Tolstoy wrote that happy families are all the same, but each unhappy family is dysfunctional in its own special way.  I think wine cooperatives might be the opposite of Tolstoy’s families: the unhappy ones are all the same, but each happy one succeeds in a different way.

Made when Alto Adige was Austrian.

This is not a theory, only a working hypothesis (a.k.a. educated guess) based upon some recent fieldwork. We all know the story of unhappy cooperatives (which I summarized in my last post on Invisible Wineries), but what about the successes?  Answering this question was one of my goals during our recent visit to Italy’s scenic Alto Adige wine region.

A Recipe for Failure?

If I describe the Alto Adige wine economy to you it will sound like a recipe for failure. The region is tiny in terms of wine, producing a total of only about 40 million bottles each year, which is less than one percent to Italy’s total output (and about 1/20th of Gallo’s annual output). Although I don’t have data on this, I am pretty sure that wine is not even the most important agricultural product in the region — I suspect that apples are #1.

The vineyards are tiny and ownership is impossibly fragmented. Typical vineyards are a hectare; the top 100 account for only about 5 percent of the total. And, although popular international varieties are grown here, production is dominated by indigenous varieties such as Schiava (aka Vernatsch), Lagrein and Gewurtztraminer.

Historic barrels at Elena Walch

Against all odds, the Alto Adige cooperatives are among the happy families of the wine world. Seventy percent of Alto Adige’s wine is produced by its 14 cooperative wineries. Although this wine varies in price and quality, of course, it must be said that the best of the cooperative wines rank among the best wines of their type in Italy and perhaps even the world and the cooperatives we visited were prospering.

Thumbing through my copy of the 2007 Gambero Rosso guide to the wines of Italy, for example, I encounter a long list of cooperative wines with the highest “three glasses” ratings. Here’s a list of the cooperatives so honored: Cantina Calterenzio, Cantina San Michele Appiano, Cantina Convento Murie-Gries, Cantina Santa Maddelena/Bolzano, Cantina Viticoltori di Caldaro, Cantina Valle Isarco, Cantina Terlano, and Cantina Termeno/Tramin. Several others earn ratings nearly as high. These are my happy cooperative families.

[By comparison, only about 25 percent of the wine made here comes from 37 private wine estates, which purchase grapes to supplement their estate fruit. They are small wine firms, obviously, but some have international reputations and distribution  — Tiefenbrunner, Elena Walch and Alois Lageder, for example.]

Getting the Incentives Right

Why do cooperatives work here when they seem often to fail elsewhere in Italy and Europe? My very tentative conclusions (based on visits to three cooperatives — Cantina Santa Maddelena/Bolzano, Cantina Termeno/Tramin and Cantina Valle Isarco) can be sketched this way. On one hand, the cooperatives we visited avoided the key errors in institutional set up: they require that members bring all their grapes to the cooperative rather than allowing them to keep the best and dump the rest in the cooperative vats. And they carefully monitor member wine grower practices and grape quality.

Many cooperatives are organized so that the collective cellar is the “buyer of last resort.” Members can keep the best grapes for their own production and dump the rest in the cooperative’s vat. If coop members have a choice, they will keep the best grapes for themselves (putting private interest ahead of collective interest) and the result is that after a while only the worst grapes go to the cooperative and the wines necessarily suffer both in the bottle and in the marketplace. With no alternative but to sell all their grapes to the cooperative,  however, Alto Adige vineyard owners have an interest in raising quality in both their own plots and those of other members.

(I was surprised to learn that the well known Prunotto winery, which we visited in Piedmont, was originally a cooperative, which failed when a harvest of exceptional quality produced almost no cooperative grape deliveries. All the growers apparently kept the grapes for their individual wines rather than add them to the cooperative fermentation vat. The crippled winery soon fell  into private hands. It was eventually acquired by the Antinori family, who have guided it to higher and higher levels of quality.)

Old and new at Cantina Valle Isarco

Getting the incentives right is clearly important, but this is often easier said than done. What happened to the Alto Adige cooperatives to cause them to adopt effective collective arrangements?

