A Sneaky Preview of a Work in Progress: “Around the World in Eighty Wines”

80daysI am busy working on the third draft of my next book, which will be released at about this time next year (lots of work left to do!). It is called Around the World in Eighty Wines and I am sure you have already guessed that it is inspired by the famous Jules Verne adventure story.

It is too soon for details, but I thought I would tease you just a bit with a pair of maps. The first map (above) is my lame attempt to plot out the route of Jules Vernes’ hero Phileas Fogg. He started in London and worked his way from east to west around the world and back to London again.

My quest, which also starts in London, is to travel the world in eighty wines, not eighty days. Each individual wine needs to represent something important about wine and the places and people and cultures that produce wine. Since there are thousands of wines in the world, you might think this is an easy task. But you would be wrong (or at least that’s the premise of the book).

Telling the story of wine and its world with just eighty bottles — that’s insane. But I think it will be fun and I promise that the readers who come with me for the ride will find much to learn, love and laugh about along with (as in the Jules Verne story) some inevitable challenges and confounding frustrations.

80winesThis map (above) is my obviously amateur attempt to plot out the route that my book seems to be taking us (books have minds of their own — sometimes it is the story not the author who calls the shots).

If you compare the two maps you will see that circumnavigating with eighty wines is obviously much more difficult than doing it in eighty days. Just look at how much more complicated our route is than Phileas Fogg’s!

My maps are terrible, but that’s OK with me because I don’t want to give away too much just yet. Maybe you can guess where the journey will take us and perhaps you can even channel some of the wines. But I guarantee some surprises even for the most clairvoyant readers!

Where would you go on this adventure? Which wines would you choose to fill the eighty spots in your wine case? What fun we will have together finding the answers and the wines to go with them!

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BBC presenter Michael Palin took on the 80 day version of this challenge in 1989. Here’s a snippet of the 7-part television series that recorded his adventures. Enjoy!

Judge & Jury Paradox: What Can Jury Duty Teach Us About Wine Markets?

juryI am out of the office for a week or two on jury duty and  the experience has unexpectedly reminded me of some important things about the world of wine.

A Jury Duty Paradox

I didn’t hesitate for a moment when the jury service summons arrived. I can find the time right now and besides it is a civic duty. I am not an expert on the law but that doesn’t seem to matter.

The idea of a jury trial is that the experts make their case and try to convince ordinary citizens like me that they are right. Some cases are decided by experts — the Supreme Court,  for example, is both judge and jury for the cases that come before it — but most justice starts (and often ends) with the judgment of a jury of peers.

I think it is a bit of a paradox, however, that I accepted the jury duty quickly but, about the same time, I declined an invitation to be on a different kind of jury — a jury of judges for an important regional wine competition. Thanks, I replied,  but I am a self-taught taster and inexperienced with these particular wines. This is a job for experts, not someone like me.

Each of these decisions makes sense on its own, but they are a bit puzzling when you put them together.Objectively, I might actually be better qualified to judge wine than a legal case. But for some reason I applied different standards in the two situations.

Why do I seem to believe that specialized knowledge is needed to serve on a large wine judging panel (where the stakes are actually very low), but expertise is not required for duty on a civil or criminal court jury where with potentially significant consequences? Seems like I’ve got my priorities backwards, doesn’t it?

The Jury of Public Opinion

But then I realized that I was missing something. Wine is actually a lot like the judicial system. While there are a few wine market cases that are decided mainly by the “Supreme Court” of experts (here I am thinking of the role of big-name critics in the en primeur market, for example), it is really the supply and demand “jury of peers” who render most verdicts.

At the end of the day for most wines, it is what the buying public thinks that matters more than the experts’ judgement. Is this a good thing? It is easy to point out that citizen juries have some disadvantages compared with expert panels, but there are advantages, too. It is important that arguments are persuasive enough to sway unbiased citizen peers. It sort of keeps us all honest, if you know what I mean.

