Unravelling Global Politics & the Vineyard Mechanization Imperative

January 31, 2017 By Mike Veseth in new normal, technology, wine, wine markets 2 Comments

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Vineyard mechanization was a featured topic at the 2017 Unified Wine & Grape Symposium in Sacramento this year and it was a very timely choice. In case you haven’t noticed, the political framework of globalization is unraveling just now, with strong push-back against international movements of goods, services, capital, people and even information.

Restrictions on trade and immigration are much in the news in the U.S, U.K., parts of Europe, Australia and other regions. Many industries are impacted, including especially agriculture. Closing down the flow of workers means fewer resources, higher costs and greater risk.

Strategic Response?

What’s the best business strategy in the face of anti-globalization policies like immigration restrictions? The right response varies by time, place and industry. Tech giant Microsoft, for example, has responded to international worker restrictions in a number of ways including setting up a research center in Vancouver BC in order to have freer access to the international talent it needs to stay competitive. Canada remains proud of its identity as a nation of immigrants and that’s a selling point in the technology business.

Sometimes you can shift the jobs to where the workers are as in the Microsoft case, but this harder when it comes to agriculture. As farming labor becomes both scarcer in the U.S. and less secure in terms of availability, there is a natural movement towards alternatives, including mechanization as well as shifting to foreign-sourced product.

Look, Ma. No Hands!

We usually think of mechanization as a response to higher labor costs, but in this uncertain environment the imperative is also driven by concerns about availability and security.The Unified Symposium program combined with the massive trade show provided an opportunity to get up to speed on mechanization by attending sessions and touring the show floor asking questions.

For example, Gallo’s Keith Striegler moderated a session titled “Vineyard Mechanization: Moving to the ‘No Touch’ Vineyard” that surveyed state-of-the-art practices that go beyond mechanical harvesting. As the session program explains,

The labor situation in vineyards is reaching a critical stage. Growers are faced with reduced availability of labor while regulations and costs are increasing. The economic viability of sectors of the grape industry has become more challenging. Innovative growers and manufacturers are developing equipment and cultural practices to increase efficiency while maintaining or improving yield and fruit/wine composition. An important component of these efforts is to manage as many operations as possible in mature vineyards using equipment to reduce the number of “Touches” required by labor.

In other sessions Francisco Araujo moderated a Spanish language program on advanced technology in winegrowing and wine making and Steve Mcintyre and Cecilia Aguero led technical exhibit floor tours to help participants connect theory and practice.

The French Connection

Vineyard mechanization technology has improved steadily over the years from the early make-shift grape-sucking contraptions to today’s efficient machines. Most people in the industry recognize mechanization as a choice involving trade-offs and labor issues are increasingly pushing producers towards the machine.

My consumer friends sometimes seem to be shocked with the idea of machine harvest comes up — I guess it doesn’t align with their image of the noble vigneron carefully tending his row of grapes. Machines — it must be a New World thing, they tell me. They would never do it in France!

That comment is a bit ironic. A 2013 Economist article (“Bacchus to the Future“) about mechanization in French vineyards noted that …

France is the undisputed global leader in wine technology … the country has a greater demand for mechanisation than America because its agricultural wages are higher. And France’s reputation means that its elite winemakers, unlike those in other countries, do not have to worry about criticism from elite French winemakers.

Some of the cutting edge technology Sue and I saw at the trade show was made by European manufacturers, which makes sense since France, Italy and Spain together produce more than half the world’s wine (and so are a big equipment market) and, as we just saw, economic incentives to mechanize there can be strong. It would be ironic if “America First” protectionist migration policies pushed US winegrowers to purchase more foreign equipment!

Lodi Night Harvest

Sue and I had an opportunity to see the big machines at work back in 2015 when Fred and Joey Franzia invited us to observe a night harvest at one of Bronco’s Lodi vineyards. Sue took the photo at the top of this column on that visit.

Cold, dark and kinda loud — it wasn’t exactly a romantic “Sideways” vineyard harvest scene. But it sure was effective.We were impressed with the quality of the Cabernet Sauvignon grapes that were harvested.

You can bet that the grapes that go into inexpensive wines like Barefoot and Two Buck Chuck are machine harvested and mechanization employed in other vineyard activities, too. But the technology has improved to the extent that it is used to for wines that sell for a good deal more.

