scores and labeled their wines as Shiraz, South Australia…now how many consumers know the difference between a Shiraz labeled as South Australia and one labeled as Southeastern Australia – an how many know the importance of a Barossa Valley Shiraz versus MacLaren Vale or Padthaway or Orange or Heathcote or Riverina… Now put Mr. Parker and Mr. Shanken (et al) in the mix and now you have Yellowtail (Southeastern Australia Shiraz) scoring 86-90 points and costing $9.99 for a Magnum on a wine searcher bot!

    So now how does the average wine drinker view Malbec? I have heard and seen it, they go Malbec? Argentina. How many serious wine drinkers can go: Argentina; Mendoza, Lujan de Cuyo or Tupangato or… yet the same wine drinker knows where Pomerol or St. Emilion is.

    I am a serious fan of the people, wines and country of Argentina and very much hope they can distinguish their wine from just Malbec=Argentina or Malbec=Mendoza. Otherwise I am worried for them.

  5. As Christian wrote, some great comments by some thoughtful people. The supply/demand balance captured in the Turrentine grape cycle primarily describes grape growing in a domestic (single) and somewhat insulated market before U.S. marketers began augmenting supply through movement of bulk wine around the world. Conversely, the Australian model was focused on export, and lacked a large domestic market that could absorb surplus production if export faltered. The question that comes to my mind for Argentina is how much of the new plantings can be absorbed in the domestic market if exports taper off? This necessarily raises the question of price, which in turn revolves around the worth of the Argentine peso relative to other currencies. The Argentine boom in Malbec really only began with the 2002 devaluation of the peso, which dramatically changed the price/value relationship of Argentine Malbecs. My understanding is that inflation is once again running quite high in Argentina–will we see another devaluation or simply a slow decline in the Peso, either of which would keep Argentine Malbecs quite competitive in the world market. Certainly the appreciation of the Australian dollar played a major role in their recent bust.

    Mike–enjoy Mendoza and when you get tired of drinking wine, search out a brew from the Jerome Brewery, Mendoza’s first craft brewery and produced in Potrerillos, south of Mendoza, in the mountains. The brewery was begun by Eduardo Maccari, who recently passed on at 68 years of age, but it is continued by his children. The brewer is Eduardo Jr. A great place to visit but the beers are also available in the better bars in Mendoza.

Leave a Reply