Category Archives: economic crisis

Is Wine a Good Value?

August 13, 2024 By in economic crisis, Economic impact, wine, wine markets, wine price 4 Comments

These are challenging times for many (but not all) consumers. Rising housing and interest costs are squeezing budgets. Pandemic-era stimulus check bank balances are going or gone. Student loan payments, paused for a time, are back again.

Faced with tight budget constraints and rising debt costs, consumers are struggling to cut costs without sacrificing their standard of living, which means they are more and more focused on value for money. Perhaps the most obvious indicator of this trend is the surge in purchases of store-brand supermarket products at the expense of similar but more expensive name-brand products. But, as the financial news reports, the changes in buying patterns go far beyond that.

Do You Want Fries with That?

Two recent news reports suggest that consumers want value, not just lower prices. A Wall Street Journal story about casual dining restaurant chain Red Robin (see article link below), noted a two-prong strategy to get diners back. Step one was to improve food quality. Step two was to expand the number of “bottomless” offerings so that there is a sense of abundance and value, even when (like me) diners rarely ask for free extra servings. Menu prices have not declined, but business traffic is up. Value sells

The Economist newspaper’s “Schumpeter” business columnist recently compared fast-food king McDonald’s value strategy with casual Mexican chain Chipotle (see article link below). McDonald’s has struggled in the post-pandemic era and recently introduced $5 meal deals in an attempt to regain its lost reputation for good value.  Chipotle, on the other hand, has actually raised its prices. Which strategy do you think would be more successful?

Chipotle wins, at least according to the Economist columnist, who argues that Chipotle is better value despite being more than twice as expensive as the McDonald’s meal deal. Maybe, as the column notes, the demographics of the two food chains are too different to make a comparison valid. But perhaps restaurant dinners look beyond price in calculating value. Schumpeter reports having two generous meals from his Chipotle order, but not wanting to even finish the salty McDonald’s $5 meal.

Price vs Value?

If value for money is a rising priority for many consumers it is fair to ask if wine provides good value? Or is wine’s value proposition one of the reasons the industry is facing headwinds these days?

This is an awkward question because different people have different ideas of what makes something a good value and also because wine comes in so many different price/quality combinations. When I asked my university students to do an economic analysis of the wine wall at a local Safeway store, for example, they found wines as cheap as about $2 per bottle equivalent and as expensive as about $225 per fancy glass bottle.

How can you generalize when there is such wide variation? One way is to look at average cost per serving of wine and other alcoholic beverages. Every study that I have seen suggests that wine is more expensive per serving than either beer or spirits using average price data. So there is reason to believe that consumers might see a value problem with wine.

The way that wine is packaged is a value problem, too. Many consumers hesitate to open a 750 ml wine bottle for only one or two glasses because they are afraid that what’s left will quickly go bad, making the bottle purchase an even worse deal than the per-serving averages suggest. (By comparison, beer comes in single-serving containers and spirits can keep for a long time, so they don’t suffer the same wasted money problem.)

Well, you might say, if this wine is too expensive, trade down to cheaper brands. Indeed, wine can be very cheap (per bottle or per serving) if that’s what you really want. But, good value isn’t the same as cheap price, as McDonald’s problems show.

And, indeed, consumers have for several years moved away from inexpensive wines, calculating perhaps that they are not worth even the low price charged. The premiumization trend has plateaued, too, suggesting that perhaps higher price doesn’t always mean better value.

It’s in the Bag?

If consumers are feeling the budget squeeze (and many are) and looking for value in wine as they are, apparently, in fast food and casual dining, where will they go? Some will abandon wine and indeed cut ties with beverage alcohol, generally. Some will drink less but focus on quality when they do. Others will try to find the spot on the wine wall with the best value proposition. Where is that?

NIQ market data reported in Wine Business Monthly finds only a few bright spots on the wine wall, one of them is for “premium” 3-liter bag-in-box wine selling at about $5 per bottle equivalent.  Sales of wine in this format have held up pretty well while sales of glass bottle wine at about the same price point have fallen. Maybe that Red Robin sense of abundance applies here, too.

Clearly, the economic side of the wine market equation, with its focus on disposable income, consumer budget constraints, and value for money, is not the whole story when it comes to today’s challenging environment. But I am convinced that it is part of the story and one, perhaps, that should be taken more seriously. The people who are having trouble selling other consumer goods have got the message.

What is wine’s value proposition? Food (or maybe drink) for thought?

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Blake Gray’s recent Wine-Searcher.com column is one example of what a value-driven wine marketing strategy might look like.

