Crisis distillation is back in the news. For those unfamiliar with this wine business term, crisis distillation refers to government programs that buy surplus wine and distill it into industrial alcohol. The point isn’t to increase industrial alcohol supplies but to support prices and incomes in the wine sector by taking excess supply off the market.

Crisis distillation has a long history in the European Union. You might remember that some countries authorized crisis distillation just a few years ago during the COVID-19 pandemic. Public health restrictions hit on-trade wine very hard in some places where producers rely heavily on bar and restaurant sales (a more significant factor in Europe than here in the U.S.). The crisis was short-lived, but distillation was a significant factor while it lasted.

Distillation was a persistent feature twenty years ago, however. EU price support programs encouraged the production of low-quality wines that were poorly suited to highly competitive market conditions. Distillation programs bought the surplus wine that resulted. It was an expensive way to stabilize wine-grower income and, for a while at least, it seemed like it would go on forever, getting more and more costly each year.

It was reported at the time that Britain’s Prince (now King) Charles had his Aston Martin configured to run on a grape alcohol-rich fuel blend. Plonk power! I wonder what other uses they found for the enormous quantity of distilled wine that was produced?

The distillation policy was changing when The Wine Economist first appeared back in 2007. I have inserted a column below that was first posted on Christmas Eve of that year, which I think you might find useful to read for perspective on the current situation. The combination of supply adjustment and demand-based policy reforms did in fact address the critical issues and crisis distillation slowly disappeared from the wine business lexicon.

Distillation is back, but things are very different today. This wine glut today is caused more by stagnant and falling demand than by high supply, for example. And the quality issue is different, too. Back in the 2000s, the issue was poor quality wines that were hard to sell at any price. As you can read below, one part of the solution was an effort to eliminate these wines and raise quality and marketability. These efforts (magnified by the market premiumization trend) have been relatively successful. Now Sue and I routinely encounter excellent wines from regions that only a short while ago were better known for plonk.

What was important about the policies I discussed back in 2007 was that they addressed the causes of the problems that the EU wine industry faced. Crisis distillation today treats the impact of today’s issues in terms of surplus wine, but the causes (and therefore, I suppose, the cures) have not yet been directly addressed.

Distillation buys time. Spend it wisely. Here’s that 2007 column.

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Draining Europe’s Wine Lake

Wine Economist / December 24, 2007

Europe is afloat in a sea of bad wine and the European Union agriculture ministers agreed last week to do something about it. But is it too little and too late?

Marian Fischer Boel, the EU Agriculture Minister, proposed a number of fairly radical reforms in 2006 and these were the basis of the discussion. She wanted an immediate end to distillation subsidies and a vast program to encourage small winegrowers to pull up their vines — one million acres — replacing them with other crops or, in some cases, with more marketable grape varieties. Perhaps predictably, the policies agreed last week are much weaker than the original proposals. Distillation subsidies will be phased out over five years and as many as 400,000 acres of vines will be “grubbed up.” Four hundred thousand acres seems like a lot, but given the size of the problem is it, as Wine Spectator reported, just “a good start?”

Current EU policies are as useless as the old wine barrels shown above. At the top end of the market, national and EU policies tend to stifle innovation and prevent effective market adjustment (the counter argument is that they preserve tradition and prevent destructive commercialization). I have read any number of stories about high end European winemakers who have expanded abroad in part to escape regulations on what they can produce, where, and how they can market it.

In the mid-market, where current attention is focused, EU and national regulations seem to prevent winemakers from achieving the transparency that an increasing global market requires. It is hard enough to know what’s in a bottle of wine without the complicated rules that government European wine labeling. French wines are typically “branded” by place of origin, not grape varietal, for example. Buyers who are not confident about their French geographical knowledge and the relationship between place, grape variety and wine style, are likely to choose New World wines with more easily understood characteristics. Australian wines sell well in France partly for this reason.

At the low end of the market, EU policies designed to support farm incomes have produced the famous “wine lake.” Each year the EU spends about $2 billion to buy up unsold wines and turn them into industrial alcohol. This vast reliable market for poor quality wine keeps thousands of small scale producers in business. The distillation subsidy insulates low-end producers from market forces with the result that the vineyards remain uneconomically small, the practices favor quantity over quality, and the wine, while it may reflect local tradition, finds few buyers in the marketplace. Cheap New World wine is preferred to bad Old World plonk.

The new EU policies are designed to drain the wine lake by making the wine sector more responsive to market forces. Label laws and regulations will be reformed so that European wines can be sold by regional and grape varietal just like New World wines. The distillation subsidy will be phased out over four years, with some of the subsidy funds returned to regional groups to be used in wine marketing and promotion efforts. And up to 400,000 acres of vineyards will be included in the new “vine-pull scheme.” New plantings will be allowed over time, but they will be market-driven not subsidy-driven.

The top end of the market is unlikely to be affected very much by these policies, since by definition they already have established brands and distribution channels. New label laws and subsidy reductions will have few direct effects on these producers, although they may be able to gain indirectly as vineyard consolidation takes place and Australian-style brands grow in importance. I predict that the most visible early effect of the new rules will be expansion of European brands both at home and in export markets.

The clear gainers are the mid-market producers — the wines that sell for about $12. There is great potential profit in this part of the market, which is expanding rapidly in the New World. Freed from the constraints of tradition, European winemakers should be able to compete in this market quite well. It is, however, a hotly contested market segment. European producers will need to use their new freedom well to succeed and those who choose not to adjust may suffer as the European market realigns itself.

The real problem is at the bottom of the market. Losing the distillation subsidies will hurt many producers and I don’t know how enough about the cost-benefit of the vine-pulling schemes to comment. Pulling 400,000 acres out of wine production should help stabilize the market by reducing the annual surplus, but I don’t know if it is enough and I don’t know if the incentives provided are strong enough.

Four hundred thousand acres — how big is that? Huge if you are thinking New World — Australia had just 388,000 acres of vineyards altogether in 2003 according to my Oxford Companion. But tiny if you think Old World — and of course this is an Old World problem. Italy and France had more than 2 million acres of vines each in 2003. (The Languedoc region in the south of France has 528,000 acres by itself.) Taking 400,000 acres out of production in Europe is like removing Moldova and Switzerland from the market. The effect on the regions where the vines are grubbed up will be large, but the impact on the global market is likely to be quite small — reducing the global surplus, but not eliminating it. I don’t know if it will be enough.

Will it work? Much of the discussion that I have read focuses on the size of the vine-pull scheme — 400,000 acres versus the million acres that Marian Fischer Boel proposed two years ago. Although I think the size of the grubbing up program is important, I believe that the market-driven reforms and the elimination of distillation subsidies are more important. The 1988 vine-pull scheme took over a million acres out of production but, as we see today, didn’t eliminate the surplus because of the difficulty of selling the good wines and the incentives to keep make bad ones.