In the same way, it is a good thing that critics don’t always reign supreme when it comes to wine markets and that most of us take their expert wine advice with a grain of salt. Wine’s most important job is to give us pleasure, as Jancis Robinson has said, and we amateurs are ourselves the best judge of that.

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(Did you notice the sneaky way I used Jancis Robinson as a kind of “expert witness” in the last paragraph?) The Wine Economist will take a brief recess until my court duties are complete. In the meantime, here’s a “judge and jury” scene from Eric Idle’s fun London Mikado production. Enjoy!

When Will Wines from Asia Hit U.S. Shelves? (Hint: They’re Already Here!)

chinasaleMost people are surprised when I talk about the growing wine industry in Asia. In working on my next book  Around the World in Eighty Wines I have sampled interesting wines from China, India, Thailand, Korea, Japan, Vietnam and even Bali. And I know there are more out there waiting to be discovered.

Why are people so surprised? Stereotypes are part of the answer — wine isn’t part of the way that we usually think of these countries. But availability is also important. We understand that wine is made in far-away New Zealand because we see it on store shelves. When will Asia wine arrive in the U.S. market?

Flying Below the Radar?

Asian wines are a little more visible in Europe and the U.K. Reports from Paris suggest that Chinese wines can be found in many places (perhaps reflecting in some way the boom in Chinese investment in Bordeaux) and Berry Bros. & Rudd, the London wine seller, proudly advertises its commitment to Chinese wine offerings. Sue and I enjoyed some lovely Thai wines from Monsoon Valley on our last visit there to London, too.

Asia wines are pretty much flying below the radar in the U.S., but they are here if you know where to look. I found a nice Korean raspberry wine at one local Asian market, for example, and a Chinese wine — a Changyu Cabernet — at another. A brand of Chinese wines crafted specifically for the U.S. market appeared a few years ago and made a bit of a splash, but now Dragon’s Hollow wines seem to be hard to find.

Not Sherlock Holmes
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You won’t have to be Sherlock Holmes to find wines from India if Rajeev Samant has his way. Samant is founder and CEO of Sula Vineyards and his wines are not just here, but are getting a good deal of attention. They were featured in the May 2016 issue of Wine Enthusiast magazine, for example. The Sula Dindori Reserve Shiraz was named an Editors’ Choice and the Sula Sauvignon Blanc, Chenin Blanc and Shiraz all received ‘Best Buy’ recommendations.

Wine was probably  not high on priorities when Samant was growing up in Mumbai, but things changed when he came to the United States to attend Stanford University and work for a while in Silicon Valley. Visits to Napa Valley and wineries like Robert Mondavi left their mark.

Coming home to India, Samant accepted the challenge of reviving a family farm near Nashik. He cast about for crops that would provide higher margins and wondered if wine grapes might thrive. With help from a California flying winemaker, he learned tropical viticulture and made the necessary winery investments.

The rest, as they say, is history, but that phrase doesn’t begin to capture the challenges that Samant has faced and overcome over the last 20 years. Sula is today India’s largest winery, with capacity to both service the growing India domestic market and also make targeted export sales.

The Mondavi of Mumbai

The Stanford University alumni magazine published an article about Samant a few years ago, calling him the “Mondavi of Mumbai,” a reference to Robert Mondavi, who was also a Stanford graduate.  It was a bit of journalistic hyperbole then, but the title is not without merit today.tasting1

Samant seems to have followed the Mondavi blueprint in many ways, both in breaking new ground in wine production and promoting his products and the region through wine tourism. The Sula Vineyard winery includes attractive hospitality facilities and hosts concerts and festivals, too.

The operation is world class. Or at least that’s what the experts at The Drinks Business believe — they presented Sula with the prize for  Best Contribution to Wine and Spirits Tourism at their London awards ceremony in May.

Once the Novelty Wears Off …

The thing about wines from unexpected places is this. People will try them once just for the fun of it, but the quality and value have to be there to earn a repeat sale. Sue and I have had an opportunity to taste the Sula lineup and we think the wines pass the test.