Here are links to the articles referenced above.

Economist newspaper “What Chipotle and McDonald’s say about the consumer slowdown.”

Wall Street Journal “Bottomless Fries, Floats, and Broccoli. One restaurant chain’s bid to get diners.“

Wine Books Revisited: Lewis Perdue’s “The Wrath of Grapes”

March 26, 2024 By in book reviews, economic crisis, wine, wine markets 5 Comments

A look back at The Wrath of Grapes by Lewis Perdue (Spike Books / Avon, 1999).

Over long, hard decades, American winemakers have won the respect of connoisseurs everywhere. Many of the world’s most cherished, and expensive, wines come from the United States. But today, the unique and eccentric wine industry faces a grim set of challenges that could transform it forever: oversupply in the face of flat consumption, devastating vineyard diseases, an antiquated distribution system, fierce competition from abroad, attacks from anti-alcohol forces, and an inability to capitalize on wine’s proven health benefits.

Sound familiar? This list of problems plaguing the wine industry reads like it could be taken from today’s wine industry news headlines. But it comes instead from the back cover of a 1999 book by Lewis Perdue. What can a 25-year-old analysis of the wine industry’s woes tell us that will help us today? I couldn’t resist looking back. Here is what I found.

Is It Time Yet?

The Wrath of Grapes was one of the first books I read when I started studying the wine business. Going back to it now I am impressed with how relevant it remains today and how much it has obviously shaped my thinking about the wine industry.

The first part of Perdue’s book is a sharp critique of the American wine industry. Why don’t consumers buy more wine? Because the way that wine is marketed confuses and intimidates them. Perdue cites the famous Paul Masson ad campaign starring Orson Welles as an example. The tagline “We will sell no wine before its time” was meant to assure consumers that Paul Masson was mature and ready to drink. But, consumers might have wondered, does this mean there is a wrong time to drink this wine? Maybe I’d better stick to beer!

It might be possible to overcome the misguided marketing strategies of individual wineries through an effective generic marketing campaign, Perdue suggests. But the wine industry is too dysfunctional to do anything important. Leadership and followership both fail at critical points.  Vested interests focus on share of the wine market pie, so little is done to grow it.

I am not enough of an insider to evaluate Perdue’s critique of industry politics either then or now, but he pulls no punches in casting blame. Only one industry group, Women for WineSense, is praised for their effectiveness.

An even bigger problem than marketing is the lack of a cohesive strategy to address concerns about wine and health and the neo-prohibitionists who push for policies to reduce and restrict wine consumption. If nothing is done on this front, Perdue asserts, falling consumption is assured. Well, nothing much was done and here we are.

Love, Not Money

Part II is titled “Investing in Wine” and it takes the topic broadly, offering advice and analysis for those thinking of investing in a vineyard or winery, investing in fine wines for resale, and investing in the wine business through common stocks. Is investing in wine a matter of love or money? I suspect that most people would say “both,” but Perdue warns that you’d better be doing it for love because there are other ways to earn similar returns with less risk.

I think this was the first time I had seen an economic breakdown of a bottle of wine. Where does the money go to produce the wine (hint: grapes are not the biggest cost)? And how is the final price distributed between producer, distributor, and final seller? The specific numbers are different today, of course, but the fundamental analysis remains shockingly relevant.

Perdue’s hard-nosed analysis of wine-related common stock opportunities circa 1999 makes interesting reading. Coming from a Silicon Valley venture capital background, he is very objective about business models and risks and, interestingly, pays some attention to the perks such as wine discounts or special events that some of the wine companies offer their shareholders. He sees the perks as part of the “love” you need to get out of your wine investment to compensate for the risky return.

But perks aren’t everything. If you read Perdue’s analysis of the Robert Mondavi company, for example, you can appreciate the troubles that were building in its business model and why it got into such trouble a few years later. You’d need a lot of discounts on Opus One to compensate for the underlying economic woes.

There are three useful appendices. The first explains financial ratios, which anyone needs to understand to make sound investment choices, but not everyone thinks about when contemplating wine. Vineyard finance is the second topic, explored through a simple example of the sort of financial analysis that an intelligent investor should consider. The book concludes with a brief statement about wine and health.

Back to the Future?

Although some parts of The Wrath Grapes have naturally aged better than others, the book’s overall argument remains timely and relevant. Most of the big problems that Perdue wanted us to take seriously 25 years ago remain at the top of the agenda. No wonder the book is still in print.

If you haven’t read The Wrath of Grapes in a while, it’s time to look back at what Lewis Perdue was saying 25 years ago so that you can look ahead with more insight.

