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.