No one comes to this URL looking for tasting notes or point scores, so I won’t give any, but the Sauvignon Blanc was particularly noteworthy. It managed to walk a fine line. It was made in an international style — clean, crisp, balanced — but it had its own character, with a rather nice finish that wasn’t Marlborough or Napa or anywhere except Nashik. Not a me-too wine, if you know what I mean, and therefore a good addition to the wine shelf.

Sula isn’t the first wine from Asia to arrive on these shores and I expect we will see more and more of them now, especially if (as I worried in a previous column) the recent UK Brexit vote makes London a less desirable wine market and more of these wines are directed our way. If that’s what happens, I guess London’s loss is our gain.

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This brief video does a good job telling the Sula story. Watch it — I think you will be surprised!

It’s Complicated: Four Things I Think I Learned at Riesling Rendezvous 2016

rrSue and I are back from Riesling Rendezvous 2016, a gathering organized by Chateau Ste Michelle and Dr. Loosen. The conference brings together winemakers and industry leaders from the four corners of Planet Riesling for three days of tasting, discussion and debate.

I have been fortunate to attend four of the five editions of Riesling Rendezvous beginning with RR2 in 2008. Herewith a quick accounting of my takeaways from the 2016 meeting.

1. Talking around in circles

One constant of the conferences has been a tendency to talk around in circles during the formal tastings — twenty dry Rieslings on Monday and twenty more off-dry wines on Tuesday. (Twenty wines for three hundred participants each day– that, my friends, is a lot of stemware to set up, fill, dump, and replace and a lot of bottles to organize.)

Don’t get me wrong — these tastings are amazing. What a great opportunity for winemakers to benchmark their own wines and assess the state of the industry than by tasting forty of the finest Rieslings on earth and hearing from the winemakers. Truly a priceless experience.

But as the discussion unfolds I have found that the same issues seem to come up over and over again. Do you really think this is a dry Riesling (often stated as an accusation more than a question)?  The focus often shifts to the analytical data (RS, TA, PH), which is another set of circles. Then the big question: is this Old World or New World (the wines are tasted blind)? It is as if each wine must fit neatly into a set objective category and, of course, they don’t because wine isn’t really like that.

These debates, unlike the actual tasting of the wines, seem like a dead end to me. Perception of sweet and dry is individual and subjective, so what is dry to you might be sweet to someone else. The analytical data have limited significance, as Jamie Goode, who also attended the meetings, recently explained.

And it doesn’t matter to me very much if someone can guess where the wine is from — wine should not be a game of Where in the World is Carmen Sandiego. In any case, even the experts usually couldn’t answer the Old/New geography question with confidence and there were many surprises when makers and regions were revealed.

Talking around in circles doesn’t lead anywhere by itself, but I think it does serve a purpose. Like the tasting itself, it brings people together and often puts them in a frame of mind to take action either in their own winemaking or address the industry’s collective problems.

2. Actions speak louder …

The good news is that once the Riesling folks get beyond ritual circle talking they can and do accomplish quite a lot. One problem that is often noted is that many consumers think of Riesling as a sweet wine, unaware of its great diversity of styles and unable to figure out what is what. The International Riesling Foundation and its very useful Riesling  scale came out of earlier Riesling Rendezvous gatherings. Not every winery uses the scale as a back label way to communicate with wine drinkers, but those that do give consumers useful information and the confidence to try a new wine.scale-300x103

Chateau Ste Michelle uses the scale, for example, and has seen significant growth in both its Dry and sweeter Harvest Select wines that share shelf space with the big-volume off-dry Columbia Valley bottling. Consumers seem to be able to find the particular wine style they like best and come back from more. That’s progress.

The “winemaker only” sessions at Riesling Rendezvous allow for transfer of knowledge as well as a frank exchange of opinions and it seems like these discussions have had an important impact. The quality standard of Riesling has risen as technical expertise about vineyard and cellar practices have been shared. That’s progress, too.