The Tax Man, Carl Lewis, and the Paradox of South African Wine

March 19, 2024 By in economic crisis, Economic impact, South Africa, wine, wine markets 4 Comments

It was an unlikely pairing. Thirty years ago the legendary Olympic champion Carl Lewis became the face of Pirelli, the Italian tire maker. “Power is nothing without control,” the advertisements proclaimed.

This photo of sprinter Lewis in high heels made the point very well (as did a spectacular television commercial). Power without a strong foundation isn’t very useful. It is important to assess situations from the ground up (where the “rubber meets the road”) rather than simply top-down.

The Tax Man Cometh

What prompts my interest in vintage tire advertisements?  I am inspired by recent reports from South Africa. The wine industry there, as I will explain below, is robust and resilient, and yet fragile. However, the South African government doesn’t seem to appreciate the situation’s complexity and has recently announced an excise increase of 7.17% on still wine, 7.17% on sparkling wine, and 6.67% on brandy. This is a harsh blow to an economically important but fragile industry just as it moves to recover more fully from the dismal pandemic days.

It is worth noting that South Africa is not the only wine region facing detrimental tax or other policies. One survey of winegrowers in Ontario, for example, lists discriminatory tax treatment as one of the top two or three headwinds and I know other regions with similar concerns.

It seems to me that the officials behind this tax fail to appreciate the wine industry’s double nature. It is robust, resilient, and an important economic driver of the national and many local economies, which is something to be protected. But, at the same time, it is fragile because the foundation of the wine industry is farming, and especially in South Africa, that is a difficult business.

Read the Report!

I recommend that government officials study a recent report issued by South Africa Wine titled “Macro-Economic Impact of the Wine Industry on the South African Economy.” The report traces the economic impact of the wine and brandy industry on the South African economy, making the case that it is an effective driver of economic growth.

The wine and brandy industry’s extensive value chain, which is deeply rooted in agriculture, has, over the past 365 years, played a significant role in South Africa’s cultural and economic history. Its distinct role within the South African alcohol industry landscape includes an extensive rural footprint, tourism, foreign revenue via exports of wine to more than 120 countries, and the associated brand reputation for the country.

You would not think it necessary to make such a case, but the industry suffered a variety of headwinds in recent years, including devastating drought and covid-related policies that banned the domestic sale of alcoholic beverages for long periods and also limited port access that is necessary for export shipments. What a nightmare!

Unsustainable Foundations

So it is important to dig down into the report to assess the condition on the ground, which in this case means the wine growers. The news is not good.  Winegrape growers in South Africa, as in many places including the United States, have been hit with rising costs and limited opportunities for price increases. Margins have been squeezed like a fragile grape.

This chart from the report shows how quickly a fragile situation has worsened. In 2018 only 20 percent of grape farmers reported profits high enough to justify continued investment. Fifty-two percent of growers reported unsustainably low profits. Twenty-nine percent experienced losses. This is a picture of an industry on the edge.

Fast forward to the 2022 vintage and you can see that conditions deteriorated significantly. Only 12 percent of growers experienced sustainable profits while nearly a third reported losses and almost half unsustainably low net revenues. It is no wonder that hectares under vine have been in steady decline.

The Curse of Stein’s Law

In the past, the report explains, winegrowers have responded to higher costs by pushing up vineyard yields rather than through price increases. This strategy is difficult to sustain, however, and Stein’s Law holds that if something cannot go on forever, it will eventually stop. The steadily falling quantity of producing vineyard land indicates Stein’s Law at work.

So what should the government do when an economically important industry, with substantial domestic and international backward and forward linkages, is in such a fragile condition? Raising taxes on its products doesn’t seem like the obvious answer. Some may argue that the tax increases are intended to reduce alcohol abuse, which they might do, except for the existence of robust illegal alcohol markets, which would likely expand as the regulated market declines.

The South African wine industry has many problems, just like other wine regions today, but it has one thing going for it: professional organizations like Sound Africa Wine that provide unusually strong data and analysis that could and should help guide public policy. Now it needs government officials to wake up and understand that the wine industry is a powerful but fragile engine for growth and change and not just a conveniennt source of tax revenue.

Got Bacon? What Can the Wine Industry Learn from Pork’s Problems?

February 20, 2024 By in economic crisis, Uncategorized, wine, wine history, wine markets 9 Comments

The outline of the Wall Street Journal story was very familiar to anyone who has followed wine industry trends in recent years. The product had a long history and was well-loved in America and around the world. But the industry itself was in crisis. Demand was down. Part of the problem was health concerns and part of it was price (its retail price was higher than the most popular substitute). Worse of all, younger consumers were turning away.

