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 Story
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.
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
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.