Invasion of the Vineyard Machines?

Are the machines coming to a vineyard near you? No, they are probably already there and, as vineyards — even those in iconic regions — are replanted or renewed, you can be sure that one factor that will be considered is the potential to maximize technological compatibility.

Hand work in the vineyards is not going to disappear and many wineries will continue to rely upon their teams of highly-skilled vineyard workers for years to come. But what we are seeing is that the business model associated with vineyard labor is changing rapidly. Technology, economics and anti-globalization politics are all part of the dynamic.

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It was great to see everyone at the Unified Symposium. Great sessions and an incredible trade show plus all the top people in U.S. wine. Here is a photo of me speaking at the State of the Industry session.

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Which Brexit? Good, Bad & Ugly Scenarios for Global Wine Markets

January 17, 2017 By Mike Veseth in Uncategorized 2 Comments

41njy9jreol As last week’s column explained, Britain’s exit from the European Union (a.k.a. Brexit) will disrupt global wine markets in a variety of ways. British wine drinkers will be affected, of course, but so will consumers and producers in other countries as global markets react, redirect, and seek out new market equilibria.

How much will the global wine market be disrupted? It depends upon exactly how Brexit unfolds. There are good, bad, and ugly scenarios (although, as in the famous Sergio Leone film, the good is really only not-so-bad compared with the bad and ugly story lines).

The British Pound’s swift fall has increased UK wine prices already, as I said last week, but this isn’t the end of higher prices. I expect tax increases to be the next shoe to drop.

Mind the Gap: Higher Wine Taxes

Why would the May government raise wine (or alcohol) taxes? Brexit is going to be expensive. Really expensive. The UK will be on the hook for as much as £50-£60 billion of obligations for EU projects that are currently in progress. These payments may be negotiated to some degree, and are sure to be a point of contention, but they won’t go away. So outflows to the EU will continue.

In the meantime, the UK government will need to staff up domestically to replace government functions currently handled by EU personnel. One estimate suggests that 30,000 new government employees will be needed. Some of the first to be hired will be the trade negotiators needed to negotiate Brexit. Incredibly, the now-defunct Cameron government that called the referendum on EU-membership had no contingency plan for Brexit or staff to implement it ready in case it passed.

Higher expenses will come on line just as the British economy weakens (growth estimates for 2017 have been halved already — from 2.2% growth down to 1.5% — although the economy help up very well in 2016), so tax increases will be needed to span the budget gap. I expect wine/alcohol taxes to be part of that package. Such taxes already account for about 50% of the cost of inexpensive supermarket wine in Britain.

Beyond the exchange rate and tax effects, the impact of Brexit on wine depends upon what kind of Brexit is finally agreed — and there is a wide range of possible agreements (and disagreements!). ap-frame-622-good-bad-ugly-sergio-leone-italian-movie-poster-1966

Too Good to Be True: Buffet Brexit

Many in the UK would prefer what I call “Buffet Brexit” where the UK government picks and chooses what it wants from the relationship (access to the Single Market, please, and special considerations for the London financial sector) and what it prefers to skip (free labor movement and immigration).

Buffet Brexit would be not-so-bad for wine. The British market would retain free access to European wine markets and also the existing system of tariffs and trade agreements with outside countries. The tax and exchange rate issues would not go away, however, but might be less severe.

Buffet Brexit is, however, the least likely outcome. Probability = zero. If the EU lets Britain dine at the buffet, other members will want the same options and benefits and the union could quickly collapse.

Not-So-Bad: BFF Brexit

I call the second option BFF (Best Friends Forever) Brexit but the more common term is “Soft Brexit.” The UK formally leaves the EU but both sides pledge to stay best friends forever and so exit expenses are minimized and spread over many years, “passporting” agreements are made to allow the UK to remain a major financial hub, and access to EU markets, perhaps through customs union membership, allows continued access to EU markets.

Precedent (the Norwegian model) suggests the Britain would have to pay for the privilege of having market access, however, and remain subject to EU regulations without a voice in setting them.

BFF Brexit might not dramatically change the UK wine market depending upon how trade relations are negotiated. UK sales would still fall, however, creating a global surplus that would spill out into other markets, increasing competition and lowering margins elsewhere.