Production costs kept rising and rising, but retail prices not so much (or at all, in some cases) eating margins and leaving red ink stains on the account books where black ink profits once regularly appeared.

It all had a familiar ring, except (here’s the punch line), the story was about pork, not wine. “We’re not eating enough bacon, and that’s a problem for the economy,” the headline proclaimed.

Does misery like company? If so, I guess I now feel solidarity with pork producers. Or is it a case of miserable company? I don’t know. But I decided to dive into the article, looking for lessons from the pork crisis.

Lesson One: Re-Education is Difficult.

Wine has a health problem. Moderate wine consumption can be part of a healthy diet (the French Paradox effect), but alcohol itself has many detrimental effects. If you define wine by its alcoholic content, then that’s a problem for health-conscious consumers, who are increasingly drawn to no- and low-alcohol wine (and to the not-wine alternative, too). A challenge for the wine industry is to tell a positive story in the face of the negative anti-alcohol headwinds.

Once upon a time, pork had serious health issues, too. Pork was fatty, which discouraged health-conscious consumers, and needed to be very thoroughly cooked (165-170 degrees) to avoid the disease trichinosis. Changes in production methods over the years have created a healthier product, which is leaner and safer to eat without over-cooking. Pork has become so lean that foodies now seek out fattier heritage breeds with more flavor.

The facts about pork have changed, but consumer attitudes have not changed with them. It isn’t easy to re-educate consumers once the conventional wisdom has been established. It will be hard for wine to change the narrative, too.

Lesson Two: The Perils of Generic Marketing

What would a generic marketing campaign for wine look like? I don’t know (I’m not sure “Got Wine?” would do the trick), but a lesson that we can learn from the pork industry is to be careful what you say and how you say it.

“Pork, the other white meat” was a popular ad campaign that raised awareness of pork products and created an opportunity to establish pork as an alternative to low-fat chicken.  The good news is that it might well have prevented a steep decline in pork consumption in the past.

But, the WSJ article reports, the campaign seems to have backfired in the current environment because, if you compare pork to chicken, the chicken is likely to be cheaper — and that matters a lot.

The WSJ article quotes one stakeholder who suggests maybe they should have tried to position pork as a cheaper alternative to beef rather than the new chicken. But, as the graph shows, beef consumption is falling, so maybe that’s not the optimal strategy. The current campaign is “real pork makes a real difference.” Really? Is the goal to lure people away from fake pork? Or is it to discourage chefs from using chicken instead of pork in traditional recipes? Not sure.

Wine needs to take the pork experience into account and remember that wine is more expensive on a per-serving basis than beer or spirits (on average) and a moderate wine consumption message, even if effective, can’t change that.

Lesson Three: Innovation

I was especially interested in the WSJ’s report on how pork producers are innovating to try to stimulate demand. Innovate? How can you innovate something as basic as bacon or a pork chop?

As noted above, some farmers are going back to the future by re-introducing heritage pig varieties that have more fat and flavor than the lean pork products that have taken over the market in recent years. Foodies will look for (and pay for) heritage breeds.

Bacon is a favorite pork product and there are lots of different styles in the supermarket meat case. Smithfield is innovating by making bacon that is more convenient to use, needing just 10 minutes in the oven to crisp up rather than the usual 20 because of special processing before packing. Quick bacon.

My favorite innovation idea (I like the idea, but I haven’t tried the product yet) is Tyson Food’s “pork griller steak.” This is a new cut of pork that Tyson seasons and marinates. It is designed to be flavorful and easy to cook. You can grill it, broil it, pan fry it, or even cook it in an air-fryer so long as you stop cooking when the internal temperature reaches 145 degrees. Note that the recommended temp is well below the old cooking standard for pork, producing a result that is more tender and juicy.

The Folly of Complacency

Some people may be uncomfortable with this wave of innovation in the pork business, but it seems to me that change is nothing new for bacon, ham, and chops. A lot of new ideas will need to be tried to discover the ones that make a difference.

The same is true in the wine business. As a traditionalist, I am not always persuaded by the new wine ideas I see on the shelves. But, as I said recently in a public radio interview with reporter Tina Caputo, “If we simply make the same wine, packaging it the same way, sell it with the same message, we will get the same result.”