Every Happy Cooperative is Different

I think the unique history of the Alto Adige wine region has something to do with it. Alto Adige has been a wine growing region for thousands of years. Production seems to have peaked around 1910 when nearly 10,000 hectares (25,0000 acres) of vines covered the region, which was then part of Austria. The local industry was devastated by the combination of World War I, the Treaty of Versailles (which transferred the territory from Austria to Italy) and then the Great Depression. Alto Adige producers found that the couldn’t sell their wines in Italy (which still thought of them as the enemy) or in Austria or, well, anywhere given the Depression.

The Alto Adige wine industry collapsed except for rather limited production for local consumption. The valley floors were taken over with more profitable apple orchards; vines grew only on the steeper hillsides.

When DOC regulations were instituted in the 1960s, the lines were drawn to reflect this history. Wine grapes were limited to the hillsides, where quality was generally higher, and apples ruled the valley floors, crowding out vineyards there. Apples were still more profitable than grapes in the 1960s, so the DOC lines reflected local economic reality.

Vineyards today occupy about 5300 hectares (13,000 acres), half of the peak level and, as noted above, they are fragmented into tiny plots of surprisingly high value. The limited vineyard area combined with the success of the cooperatives and wine estates makes these small plots some of the most valuable vineyards on earth — second only to those in Champagne, one winery owner told me. When the tiny vineyards change hands so do hundreds of thousands of euro. Wow!

This is not to say that all the wine made in Alto Adige is of the highest quality. I would say that the majority of the production of the cooperatives is still simple low cost Schiava — these easy-to-identify pergola-trained vines are everywhere. But the trend is clearly up and — unlike the worst of the wineries elsewhere — there seems to be a local market for even the most modest bottlings.

Wines of the Cantina Bolzano

Lessons for Europe’s Cooperatives

What lessons can the successful cooperatives of Alto Adige provide for the struggling cooperatives elsewhere in Europe — the ones who have produced the lake of surplus wine and who are threatened by EU reforms on the wine hand and New World competition on the other?

I would like to say that it’s really simple — just adopt the sort of incentive structure that these Italian cooperatives have used so successfully. This is good advice and perhaps a place to start, but I do not think it is as simple as that. We used to talk about Path Dependency in economics. Path Dependency is the theory that “you can’t get there from here.” The road ahead depends on the path you have already taken.

It may not be possible to backtrack on the road that Europe’s unhappy family of cooperatives have taken, which has left many of them dependent upon subsidies and crisis distillation.

My working hypothesis is that Alto Adige’s unique history (and geography, too) put them in a position that  allowed them to succeed (or forced them to do so?).  The “unhappy family” cooperatives may not be able to transform themselves, but rather may be victims of their own history. Perhaps, like the Prunotto case, their future lies in private ownership.

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The photos I have inserted in this post show the contrasts we found in Alto Adige cooperatives and wine estates.

If, as I suggested in my last post, there are “invisible” wines, then it makes sense that there are also invisible wineries. Here in the U.S. for example we are accustomed to”virtual” wineries that are invisible in the physical sense. They frequently exist as brands in the portfolios of larger wine companies, but have no distinct location or particular terroir.

The wines are often sourced from many regions, wherever the price-quality mix is right, and the blends are determined by supply and demand. Some virtual wineries become durable brands, but most are like ghosts — they appear and disappear as wine buying trends or market opportunities change.

(Just now, for example, I’m noticing a lot of red blends from invisible wineries — an opportunity to dispose of surplus Syrah?)

One-Fourth of the Global Glass

Virtual wineries are an interesting phenomenon but they’re not what I want to discuss here. The invisible wineries that concern me are Europe’s cooperative wine producers.

The Oxford Companion to Wine (2005) gives a sense of the importance of European cooperatives as a production sector. Here are excerpts.

“Since 1975, more than half of the wine produced in France has been produced by co-operatives, and the total area of vineyard owned by their members is also more than half the French total”

“Nearly two in every three German vine-growers today belong to the local co-operative, although their vineyards are often a small, part-time activity which therefore, cumulatively, represent almost a third of the total German area under vine”

“In Italy, the cantina sociale is no less important, accounting for over 60 per cent of the country’s production.”

