How Much Has the Strong Dollar Affected U.S. Wine Imports?

euroAbout this time last year I wrote a column that analyzed how the rise in the U.S. dollar’s international exchange value was likely to impact the wine market. My conclusion was that the simple Econ 101 rule that a stronger currency leads to higher imports and lower exports might not perfectly apply to wine. I cited research from the falling dollar era to support the idea that the impacts would be different in different market segments and for different sets of countries.

So it is a year later now and enough time has passed to begin to see some impacts. What is the story so far? I’ll review the exchange rate effects and focus on imports this week. Next week’s column with analyze U.S. wine exports and try to draw some broader conclusions.

The Strong Dollar Storyoz

The U.S. dollar has increased in value dramatically over the last two years relative to several important currencies, making products from those countries potentially cheaper to U.S. buyers. The euro, for example fell from almost $1.40 to about $1.10 during this period, meaning that a €10 bottle of wine would have moved from $14 to $11 if the exchange rate effect was fully realized.

That is a substantial price shift for a bottled wine. Price changes like this can be especially important in the bulk wine market where margins are sometimes just pennies per liter and small changes can shift competitive advantage from one country to another.

The euro’s fall has a lot to do with monetary policies. The U.S. Federal Reserve is raising interest rates while the European Central Bank has pushed them into negative territory. Other currencies that are important to the wine industry such as Australia, Chile, and South Africa have also fallen but due instead to China’s slowing growth.chile peso

When China’s growth began to stumble, it affected natural resource imports from Australia, Chile and other countries, reducing the demand for their currencies and pushing the value down as the next two charts show.

The result is that both the Australian dollar and the Chilean peso are much cheaper making their wine exports relatively cheaper to dollar buyers both in the U.S. and in some other countries. This is one reason why Australian wine exports rose to their highest level since 2007.

Chilean exports and those from New Zealand and South Africa have also benefited from strong dollar/weak local currency effects. How has this affected U.S. imports from these countries?

Imports in the U.S. Market

 

US Imports

Here is a snapshot U.S. wine imports for the first three quarters of 2015 as provided by Wine by Numbers, a publication of the Unioni Italiani Vini (click on the chart to enlarge). The numbers suggest that the exchange rate changes have had some effects, but that those impacts are different by market category and country. And they also show that the exchange rate is far from the only thing that affects the wine market.

Take sparkling wine, for example. Overall imports of sparkling wines grew by more than 21 percent by volume and 19 percent by value during this period while average unit prices fell. This pattern has the Econ 101 textbook direction, but the magnitudes are much higher than you would expect if the exchange rate was the only factor. Sure enough there is something else going on — the Prosecco boom that has broadened the whole sparkling wine category. The cheaper euro certainly aided this process, but it wasn’t the whole story by any means.

Now look at bulk wine imports. As I noted before, bulk wines in the past were more sensitive to exchange rate changes than other types of imports, so looking only at the strong dollar you would expect a big increase in bulk imports. But instead we see a dramatic decrease in bulk imports (although this varies by country). Yikes! What’s going on here?

As with sparkling wine there are other factors than the exchange rate at work. U.S. producers have substantial existing  inventories of bulk wines and are less interested in imports now, even if prices are attractive. The demand for wines selling for $9 and less has been declining in the U.S. market in the last two years and large harvests in the Central Valley have reduced the need for imports substantially. The strong dollar has probably kept bulk wine imports from falling even more but foreign currencies would have to plunge dramatically to make higher bulk imports attractive.

Bulk versus Bottle

Finally, the market for bottled wine imports shows rising import volumes and falling import expenditures and prices, which is what the textbook analysis would suggest for products with an inelastic demand. The question here is why didn’t imports rise even more?  The inventory/depletion/reorder time lags in the wine market are one reason.

But a more important factor is the reality of brand strategy pricing for higher-priced bottled wine products. One lesson of the financial crisis is that once your reduce sticker price it is hard to persuade consumers to pay more again. As a result, I suspect that many import producers are absorbing some of the exchange rate changes in the form of higher margins or spending it on importer and distributor incentives rather than retail price cuts. Some of the growth we see here is from new entrants (and re-entrants) into the market (and there are many of them) who are taking advantage of the exchange rate to launch campaigns in the U.S. market.

So, as you can see, the exchange rate has been a factor, but the picture is complicated. It is even more complicated if you break it down country-by-country. Come back next week for my take on the export side of the equation.

2 responses

  1. Dear Mike:– I look forward to your views and data on wine exports.

    I promote a Tax Code US product export-seller tax benefit, the IC-DISC, and have observed customers and customer-candidates have been much affected by the exchange rate and consumer demand weakness in China and Europe.

    It seems wine exporters — outside the Jackson Family and similar worldwide businesses do not use the DISC program. I use the Ex-Im Bank customer data base to identify export sellers in other agricultural products but the wine export sellers do not use the Ex-Im Bank. So I have a “program” to promote, the Tax Code IC-DISC benefits, but cannot identify wine exporters with sufficient sales to make it worthwhile.

    The Wine Institute, funded by the Department of Agriculture, has this info but will not release it.

    The US product export of bulk wine business is also hard for me to find – and those export sellers, working on narrow pre-tax profit margins can be really, really big beneficiaries of the DISC tax benefit as one parameter for the tax benefit amount is gross sales. Large gross sales and thin profit margins mean the whole of an export seller’s taxable income can be converted from ordinary income to dividends (a 40% to 20% tax rate change) and this increases the after-tax income on those export sale by *one-third*.

    So I wonder if your next article about exports will have some reference to export data sources.

    I also invite you to contact me as with your industry knowledge and sources you are likely to help the wineries — and benefit yourself by assisting in the IC-DISC program introduction in the wine industry.

    Thanks for your time, Glenn – Miami (305) 772-2491

    On Tue, Feb 2, 2016 at 4:02 AM, The Wine Economist wrote:

    > Mike Veseth posted: “About this time last year I wrote a column that > analyzed how the rise in the U.S. dollar’s international exchange value was > likely to impact the wine market. My conclusion was that the simple Econ > 101 rule that a stronger currency leads to higher imports ” >

  2. We are seeing almost no change in MSRP on French wines we taste – static prices (though not currency as you point out) sometimes back as far as 2010 and even 2005. In some regions, prices have dropped (ex: $18 to $15ish) as they marry with new importers.
    There seems to be a big churn in importers – including those who had multiple-year relationships. In the French Southwest/Bordeaux/Loire, this may have to do with the 2013 vintage where substantially fewer US importers were interested. This, of course, left a gap and gave (required) the producer an incentive to look for someone new. The result looks to be greater focus on multiple importers for one product. Whether this is due to importer only taking small amounts or producer putting eggs in many baskets after 2013 vintage was shunned, I don’t know. Perhaps you and others can comment. I am also curious how EU/AU/CL prices will impact domestic sales in 2016. Thanks, as always, for your insight.

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