The Road Ahead: Lessons from the Unified Symposium

February 6, 2024 By in economic crisis, Unified Wine & Grape Symposium, wine, wine markets 7 Comments

What’s the state of the wine industry? Here are four observations inspired by things I learned at the Unified Wine & Grape Symposium‘s State of the Industry session and in hallway conversations. The theme, if there is one, is a spin on Robert Frost’s poem about the road not taken. The industry needs to choose a direction. Follow the well-trodden path that got us where we are or break away? Frost thought the choice was significant. What do you think?

One: The wine industry has a problem. But it isn’t just wine’s problem.

Everyone knows that the volume of wine sold has declined in recent years, which is a serious problem for many people in the wine value chain. Not every category has suffered equally and there are a few areas of growth. The picture improves a little if we look at the value of wine sold, but this mainly highlights segments where increases in average price have outpaced declining volume.

For many years the industry was built on an expectation of continued growth and it is difficult to re-gear for a declining market with high inventories from previous vintages that cloud prospects for the near future.

Some people were shocked when Jeff Bitter, President of Allied Grape Growers, called for the quick removal of 30,000 net acres of vineyards in California in order to bring supply into line with demand.  Jeff has been saying this for several years and I think his message is finally starting to sink in.

What’s behind the headwinds blowing against the wine industry? We used to blame spirits and craft beer. The story was that consumers were shifting to beer and cocktails in preference to wine. But that’s not true in general today. Both beer and spirits have falling overall demand, too.

Wine’s problem is not just a wine problem, it is a beverage alcohol problem. The situation is so bad that even once-hot tequila is cooling off. The Financial Times recently reported that some agave farmers in Mexico are balking at requests to replant for another harvest cycle. Maybe demand will be there when the plants mature. But maybe not, especially if U.S. demand tumbles (markets in other countries are not large enough to absorb a big U.S. surplus).

Two: We are not alone.

OIV data show that global consumption has fallen after a decade of stagnation. The soft wine market is just about everywhere you look, but especially noteworthy in the U.S. and China. I highlight the U.S. because it is the world’s largest consumer of wine (and still, many would argue, the best market around because American wine declines are relatively small compared to some others).

China? Well, that’s my own addition to the list. Chinese wine consumption increased dramatically before the pandemic struck and many imagined that its growth would be enough to offset declining sales elsewhere.

But then came covid, which crippled critical on-premise sales in China, and then the trade wars and tensions that have followed. The Chinese market is opening up again now (Australia has its fingers crossed that Aussie wine will be granted favorable access to China soon), but the market there has changed, and lost its dynamism. China after covid is not the growth market for wine that some counted on. It’s a small world after all and wine’s share of it has shrunk.

Three: The prisoners’ dilemma.

It is one thing to say that the wine industry needs to become smaller, more efficient, and more profitable (and it does!), but how do you do that when there are thousands of growers and wineries each protecting their own interests?  There is an element of the prisoners’ dilemma problem here. Collectively, the ideal strategy would be for many winegrowers to reduce vine acreage and take surplus grapes off the market. That would help everyone gain some control over margins.

But collective interests and individual incentives aren’t aligned. If everyone else is going to pull up their unprofitable vineyards, then it is in my interest to keep vines in the ground and gain from the higher prices while they suffer from smaller production. The private incentive encourages everyone to keep production high and the problem continues.

How do you overcome the prisoners’ dilemma created by this conflict of collective versus individual interests? Well, one solution is to play and replay the game over and over until the participants learn that cooperation is a better solution (even then, the “defect” strategy is always a problem). Or some sort of collective action mechanism can be employed, which is one of the things that the Spanish industry’s strategic plan hopes to achieve.

Four: A tale of two futures.

Susana Garcia Dolla, the director general of Spain’s broadest wine industry organization, framed the question in terms of two cycles, one a vicious cycle that reduces the wine industry through crisis and shake-out, and another, a virtuous cycle, that moves ahead toward sustainable profit by design.

Lots of forces will shape the wine industry’s future and it is impossible to expect any predictions to bear up over time. That said, it seems to me that the facts above suggest that we have reached a fork in the road and need to take the right path.

One road leads … well, it leads nowhere in terms of the future of wine. And it seems like the road we are on right now. This road blames consumers for the soft market and fails to confront over-supply in any coordinated way. The industry will lurch along until a critical point comes along, forcing action.

The other road leads to a smaller, more efficient, and profitable wine industry through timely and intentional actions.  The process is painful but follows Machiavelli’s advice to give the bad news all at once and the good news a little at a time. Which road will be taken for wine? And what’s the road not taken?