3. Riesling’s rising tide

One impact of the rising quality tide, as noted earlier, is that even the  experts find it more difficult to tell Old World Riesling from the New World wines. At one point in the dry wine tasting, for example, Tom Barry (of Jim Barry wines) responded to a question by looking at the unidentified wine in his glass and saying simply and approvingly, “This is a nice wine from somewhere.”

The days are gone when Old World wines were typically better made than their New World competitors. Now there are well-made wines from all the regions that participated in the program. But I don’t think the wines have been reduced to a homogeneous “international style” — there is still great diversity even if there is also a trend, well documented in John Winthrop Haeger’s recent book Riesling Rediscovered, toward market-friendly drier styles.12182-110

The big moments of the earlier meetings happened when we found a stunningly good wine (and great wines still earned applause in 2016). This time most of them were stunners and the oohs and aahs were loudest when we encountered a wine that surprised  by walking a tightrope defined by terroir, vintage or technique with great success, like the memorable 2014 Tantalus Old Vines Riesling from British Columbia. The rising quality tide has served to accentuate and reward originality and authenticity, which is a good thing in my view.

4. Keep it complicated (and tell stories)

Riesling is special — it is my Desert Island wine if I have to choose one. The wines that we tasted spoke clearly and truthfully about Riesling’s progress around the world.

But as quality has increased Riesling has also become a bit more like other wines in the sense that the key factors are not simple dichotomies — Old versus New, dry versus sweet, good versus not-so-good and so on. And this is also a good thing.

Riesling Rendezvous revealed a wine world taking the next step from dichotomies to richer ways of thinking. As Ernie Loosen said at the opening session, complicated things need to be understood in complicated ways. How is this done?  People understand complicated things through the stories they tell about them.

And that’s where I see Riesling headed now. The story of what is happening today is complicated and important. It’s time to move beyond dichotomies and develop richer narratives about Riesling wine in the Loosen style that will attract and engage consumers, especially younger ones, by connecting them more persuasively to the people and places behind the wines and to their friends who they invite to share them.

Riesling Rendezvous has an important role to play in shaping those stories and helping producers get their complicated messages out. Can’t wait to see (and taste) the next chapter.

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Thanks to Chateau Ste Michelle and Dr Loosen for sponsoring Riesling Rendezvous and allowing us to attend. Thanks to everyone we met and talked with for your insights.

No Sale: Liv-Ex Report on Low Interest Rates & Bordeaux’s Dismal New Normal

bigstock-no-sale-280I have sometimes made fun of my wine collector and investor friends, saying that they are engaged in what Thorstein Veblen might have called “Conspicuous Non-Consumption.” They buy some fine wines for the purpose of not enjoying them in the glass, or so it seems at times.

Owning the wines and visiting these great wines in their climate-climate-controlled secure storage lockers is pleasure enough. Drink them? Horror! Then they’d be gone! OK, I know it is more complicated than this, but  you get the idea of the joke.

Not For Sale

Now a fascinating report from liv-ex.com, the fine wine market trading platform and research center, suggests that non-drinking of great Bordeaux wines must be considered along with another phenomenon that would make even Veblen scratch his head: producers who make a business of not selling their wines. Or not selling very much of what they produce.

livex“Final Thoughts on Bordeaux 2015” is the title of a Liv-ex report that tries to make sense of the recently concluded Bordeaux en-primeur campaign. This year’s market for 2015 wines was unusually complicated, the report indicates. Vintage quality varied greatly by sub-region, for example. And while critics gave the wines high markets overall, they didn’t do so consistently, which is important since the speculative value of a 97 score (Suckling’s overall rating of the vintage) is very much greater than 94 points (Wine Spectator‘s evaluation).

Add to this exchange rate changes in the run up to the Brexit vote and you have a recipe for confusion. But all of this doesn’t really explain the fact that seller prices were well above what the market expected and so not much wine changed hands (at least compared with a few years ago). The opportunity to re-set the market, which the Liv-ex analysts had anticipated, was apparently wasted.