But even BFF negotiations are problematic. In case you haven’t noticed, trade agreements these days are detailed and negotiations take a long time — some believe it will take 10 years to reach complete agreement!

Even if the UK and EU remain BFFs through all this, the uncertainty the comes with these negotiations will be bad for wine and bad, really, for most sectors the British economy. Probability of BFF Brexit = only 10 percent, mainly because the exit cost conflict is likely to turn friends into enemies. That’s what often happens when couples divorce, isn’t it? And this divorce is very complicated and there is a lot more than custody of Fido at stake.

The Bad: Break-Up Brexit

Break-up Brexit (a.k.a. “Hard Brexit”) is a more drastic option and would have important impacts on global wine. Significantly, this is the option that Prime Minister May seems to favor. Britain would cut ties to the EU, with free access to the single market replaced with WTO “most favored nation” status which, according to the Economist, is a best understood as an open can of worms and not a simple process. Britain would need to start from scratch negotiating deals with its trade partners.

Interestingly, President-elect Trump, who says he hates trade deals, has recently said he would push through a UK-US trade agreement quickly in the case of a hard Brexit. Apparently he hates the EU even more than he hates trade deals. Go figure.

The cost of wines from France, Italy, Spain and other EU countries would jump in the UK as would those from non EU countries when existing trade preferences end. Chile, which has a preferential trade agreement with the EU, would be a big loser at least until a separate trade agreement with the UK is agreed after Brexit talks are concluded.

Break-up Brexit would give UK “Leavers” what they want most — control over immigration and trade barriers — but at a very high price.The impact on the UK wine market would be very substantial and the side-effects around the wine world would be quite large as the markets adjust to the loss of British sales. The UK’s central place in the wine industry would clearly change. Probability of Break-up Brexit = 40 percent. 14565124

The Ugly: Train Wreck Brexit

Financial Times columnist Gideon Rachman argues that the most likely outcome is what he terms “Train Wreck Brexit” and I will give it a 50 percent probability, although that’s just a guess.

The train wreck occurs, in Rachman’s analysis, when EU and UK negotiators realize that they just can’t agree on critical elements of the exit deal throwing some issues into the courts (the International Court of Justice in the Hague might have to decide how much the UK owes for transition payments) and other issues into limbo. It could take years and years before the smoke completely clears and in the meantime the uncertainty would have terrible effects.

The train wreck scenario isn’t good for anyone and certainly not good for wine, which would suffer all the problems of hard Brexit plus others due to the lack of a clear path ahead. The stress and uncertainty levels would be high. Scotland might vote to exit the UK to gain some control over its destiny, which would add to the crisis.

Perhaps the threat of the train wreck will be enough to convince the parties involved to find a better solution. Interestingly, it is not clear that the Brexit process can be reversed once Article 50 is invoked. Like the doomsday machine in Dr. Strangelove, the idea seems to be to deter EU exit by making it a total and inevitable disaster. But, that doesn’t work if no one knows about doomsday plan (the Dr. Strangelove scenario) or if voters don’t believe it or just don’t care (Brexit).

Bottom Line

As you can see from my speculative analysis, the most likely options are also the most disruptive for the wine industry. Wine prices are likely to rise dramatically in the UK due to the falling Pound, rising taxes, and higher trade barriers. Price-sensitive British buyers will react accordingly, creating a surplus of wine on the global market and disruptive market arrangements generally.

EU wine producers will be hurt the most by lower UK sales and others like Chile, with its preferential access undermined, will also suffer. But the impacts will extend far beyond as the wine not sold in the UK looks for a home elsewhere in the global marketplace. Winemakers in California who never gave a thought to UK sales will find themselves the unintended victims of increased competition.

The odds are that Brexit will be a game changer for wine, but it is hard to know for sure what the new game will look like. Stay tuned.

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The Wine Economist takes a break next week — I’ll be at the Unified Wine & Grape Symposium in Sacramento moderating the “State of the Industry” session and talking about Brexit and other wine market issues. Hope to see you there!

In the meantime, enjoy this clip from Dr. Strangelove.

Brexit Means Brexit (But What Does It Mean for Global Wine Markets?)