The Case for Cautious Optimism about the Future of Wine

January 30, 2024 By in economic crisis, Unified Wine & Grape Symposium, wine, wine markets 4 Comments

Sue and I have just returned from the 30th edition of the Unified Wine & Grape Symposium in Sacramento. The Unified is the largest wine industry gathering in the Western Hemisphere with about 12,000 attendees over three days and 900 trade show exhibitors. If you want to take the pulse of the American wine industry, this is the place to go.

So how is the industry’s health? Well, if you go by the economic indicators such as sales trends (more about this next week), the patient is in bad shape.  There was bad news in the wine press and the expectation that more bad news was coming (it did).

Economic Pessimism

The situation reminded me of an essay called “The Economic Possibilities of Our Grandchildren” that the English economist John Maynard Keynes wrote in the depths of the Great Depression. “We are suffering just now from a bad attack of economic pessimism,” the essay began. “It is common to hear people say that the epoch of enormous economic progress … is over; that the rapid improvement in the standard of life is now going to slow down …

“I believe that this is a wildly mistaken interpretation of what is happening to us. We are suffering not from the rheumatics of old age, but from the growing pains of over-rapid changes, from the painfulness of readjustment from one economic period to another.”

I quote these lines here because I think that we are today also suffering from an attack of economic pessimism, both in the wine industry and more generally. We tend to look down and to look back, not ahead, and we avert our eyes from good news (about inflation or unemployment or, occasionally, politics) when it unexpectedly appears.

The only bright lights we allow ourselves to see (the Barbie movie, Taylor Swift) are ridiculously popular because of their novelty and scarcity. We look like the drab men and women of Keynes’s day. How sad.

I am part of this environment, of course, and because I am an economist and therefore a licensed deliverer of bad news, I am also part of the problem. I expected to meet a pessimistic wine industry at the Unified Symposium and that’s what I found. But only at first.

Cautious Optimism

Gloom and doom. But then in casual conversations Sue and I discovered a streak of cautious optimism that we didn’t expect. A friend we met at the registration counter who is involved in winery recruiting said she felt that hiring had turned a corner. Another friend who works in bottle closures was optimistic, too. He accepted the current problems but saw a path forward and was moving with confidence. This was not the first crisis he’d seen and he didn’t think it would be the last. Talking with him was a moment of quiet inspiration.

One winery owner was frustrated by all the bad news in the air because she worried about self-fulfilling prophecies. If we think the future will be dark and act accordingly then it will indeed be dark. Someone must turn on a light or at least acknowledge that the light switch is still on the wall.

Sue was working the trade show floor while I was moderating the State of the Industry session. She reported that it seemed like lots of business was getting done. There was a record number of trade show exhibitors and thousands of people in the aisles shopping for equipment and services or checking out what’s new. It was not a dismal scene, she told me. And it was still buzzing when I got there a couple of hours later after the press conference, even though a lot of people were at lunch.

Don’t Look Back!

What should we make of this uncomfortable combination of bad news and hopeful sentiments? In my remarks to the State of the Industry audience, I invoked the great American philosopher (and baseball pitcher) Satchel Paige, who warned, “Don’t look back, something might be gaining on you.”

How you see the future depends upon how you look at the past, which is your reference point. And that’s a dangerous thing because the past can be different depending upon your viewpoint.

If you look at today’s wine industry from the viewpoint of 2008 (as I discussed in last week’s Wine Economist), then you can’t help but be disappointed. The continued rapid growth that the industry expected then has failed to materialize in general. However, there are obvious market segments (thank you, New Zealand Sauvignon Blanc) that have grown beyond expectations.

But if instead, you look back 30 years, to the very first Unified Symposium, then your perspective is quite different. Seen from 1994, the wine market of 2024 is almost unimaginably prosperous. Wine has grown in every dimension: quantity, value, quality, number of producers and brands, global reach. It’s not where we thought we’d be back in 2008, but it is pretty damned amazing from the 1990s perspective.

The fact that the wine industry today is somewhere between the smaller market that they expected in 1994 and the much bigger one projected in 2008 should give us pause. There is a path forward from here; it is not without costs, challenges, and risk, but it is there for those who take it.

Don’t get me wrong. I am not denying the seriousness of the problems wine faces. Remember that I’ve been the frequent bearer of bad news for several years now. But cautious optimism is justified. The road ahead? Come back next week for more thoughts.

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Come back next week for more about what we learned at the Unified Symposium. In the meantime, follow this link for a pdf of Keynes’s essay.