High Taxes, Low Interest Rates

This wasn’t a universal situation, the report makes clear. 2015 was the best vintage ever for some producers and the market accepted the higher prices. And some producers offered necessary discounts to move their stocks. But many raised prices and seemed content with meager sales and big retained stocks. Why?

The answer, according to Liv-ex, is complicated and begins with today’s historically low interest rates, which make the cost of carrying inventory low. Fine, but don’t they need to sell wine to pay costs? Yes, Liv-ex explains, but the margins on the grand vins are very high and so most costs can be covered quickly with an initial tranche of sales. Second- and third-wines provide additional cash flow.

France’s high tax rates are also mentioned — postponing revenue is also postponing taxation (possibly until a more business-friendly administration takes office).

A Different Economic Model?

But perhaps the biggest factor, which contributes to the “new normal” that Liv-ex sees, is a change in the economic structure of the business. Profits from making and selling wine are now less important than maintaining and advancing the capital value of the chateau itself. Selling wine at a lower but very profitable market price is old news. Raising price to enhance reputation and capital value is the new strategy.

The Liv-ex study notes that

“Priorities have shifted from making sales and generating cash flow to trying to maximise prices (of the grand vin in particular) and by extension the capital value of their properties. Indeed, …  the motivation to generate profits is dwarfed by that of keeping land values high. … Owners have achieved this by releasing smaller quantities onto the market and spreading their production across a second and sometimes a third label.  … Many commentators ascribe this trend to deep pockets. It is true that most top chateaux these days are owned by billionaires and insurance companies, but this has always been the case. The main motivation for the strategy is exceptionally low interest rates.”

The combination of the factors described here combined with similar incentives for the negoçiants results in prices generally above what consumers are willing to pay, the Liv-ex study concludes. The 2015 Bordeaux market was an improvement over 2014, but this is a “low bar,” the study says. “Moreover, for as long as the current environment — distorted by low interest rates — persists, there will continue to be a standoff … ” between supply and demand.

Hotelling’s Rule Alternative

The Liv-Ex researchers study Bordeaux closely, so their theory is probably correct, but as I read the report I couldn’t help thinking of one of the most famous microeconomics theories of the first half of the 20th Century: Hotelling’s Rule, named for Harold Hotelling. Hotelling was interested in the rate at which a firm exploits a finite resource that it owned, assuming the usual (for economic theory) perfectly competitive market environment.

To over-simply, the objective is to maximize the present value of the finite resource and so the short-run production decision depends on whether market price is expected to rise faster or slower than the rate of interest. If price is expected to rise faster than the rate of interest, it paid to hold back production for the future. If price is expected to rise more slowly than the rate of interest, then selling now and investing the returns makes more sense.

Under theoretical conditions, the equilibrium occurs when market price rises at an exponential compound interest rate.

A given vintage of a particular wine is indeed a finite resource to be sold today or sold tomorrow. Interest rates today are extremely low and so only very modest expected price increases are necessary to induce a winery to hold back stocks. At zero interest, prices need only remain steady to make stock-building a viable strategy.

The incentive to retain inventory is stronger than this, in fact, because the Bordeaux fine wine market is not perfectly competitive and restricting supply of a particular classified wine raises its current price. So in fact withholding stock may allow a wine firm to have its revenue “cake” today (scarcity premium for the wine that is sold) and eat it tomorrow, too (in the form of future sales of the retained inventory at prices above the low compound interest bar).

All else being equal, when market interest rates inevitably rise, this will shift the calculation towards current sales. But in the meantime, No Sale is the name of the game.

Logical Extreme: No Sale

I don’t think this application of Hotelling’s Rule is a better explanation than the Liv-Ex analysis or inconsistent with it, but it does open up a different way of thinking — looking at the situation in terms of the present value of the income stream.