January 10, 2017 By Mike Veseth in British wine market, economic crisis, wine, wine markets 7 Comments

“Brexit means Brexit,” according to British Prime Minister Theresa May and a host of other officials. If all goes according to plan PM May and the United Kingdom will formally begin the process of exiting the European Union in March 2017 when Article 50 of the Lisbon Treaty is invoked, starting a possibly irreversible two-year ejection-seat countdown.

Know What I Know?

But Brexit isn’t as simple as walking out the door and will require detailed negotiations on dozen of issues. No one knows what the terms of the exit agreement will be, so no one really knows what Brexit really means. Brexit means Brexit? Nonsense.

Brexit is best understood at this moment as a “known unknown” in Donald Rumsfeld’s famous taxonomy (see below) and not a “known known” as some people pretend.

Britain is sharply divided about what Brexit negotiations should seek to accomplish and in any case each of the 27 remaining members of the EU (and some regional bodies, too) will have to approve the final deal. Talk about herding cats! Who knows what the final agreement will look like?

Britain’s Central Place in Wine
How concerned should people outside the UK be about Brexit? T bottledimport he conventional wisdom is that leaving the European Union will have very substantial economic effects for the UK economy, smaller impacts on the remaining EU nations and smaller disturbances still in the rest of the world.

While this may be true in general, it is clear that there will be more widespread disruptions in several particular sectors: possibly for automobile manufacturing, for example, very probably for finance, and almost certainly for wine.

sparklingimport Britain is not yet a very important wine-producing nation (climate change might eventually change that), but it a key consumer of wine. Data from the UIV’s Wine by Numbers data project for the first nine months of 2016 show the UK’s central place in global wine markets.

The UK is #2 behind the US (and ahead of China) in terms of the value of bottled wine imports, for example.It is also #2 behind the U.S. in sparking wine imports and in second place (after Germany this time) in bulk wine imports, all rankings in value not volume terms.

This makes the UK market the #1 target for many international wine companies — even more important that the larger US market because of the US market’s complex and fragmented regulatory structures. Smaller wine exporters may find that they can get access to the entire UK market for the cost of entry into a couple of US states. Then, of course, you have to sell the wine, which is always the hardest part. bulkiimport

Plunging Pound and Rubik Cube

Any significant change in UK wine imports (or imports by any of the largest markets) has a disruptive impact on the global market for wine because, as I have written before, the global market is like a giant Rubik’s Cube. When one national market moves out of equilibrium it starts a process of changing relative prices and shifting sales that cascades through various interconnected markets until a new general equilibrium is reached.

newukbottledimport Wine by Numbers data suggest that the largest direct effects would be concentrated in the countries listed in the table above that are the leading sources of UK imports: France, Italy, Spain, Chile, New Zealand. (The table shows bottled wine imports only — bulk and sparkling imports have different distributions.) These countries are where the Rubik twists happen first.
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How and why will Brexit affect British wine imports? Well, as I said, Brexit hasn’t happened yet, but the initial impact of the Brexit vote was to cause the British Pound (GBP) to fall in value on foreign currency markets as the graph above, which shows the GBP versus USD, suggests.

The GBP’s plunge makes all imports more expensive to British buyers and inflation rates have increased in the UK as a result. The degree of exchange rate “pass through” into retail prices and the timing of the increases is different in each market. UK wine prices are on the rise.

The First Shoe Has Dropped

UK wine buyers are famously price sensitive, so wine sales will fall, setting the global market Rubik Cube spinning as sellers who are squeezed out of the changing UK market look for margins and opportunities elsewhere. Falling sales in London mean that more attention is focused on the U.S., Canada, and China sales, for example.

The exchange rate effect is only the first in a series of ways that Brexit will impact global markets. The other effects depend upon what form Brexit takes, making the “Brexit means Brexit” tautology doubly annoyingly. What are the possibilities? Come back next week for analysis.

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Here is the famous “known unknown” comment in case you missed it.