The “Uncork Ontario” Regional Wine Cluster Strategy

January 16, 2024 By in Canada, economic crisis, Economic impact, wine, wine markets 7 Comments

Although the U.S. economy performed surprisingly well in 2023, the wine business news columns were filled with gloom and doom as wine demand lagged behind the growth needed to sustain the industry. The problems affected the wine sector at all levels, but were most obvious in the vineyards. I’ve heard reports from all aroound the world of vineyards simply abandoned for lack of a market for the grapes or grubbed up and repurposed to a more profitable use.

2023 was a bad year for wine, but that’s not the whole story. Stagnant and falling demand has been here for more than ten years. And wine isn’t alone. I track the beer and luxury goods industries because I think they can tell us something about trends affecting wine. Beer is down, too. And all but the very top of the luxury goods market is suddenly stalled after a prosperous pandemic period.

There is one corner of the wine world where optimism can be found, however. Not the giddy optimism that comes when you don’t really appreciate how challenging conditions are, but the realistic optimism that comes when you have studied the problems and devised a plan to turn things around. Where is this magical place? Welcome to Ontario, Canada, and the dynamic Niagara wine region.

Uncork Ontario

The Canadian wine industry is concentrated in Ontario and British Columbia and has not been immune to the economic problems (declining demand) and natural crises (widespread wildfire damage in British Columbia) that face winegrowers all over the world. Significantly, they have decided that they need to try to take control of the situation to the extent possible. The result is a strategic plan called Uncork Ontario that is designed not just to stabilize the wine sector but to harness it into an engine of economic growth.

The first step in this process seems to have been the recognition that the various players could not achieve much on their own. They needed to work together to get traction. So an alliance of sorts was formed that combines Ontario Craft Wineries, an association of about 100 small- and medium-size wineries, and Wine Growers of Ontario, a broad group that includes some of the largest wineries, including the producers of that distinctive Canada product, IDB wine (for International-Domestic Blend).

This kind of alliance is not common because, while all the firms are in the same business and so share many broad interests, they often focus more on narrow strategies such as taking market share from each other instead of growing the overall market pie. Add to this the usual tension between larger firms that focus on commercial products versus smaller firms that want to see resources used to support their part of the market, and you can see why cooperation can be very hard to achieve.

The third partner is the Tourism Partnership of Niagara because wine tourism is an important economic force in a region located so close to major population centers in both Canada and the U.S. Tourism and wine are best friends, but cooperation is often limited because each group would prefer to focus on its narrow interests. An important informal fourth partner was soon enlisted, as I will explain below.

The Wine Industry Eco-system

Knowledge is power, so Team Ontario contracted with consultant Deloitte to produce a report titled “The Niagara Cluster: Ontario’s Untapped Economic Engine.”  The Niagara Cluster? Let me explain.

The Deloitte report uses an analytical framework made famous by Harvard economist Michael Porter, author of many books including Competitive Advantage: Creating and Sustaining Superior Performance. Prof. Porter’s key insight, which he developed by studying highly successful industries worldwide, was that successful firms don’t exist in a vacuum.

The greatest success is achieved when key firms are surrounded by effective supporting industries; have access to skilled talent, advanced research, and high-quality resources; face intense competition; and  must satisfy demanding customers. When conditions are right, the whole cluster grows as competition drives it ahead. Take away important factors, however, and things fall apart.

I like to think about Porter’s clusters as eco-systems (which is a term the Deloitte report also uses) and I am a fan of this kind of strategic analysis. (The Wine Economist reported on the Porter-style cluster analysis of the Walla Walla wine cluster in 2014.)

Strategic Partnerships

The Deloitte report makes interesting reading for anyone in the wine business for several reasons. First, it uses Porter’s analytical framework to break down the key elements of successful wine industry clusters. Second, it identifies “best practices” for each element, so there are specific targets to shoot for. Third, it frames the growth goals of the wine sector not in narrow terms (sell more wine!) but in terms of the broader economic impact on the communities involved. All of this is relevant to any wine region.

Two additional factors struck me as particularly important. First, the study doesn’t set an unrealistic goal such as “become the next Napa Valley” as sometimes happens. No, the report proposes that the Niagara region aims to be as important in its wine market (Ontario) as the Okanagan Valley wineries centered in Kelowna are to their region (British Columbia). The economic impact of such a development is large, both for wine and more generally.

But, the report found, one more partner was needed: the government. Ontario tax and regulation regimes discouraged the wine industry’s growth. That needed to change and, what’s more, the “best practices” model calls for the government to take an active role in promoting industry growth.

Time Has Come Today?

