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.
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?
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.
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.
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!