“As in Italy, co-operatives are extremely important in Iberia, where grapes are so often grown alongside other crops. According to Metcalfe and McWhirter, more than 60 per cent of each vintage was delivered to one of Spain’s 1,000 wine co-operatives or Portugal’s 300 … in the late 1980s and this has not changed substantially. However, the percentage of bottled wine sold by co-ops in Spain remains tiny—between 10 and 15 per cent of their total production, the rest being sold in bulk, with a substantial percentage going directly to distillation”

The numbers will be different today, of course; probably lower because of the effects of the EU reforms, but that’s still a lot of wine. Since France, Italy, Spain Portugal and Germany together account for roughly half of total world wine production and all of these countries have substantial cooperative sectors, I estimate that as much as a quarter of the global glass is filled by wine made by cooperatives, an incredible amount given how little attention these producers usually receive (that’s the invisibility part).

The Invisibility Cloak

One reason cooperatives are often overlooked is the “high quantity, low quality” stereotype that they wear like a Harry Potter invisibility cloak. No one much wants to think or talk about mediocre wine when excellent wine is so much more interesting.

The stereotype that cooperative wines are cheap plonk can be blamed in part on the relatively few cooperatives that have established “visible” brands that define the category. There are cooperatives that achieve real excellence (watch for my next post), but most people are likely to think of Tavernello or Riunite when they think of cooperatives, not Cantina Sociale dei Produttori del Barbaresco, for example.

Italy’s best selling brand, the ubiquitous Tavernello, is a product of the Caviro cooperative.  In the United States the most famous branded cooperative wine is probably the product of Cantina Sociale Riunite. That’s right, the sweetish fizzy Lambrusco that was for many years the best selling Italian wine in the country: Reunite on ice. So nice!

So the stereotype is understandable, but it is also unfair (as stereotypes tend to be). In fact, taking the long view, it is important to appreciate that cooperatives as a group actually improved wine and wine-making throughout Europe.

The cooperative wineries that appeared in the first three decades of the 20th century represented a vast improvement over the cellars they replaced.  Collective investment (plus government subsidies and easy farm credit terms) allowed the purchase of newer and better equipment and facilities overseen by trained professional wine-making staff. Individual winegrowers farming a hectare of two of grapes could never have produced commercial quantities of wine at the standard of the new cooperatives. No doubt about it, in their heyday cooperatives were a step up in wine quality.

They Never Would be Missed

But the cooperative form of business organization also created incentive problems. In many cases the cooperatives were compelled (by agreement or custom) to purchase whatever grapes that their members presented. When they could, members would often retain the best grapes for their own private production and turn the rest over to the cooperative. When many members did this, the quality of the collective wine necessarily fell along with its probably market price. This increased the incentive to keep the best grapes in house and to deliver masses of low quality grapes to the cooperative.

It was a race to the bottom that ended for many wineries with wine so foul its only buyer was the “buyer of last resort” — the government-subsidized “crisis” distillery. This made the cooperatives even more invisible, as Tim Atkins has noted. “If co-operatives were to disappear tomorrow — and there are plenty of people who wish they would — so would Europe’s wine surplus.” Like the people on Ko-Ko’s little list in the Mikado, they’d none of them be missed. You can’t get more invisible than that!

The stereotype of cooperative wines is very depressing but, as Atkins also notes, it is a mistake to define any group by its least attractive member. Some of the best wine in Europe is made by cooperatives and I was fortunate to taste some of it during our recent visit to Italy. What makes these cooperatives different? (And can other wineries copy their formula for success?)  Good questions. Look for answers in the next Wine Economist post.

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I have three books to recommend if you are interested in the history of European wine cooperatives. The Red & The White: The History of Wine in France and Italy in the Nineteenth Century by Leo A. Loubére (1978), The Wine Revolution in France: The Twentieth Century also by Loubére (1990) and Vintages and Traditions: An Ethnohistory of Southwest French Wine Cooperatives by Robert C. Ulin (1996). The Red & The White is one of my very favorite wine books.