Will half the wine sold in the United States in 2025 be imported? No — that’s crazy talk. But 40 percent seems very likely and 45 percent isn’t out of the question. The trend towards half imports is fairly strong even if the day we hit the 50-50 import – domestic milestone is likely to be a bit further down the road.
Not a River in Egypt
I want to talk about the forces that are driving the 50-50 trend in this post and then focus on changing U.S. strategy next week.
Imports accounted for about 35 percent of U.S. wine sales in 2012 — enough of a jump from previous years to get everyone’s attention. And even though it is easy to say that this is just a short term blip that will disappear now that 2012’s big vintage is in the tank, I think that we need to take the trend seriously
As I tell my students, Denial isn’t just a river is Egypt. It’s a good idea to face the facts. Here are five reasons for the rising import trend.
Five Steps Toward 50-50
1. The U.S. is now the world’s largest single wine market and continued growth is likely, but not guaranteed. Macroeconomic uncertainty is still high and competition from ciders and craft beers could certainly eat into wine’s expanding market. The trend is up, but lots could still go wrong.
2. Because the U.S. market is growing (and Europe continues to stagnate), we are clearly in the cross-hairs of every wine producing region on earth. Everyone wants to get into our restaurants and onto store shelves and many will succeed, which is where the 50-50 trend begins.
3. U.S. wine producers will find it difficult to meet all of the rising domestic demand, which will create an opening for imports. Yes, great efforts are being made to expand vineyard capacity to make up for the many years when such investments were uneconomic. But it might not be enough. Water availability and cost will limit expansion at some point, for example.
What economists call “opportunity cost” is a more immediate factor in some parts of California — vineyard land in some areas could be more profitably used to produce almonds and pistachios and that’s what will happen if current trends continue. The competition isn’t domestic wine versus imported wine, as you might expect, it is profits from wine grapes versus alternative crops. And wine grapes no longer have the upper hand in many cases.
4. So domestic wine demand may grow faster than domestic wine supply. Can imports fill the gap? Yes, now more than ever. The surge in global bulk wine trade over the last five years — bulk wine shipments now account for 45 percent of all New World wine trade — convincingly demonstrates that global wine production has become a tightly integrated industry. As one wine executive told me a few years ago, it’s a small world after all. Very small. And it’s smaller still today.
Pull Ahead then Draw Back
5. U.S. wine exports are likely to add to the trend, but not necessarily in the way you might suspect.
U.S. exports have risen and although this is a difficult sector to forecast because so many factors (such as exchange rates, foreign economic trends, etc.) are involved, I think growth will continue. Higher exports increase the import ratio both directly (selling the wine at home would crowd out foreign sales) and indirectly through import duty and excise tax drawbacks. (Click here to read a 2012 UC/Davis report on the drawback program.)
The wine drawback program allows a refund of 99% of import duties and excise taxes on wine for which the importer has matching exports of commercially “interchangeable” wine. Because per-unit import duty and excise tax rates are substantial compared to the price of bulk wine, use of the program is high for bulk wine imports, which compete with wine from low-price Central Valley grapes. Bulk wine exports dominated imports until 2009 and the program stimulated import growth. Now, with imports and exports roughly in balance, the program stimulates both exports and imports—leaving net trade in bulk wine roughly in balance.
— Summary of the U.C. Davis Report
Now I know what you’re thinking: who’s going to import wine and then export it — that’s nuts. Ah, but it doesn’t have to be the very same wine — you can import Moscato from Argentina, for example, and export a different variety to Britain or somewhere else and so long as certain rules are respected, the drawback will kick in. The focus is on inexpensive bulk wines, as the report suggests, because that’s where the relative impact of both duties and drawbacks is greatest.
Getting the full advantage of drawbacks requires a careful balancing of imports and exports by individual firms. If you import a lot, then you have a strong incentive to export to get the tax paybacks. And if you increase exports as I think U.S. wine producers will, you have a strong incentive to import more, too. If both imports and exports increase, as the UC/Davis report cited above suggests, then import market share rises.
How strong is the import incentive? Well, it depends on the particular case of course, but one of the speakers at the Unified cited a case where the drawback payment was almost equal to the price of the wine being imported. For a firm that was already exporting, the imported wine was nearly free. (I don’t have details of this transaction, but the source of the story is completely reliable; I wish I had been there when the deal went down!)
Bottom line. More and more of the wines on store shelves will be imports as the U.S. wine market continues to expand and evolve. What will this mean for domestic producer strategies? Come back next week to find out.
Note: this is the second of three posts where I try to make sense of what I learned at this year’s Unified Wine & Grape Symposium. Thanks to everyone I met at the Unified for giving me their views about current wine trends and future prospects.
Very interesting article.
Why do you think US producers will increase exports? To what countries should they export wine? I doubt that Europeans will buy more US wine. In fact over the last years I have always had the impression to see less US wine in stores (I live currently in Munich, Germany but lived also in Italy).
Asia might be a booming but as far as I know they are looking mostly for French and Italian wine. So I can’t see the US exporting more wine in the future.. I actually think they will export less.
You may well be correct, but I’d hesitate to generalize from what you see in the German market. Thanks for commenting!
The import of 50% by 2025 makes sense to someone from outside the US (I’m from Canada and Chile). As the consumption of wine increases in the US and as pointed out by various people in the industry that Chard and Cab Sav are the primary grapes grown now and for the foreseeable future in the US, in quantities large enough to supply the increase in demand, drinkers will turn to other varieties from France, Spain, Italy and the rest of the world or will the US growers take the giant step and diversify thier offerings, well by 2025 we shall all know.