It is possible to take this way of thinking too far, however, which is what New York Times columnist Frank Bruni hilariously did earlier this year when he wrote an “April Fools” column about college admissions. He announced that Stanford University had taken selective admissions to its logical extreme … and admitted zero percent of its applicants!

Because it was now totally unattainable, Bruni reported, Stanford was even more ardently desired than before and admission applications and strategic financial donations poured in. In Bruni’s fictional world, zero admission “sales” maximized Stanford’s reputation and revenue stream. Wow!

I wonder if that would work with wine? Whatever you do, don’t let the folks at Lafite, Latour and Margaux read Bruni’s column.

Flashback Friday: What Was Revealed at Riesling Rendezvous

Riesling Rendezvous 2016 starts on Sunday with a grand tasting on the beautiful grounds of Chateau Ste Michelle in Woodinville, Washington. Riesling Rendezvous is a project of Ste Michelle and the Mosel’s Dr. Loosen that brings together people from the four corners of Planet Riesling for three days of tasting and discussion.

Riesling Rendezvous comes around every three years and this is all the excuse needed for a Flashback Friday feature that returns to a dramatic moment at the 2013 conference.

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2_rr_wineglassI’ve been writing about the problems of marketing misunderstood and misunderappreciated wines for the last couple of weeks and before I leave this subject I want to take time to give you a brief report from the Riesling Rendezvous conference hosted by Chateau Ste Michelle and Dr Loosen in Seattle last month.

Although the public face of the conference was the sell-out Sunday Grand Tasting on the grounds of the Chateau in Woodinville, the real work took place at the waterfront Bell Harbor Conference Center on Elliott Bay. What did we learn about life on Planet Riesling (as Stuart Pigott calls it)?

Small Worlds and Big

Well, its a big world after all — that’s the first insight. We tasted spectacular wines from many corners of the globe and regions of the U.S. and Canada. But it is a small world, too, as global quality standards have risen due in part, I think, to the international exchange of technical information that Riesling Rendezvous and its partner conferences have promoted. The gap between Old and New Worlds has closed dramatically.

You might have enjoyed the scene at the two formal tastings, where about 300 of us sat in front of 20 glasses each of dry Riesling on the first day and off-dry Riesling on the second. We tasted the wines blind and then, one by one, members of the expert panel commented on the wines and tried to place them in terms of origin — Old World or New? Cooler climate or warmer site? Particular time (vintage) and place?

Sometimes the experts were spot on, but I think the organizers might have selected the line up of wines to make the point that Planet Riesling is changing, so sometimes (more often than not, I believe) they were fooled. Fooled, generally, by unexpected quality from an unexpected source, which is a nice way to be surprised.

Ooohs and Aaahs

There were ooohs and aaahs, for example, when one wine was revealed to be from Elesko Winery in Slovakia. Wow, none of us saw that coming, probably because we didn’t have Slovakia on our radar. I remember tasting a few crisp, delicious white wines from this region when I taught in Prague, but beer, not wine, is probably the first thing that comes to mind (despite Austria’s obvious presence) when you think Central Europe.  Very impressive.

Tim Atkin, who moderated the off-dry tasting (John Winthrop Haeger handled the job for the dry wines) seemed to take special pleasure in revealing that a wine that had been firmly placed in the Mosel region by a panelist was in fact made by Ste Chapelle of Idaho (part of the rapidly rising Precept Wine group).

How many cases do you make, Atkin asked Marueen Johnson who represented the winery, probably imagining the sort of hillbilly Idaho wine industry that the old Muppet Movie scene suggested? Forty thousand cases came the reply. Wow, that’s lot, Atkin said obviously surprised (and that’s just Riesling — total production tops 100,000 cases for this, the largest winery in Idaho). It’s a brave new world on Planet Riesling when fine wines can come from such unexpected corners of the globe.