What Happened to 2016 Wine Market Predictions? (and How to Prepare for 2017)

January 4, 2017 By Mike Veseth in wine, wine markets 2 Comments

As I was putting together my notes for this year’s “State of the Industry” panel at the Unified Wine & Grape Symposium in Sacramento later this month I could not resist looking back at what I had to say at last year’s conference. dollar

2016 will be a crazy year, I told my audience. Anything can happen (and it did!). Then I suggested four trends to watch. Not predictions, exactly, but pretty close. Let’s look back and see what I said and how things turned out.

Strong Dollar Double Trouble

The big news on exchange rates in 2016 looked to be what I called the Euro-Dollar twist. European banks were set to push key interest rates to zero and below while here in the U.S. the Federal Reserve had pledged to raise interest rates. That twist in interest rates, I noted, should cause a big increase in the dollar’s value, which will encourage wine imports and make U.S. exports more difficult to sell.

The dollar’s value increased all right, creating a global dilemma because so much trade and debt is denominated in U.S. currency. Most international oil transactions are denominated in dollars, for example, so the rise in the dollar’s value on top of the rise in oil’s price is double trouble for oil-importing countries.

The dollar reached its highest level in 14 years at the end of 2016 with room to rise some more in 2017 although, as I said, anything can happen — expect lots of volatility!

The dollar’s unusual strength reminds me a little of 1971 when U.S. Treasury Secretary John Connally told his G-10 counterparts that the over-valued dollar is “our currency, but it’s your problem.” Today it is the U.S. wine industry’s problem, too, because of the way it squeezes producers here by discouraging exports and making imports cheaper.

The Fed and the European banks were part of the reason for dollar’s surge, but the British vote to leave the European Union (Brexit) and Donald Trump’s election to the U.S. presidency, along with the collapse of the Renzi government in Italy after a failed reform referendum, all contributed “big league” to the dollar boom. Brexit, Trump, and Renzi — I didn’t see that trifecta coming back in January 2016. Did you? china

China Syndrome?

Look out for China, I suggested last year. The economy is fragile and slowing and this could have major indirect impacts on the U.S. wine market, especially through exchange rate shifts that affect third-party countries such as Chile and Australia.

I was right about the Chinese economy and things look even more uncertain for 2017 because it seems possible that China’s credit bubble might spring a leak. And I was right that China could have a major impact on wine, but not the way I speculated.

The biggest international impact, as a recent Rabobank report documents, has been that China imports of wine increased significantly (and not just the cheap bulk blending wines and French first growths as in some years past).

Although it is still early days, China’s bottled wine import market is making strides, developing retail sales momentum, and attracting new buyers. China passed the U.S. in 2016 to become Australia’s largest wine export market. Amazing.

Argentina Renaissance?

Keep your eye on Argentina, I suggested last year. The Argentina wine export boom of a few years ago has plateaued because of economic policies that created inflation at home but propped up the exchange rate and discouraged export industries. The new Macri government aims to reverse these policies, which will eventually (but not necessarily immediately) make Argentina wine more competitive on export markets.

The economic reforms have gone through, creating much short-term hardship but setting the stage for renewed growth. I still think the wine industry will return to good health, but 2016 was a difficult year both because economic change takes time and because of a poor grape harvest that has increased cost and limited winemaker options.. Keep watching Argentina — maybe 2017 will be the breakout year.

Keep Out!

Finally, I was concerned about a rise in protectionist trade policies that I thought might appear. My logic was that the strong dollar would put pressure on many economies, especially developing countries, and they would raise protectionist barriers, which would affect trade in wine and many other products.

I was right about the protectionism, but wrong that developing countries would be the main problem. 2016 was a year when economic nationalism seemed to catch fire in Europe (Britain, France, Italy, Germany) and here in the United States, too.

Protectionist concerns are widespread and the prospects for new trade agreements have disappeared. 2017 will be the year when we see how far protectionist policies are pushed.

How to Prepare for the Future?

Prediction is difficult — especially about the future. So how did I do? Well, I think my instincts were right — I was looking for trouble in the right places — but my logic broke down in some cases as I (we?) were blindsided by unexpected events.

This reminds me of Boulding’s Law, which is named for the economist Kenneth Boulding, who once studied the “history of the future.” He looked back what people in the past had to say about the future. When the future finally rolled around, he said, it was seldom what the experts forecast. Surprise!

The best way to prepare for the future, he concluded, is to get ready to be surprised! Happy 2017!