Very interesting article. You made important points that are not on my radar screen – namely:
1. competitive products, e.g., almonds and pistachios that will limit US grape production going forward;the same with water availability;
2. The drawback program resulting in more imports and US exports.
3. Even though the US does not drink much alcohol by international standards, competing drinks – beers, ciders, etc. will limit US wine consumption growth.
A couple of observations:
1. Rather than bottling wine in heavy glass before transport, I am all in favor of bulk shipments – let the wine makers on the destination blend the wines and bottle them.
2. A couple of years ago, I tried to bring in some Malbec from Argentina. I found that to break into the US you have to be prepared to effectively give your wine away to get in. I concluded US distributors (who sadly control everything in the US) are not all that interested in more foreign wines.
3. But US wine consumers are getting more informed about wine which means they will increasingly be unwilling to pay high prices for wine. And as this happens, new world wines will get a significant advantage because of their low land and labor costs.
Am looking forward to your next piece on this subject!
In the long run, California’s cost of production will never compete with other “New World” wine producing countries. I am not familiar with the cost structure of wine from Oregon and Washington, but I can’t imagine they are more cost competitive than Southern Central Valley commodity wine. With our southern border now effectively militarized as a function of “immigration reform”, California’s commodity wine growers will have to shift rapidly to full mechanization. Hedge-pruned vines have a short life. Neither cost nor quality will be enhanced by this development.
As you said, soon it will become clear that growing grapes in the South Valley is not the highest and best use of the ground. And before too long, it will be painfully evident that large areas of the South Valley should not be farmed at all, rather, left fallow as the desert that it is. Certainly the Westland water district should be the first to become fallow due to lack of water. Better to grow wine in Algeria.
In the unlikely advent that they are built, Gov. Brown’s twin Peripheral Tunnels won’t solve the problem. In the long run, that water would be destined for Los Angeles. Australia will always have a water problem, their brand equity in the US market has been trashed by the likes of Yellowtail, and a large volume of their wine, which represents decent price to quality ratio, is being sent in bladders to quench the thirst of the British and the Chinese. I can’t help but think that Chile’s Valle Central, with abundant water, an ample labor force, and decent terroir will surpass other New World producers, along with the eastern side of the Andes in Argentina. South Africa?
Domestic winegrowers will have to continue to emphasize quality and resulting brand equity to the end of higher margins. Consider the example of districts 11 and 17, and their constant effort to increase quality and head up market. District 12 through 14 are not able to follow suit, and necessarily have focused on production yields. U.S. winegrowers must focus on revenue rather than volume. We will continue to see more and more tetra pack and traditional bag in the box lines sourced from outside of The United States. Better the plonk be grown elsewhere, in a place of with ample water, labor, and a lower cost structure.
High cost of dirt. High cost of labor. High taxes. Expensive regulatory requirements. Increasingly high cost of water as supply is taxed. Competition for resources from a huge population. Nothing new. Trans-Atlantic free trade zone in the works, tariffs can’t protect the growers. Unless you have Fred’s vertical integration, or Gallo’s dominance, or Delicato’s clever branding and good cost to quality, it’s going to be a rough road for inexpensive domestic wine.
Lots of good points here — you anticipate some of what I’m planning for the next post.
Another correspondent writes to suggest that crush capacity is an issue. He notes that
“Many of the Central Valley winery owners don’t believe that they can drastically increase their winery production capacity due to environmental and government regulations. Many seem to think that the costs would be too great to compete with overseas suppliers. Therefore, even if we had the vineyard land, we would have no place to make the wine!”
Thanks to everyone who has left a comment of sent suggestions via email.
As one of the authors of the Davis article on Drawback (which Adam Smith discusses in The Wealth of Nations!) I’d like to clarify one point. You are absolutely correct that for a firm that exports wine, the Drawback may act as an incentive to import wine by reducing the firm’s perceived cost of the imported wine. But the opposite is also true: If a firm is importing wine already, the Drawback acts as an impetus to export wine. During our research we spoke with representatives from a major California wine company who told us that the Drawback made some of their exports profitable. In reality, the Drawback encourages trade in general and only encourages export or import depending upon the specific situation of an individual firm.
Also, you might look at the presentation I gave at the AWE pre-meeting Symposium in 2010 where I looked at the potential market for wine and if California could meet the demand. See this link: http://giannini.ucop.edu/media/are-update/files/articles/v13n6_5.pdf
Thanks for making that point even clearer, Jim. And thanks for the link to your presentation — it is extremely good analysis! Much appreciated.
I understand that the underlying rationale of the drawback program is to stimulate US exports and more trade in general. It all sounds good until you account for the fact that freight costs do not reflect the CO2 costs they generate. I believe that Google and other MNCs are now adding CO2 costs to their travel expenses. The ersult is they are doing a lot less travel and m,ore Internet meetings.
Elliott: The CO2 costs associated with transport, when fully captured in the market (since we don’t really know what the actual costs are) will, of course increase the cost of transportation for all goods. But let me make three points. First, the trade in bulk wine is more efficient than moving bottled wine, and it is this trade in bulk wine that is benefiting most from Drawback. Second, the wines that the U.S. exports are not identical to the wines the U.S. imports, a point that Mike makes in his article. Third, the American Association of Wine Economists has an interesting working paper (#9) on its website estimating carbon costs associated with the global wine trade. The paper is entitled “Red, White, and Green.”
Excellent presentation Jim
Can someone point me in the direction of how I can brand my own imported wine from Israel?
This is good news for those of us who prefer imported wine from Europe. I’d like to see a little less U.S. wine in my local wine shops.
With imports on the rise, this could be good news for the U.S. consumer that likes imported wines. I imagine that the imported wines will be competing with each other based on quality/price ratio which could lead to better-priced wines.