Two Directions at Once

Further evidence of how the Riesling map is changing was provided by two new Chateau Ste Michelle Riesling wines: Anew Riesling, which seeks to broaden the Riesling base, and Eroica Gold, which aims for a more classic style and promises to deepen interest in this category.

Anew, with its elegant bottle (which reminds me of a graceful off-the-shoulder gown) and subtle flower label seems to enter the market as a wine targeting  women, who of course make up the majority of wine drinkers and, for reasons that I’ll explain in a future post, a disproportionate part of the Riesling base. Off-dry but not too sweet,  it makes a tasty aperitif — a nice way to end of day of work and start the evening. Coming from the creators of the hugely successful 14 Hands wine brand, this is a wine that could convert Pinot Grigio drinkers to Riesling fans.

Seafood

Eroica Gold is the newest project of the Ste Michelle – Dr. Loosen partnership and it builds upon and expands the very successful Eroica Riesling line. Eroica has a hint of sweetness and can often be purchased for $20 or less (I’ve seen it at Costco for about $15) — very good value for money and often listed as one of America’s best Riesling wines.

Eroica Gold is riper, botrytis influenced, and, at $30+, more expensive. It aims to take American Riesling consumers to the next stage. Hopefully it will both communicate to American consumers what they might find in European wines and also represent the New World effectively to the Old.

Inevitable Seattle Food Porn

The conference ended with a festive reception at the Chihuly Garden, a blown glass fantasy highlighting the work of Northwest art icon Dale Chihuly, which I mention only because it gives me an excuse to include this “food porn” photo of the seafood buffet. Ahi tuna, smoked salmon, oysters, shrimp, and crab. What a treat!

Riesling may be misunderstood and there certainly are problems to be worked out, but on that warm afternoon in Seattle, with Riesling in my glass and smoked salmon on my plate, life on Planet Riesling seemed a pretty sweet place to be.

What Next? Wine Industry Mid-Year Report & Preliminary Brexit Analysis

economist-cover“What next? was the question I asked to open my report at the Unified Wine & Grape Symposium‘s “State of the Industry” session in January. Risk and uncertainty were my forecast for 2016.

Bernie, Donald, Zika, Brexit. Look out! Anything can happen, I told the audience, although I ended with a Frank Sinatra theme. It could be a “Very Good Year” if we can dodge the many potential hazards.

I wasn’t the only one who was worried. Four speakers in a session on wine industry investment were asked about their expectations for 2016. All four said that the prospects for the U.S. wine industry were bright … unless something happened to the economy.

Cautious Optimism?

We are halfway through the year and the cautious optimism expressed earlier seems justified. The U.S. remains one of the few large economies to be growing, for example, and unemployment rates are low. The June jobs report offered evidence of further recovery. But confidence in economic growth seems very fragile and the Federal Reserve has hesitated repeatedly to raise key interest rates.

One worrisome indicator is the yield curve, which tracks the difference between short- and long-term interest rates. The yield curve has become unusually flat recently, a pattern that is sometimes associated with economic slowdowns. A  recent Deutsche Bank analysis of the yield curve forecasts a 60% chance of a recession in the U.S. in the next 12 months. Yikes!

Interest rates around the world are so low (and sometimes even negative) that policy makers are worried. What if something goes wrong? How can we push interest rates even lower? Would it make any difference if we did? With fiscal policy handcuffed by political chaos in many countries and monetary policy seemingly out of ammunition, there is concern that a crisis in one country could easily spread to others.

What next? That’s still the right question, both in general and when it comes to wine. While the U.S. wine market continues to grow and attract the attention of international competitors, the Nielsen figures reported in the July 2016 issue of Wine Business Monthly suggest caution. Off-premise wine sales increased by a rate of just 1.1 percent overall in the four weeks ending April 23, 2016, indicating a possible deceleration of earlier more healthy growth.

Brexit’s Many Potential Impacts20160702_cuk400

The list of potential challenges and threats is very long but the U.K.’s vote to leave the European Union (a.k.a. Brexit) is at the top of most lists. What does Brexit mean to the wine business? The answer is that it is too soon to be sure, but here is a quick guide to what to look out for and the impact on wine.

The biggest impacts of Brexit to far have been political, with the heads of the Conservative Party and the nationalist UKIP group both resigning (for very different reasons) and Labour’s leader under sharp attack from his own members. Since British tax policy has been a significant burden on wine sales there in recent years, the uncertainty about the who will lead and where she (Theresa May will take over as Prime Minister in the next day or so) will want to go is significant for wine.

The partial political vacuum in England has seemingly increased the influence of Scotland’s talented leader Nicola Sturgeon, who suggests that Scotland might once again consider leaving the U.K. (a Scexit?) in order to remain closely linked to the E.U. Sturgeon has taken strong anti-alcohol positions, which could affect wine policy, although this is way down the list of things to worry about if Scotland breaks away and the U.K. breaks apart.

Financial markets react to news more quickly than the “real” economy and the rise of the U.S. dollar and fall of the British Pound are the most visible effects so far. The Pound has tumbled dramatically as the graph above show and some observers believe that it will continue its descent although this is far from certain.newfx

Short Run: Exchange Rate Effects

The falling Pound is important because, as this table of U.S. exports for the first quarter of 2016 from Wine by Numbers indicates, the U.K. has become a more important market for U.S. wine exports in recent years. The U.K. is second to Canada in U.S. bottled wine exports and first in the bulk wine market.

The falling Pound makes imports from the U.S. and other wine nations more expensive in the U.K. U.K. consumers are notoriously price sensitive, so the falling Pound could produce substantial wine demand impacts, especially if there is a U.K. recession, as many expect, due to falling investment (see below).

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The exchange rate effect will hurt U.S. exports to the U.K., but the biggest impacts will be on other countries that rely upon the British market to a greater extent than we do. Australia, South Africa and of course European wine producers will take a bigger hit.

The problem is compounded by the fact that supermarkets are a critical sales vector in the U.K. and much of the food they sell is imported and will therefore be more costly to source. Supermarket margins are likely to be squeezed as they attempt to pass on higher costs to consumers with uncertain economic prospects.

Don’t be surprised if this puts pressure on foreign wine suppliers to cut their wholesale prices to British supermarket buyers and thus absorb some of the exchange rate impact. That is an incentive to develop alternative markets … such as the U.S. The margin wars are just getting started.

So the wine news is not very good in the U.K., where wine prices are likely to rise, incomes could fall, wine taxes may also increase, margins come under attack, and prohibitionist forces may be strengthened. Bad news for the British who drink wine and bad news for others including U.S. producers  who want to sell it to them.

Long Run: The Vultures Circle

But the biggest impacts are likely to be the long-term structural changes that will be required if and when Britain or England or whoever is left leaves the European Union and the single market. The U.K. is an important wine center both because of the large British domestic market and also because of its essentially unrestricted access to European markets and resources. It is too soon to know how this will change for wine, but it is instructive to watch other sectors to get a sense of the dynamic.

There is already concern about disinvestment in British steel and automobile manufacturing, for example, if resources are shifted into other E.U. zones. Much of British auto production is exported and would be disadvantaged if the U.K. loses its open access to E.U. markets. Voters in Sunderland may eventually rue their strong Brexit support if Nissan moves production (and some of the current 7000 factory jobs) away from its big plant there to new homes in the E.U. heartland.

And everyone in The City, London’s big financial center, is openly concerned, too. London residents voted overwhelmingly to remain in the E.U. in part because of their desire to protect The City’s economic standing (and their jobs), which would diminish if movements of capital and skilled workers to and from the continent were restricted.

Any major disruption in The City will have widespread impacts on wine, especially the on-premise trade but not limited to that. The vultures (in the form of European cities hungry for those high-paying finance jobs) have already started circling.

I am still cautiously optimistic for the U.S. wine economy and for Britain, too, but there are lots of risks to consider. That question — What Next? — still applies.

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