Incredibly, the provincial government seems to have heard this message and, although the situation is complicated and it is still early days, it looks like changes are coming, initially to the retail sales and taxation regimes. The introduction of retail competition is a major change and will really shake things up. The powerful Liquor Control Board of Ontario (LCBO) will retain its monopoly on spirits sales,  but open up competition for beer and wine. It won’t happen overnight, but the biggest market reforms since the end of Prohibition are on their way.

I need to learn more about what’s going on, so I will be heading to Niagara later this year to speak at the Ontario Craft Winery Conference. I am sure there is much more to the story and I may have made mistakes fitting the pieces together. But one thing is clear: even with all the gloom and doom in the wine sector, it is possible to make the case for growth.

But it doesn’t just happen. Everyone’s got to work together. And that’s hard. Ontario’s journey is just beginning, but they are off to a good start.

Argentina Wine, Economy, and the Chimera Effect

January 9, 2024 By in Argentina, economic crisis 2 Comments

Sue and I spent a pleasant week last month tasting our way through a group of very interesting wines provided by  Wines of Argentina (see the wine menu below). We scheduled the last of the wines, the Achaval Ferrer Quimera to taste with a meal of smoked brisket and roast vegetables on December 13. We were looking forward to the wine because of our great memories of visiting the winery on our first trip to Mendoza.

We awoke on December 13 to find that the Quimera tasting had taken on a broader meeting. After the markets closed the previous night, Argentina’s new president, Javier Milei, had taken a dramatic first step in his “shock therapy” treatment of the Argentine economy, cutting the official value of the peso in half over-night and doubling, in effect, the cost of any imported goods priced in dollars.

The Chimera Effect

Chimera (or Quimera in Spanish) has more than one meeting. Chimera can be a mythical creature that combines parts of several different animals in unexpected ways  (Americans might think jackalope, I suppose). Or it can refer to a mystical illusion of some sort, which hides a different reality. Mythical? Or mystical? That’s the Chimera effect.

Achaval Ferrer’s Quimera wine was inspired by mythical beasts. It’s a blend of wines from three very different vineyard places. Terroir, we learned on that trip, is very important in Argentina wine, especially the difference between higher- and lower-elevation sites. It is probably just my imagination, but seem to believe that this effect is magnified when older vines are involved. Probably a Chimera!

First, we tasted the barrel samples of the wines from each of the three different vineyards and they were very different indeed! And then we re-created the final blend and finally the finished bottled wine. It was quite an experience to have the Quimera wine come together in our glasses.

Economic Illusion

The economic policies of the new President, the  “anarcho-capitalist” economist Javier Milei, seem to be a combination of the two ideas of chimera, mythical and mystical. The terrible state of the Argentine economy is neither, however. Inflation is out of control, poverty is high and rising, and social tensions are even higher. The fact of the outsider Milei’s election is evidence of the political divisions that overwhelm the nation. Or at least this is how it looks from my long-distance vantage point.

Desperate measures have been employed in the past to try to hold things together. The most obvious symptom of this, to someone familiar with international finance, is the existence of multiple exchange rates. High inflation tends to push down a country’s currency value, which protects exports but increases the cost of imports. To try to avoid the higher import costs, which further fuel domestic inflation, Argentina’s previous government artificially propped up the peso (at high cost), creating a multiple exchange rate system. There was the official rate and then the unofficial rate, which was nearly half the dollar amount,

Exchange Rate Illusions

Then the government resorted to special limited-condition exchange rates to encourage specific activities or to  please particular interest groups. An exchange rate for agricultural goods, to encourage exports, for example. Another exchange rate for foreign tourists is to keep that industry going.  A very special exchange rate, I am told, for Argentines who traveled to see their national team win the FIFA World Cup last year! And finally, of course, a special exchange rate for wine exports, the Malbec peso. What was the peso worth? The answer was all of these exchange rates and none of them. What a chimera!

Multiple exchange rates, which are a Chimera in the mythical beat sense, give the illusion of competitiveness (the other kind of Chimera), but in general, they tend to create inefficiencies and uncertainty. No one who can avoid it is likely to use the peso under these circumstances. So Milei’s “radical” devaluation as noted in the headline above is more conventional than it might seem, lifting the veil and revealing reality.

When Sue and I first visited Argentina a dozen years ago, 100 pesos would buy about 5 U.S. dollars. Now 100 pesos buys about 12 U.S. cents at the official rate, and even less on the unofficial market even after the “shock therapy” evaluation.

Elementary, My Dear Watson

So what should we think about Argentina’s prospects? I am reminded of a comment from the fictional detective Sherlock Holmes. In solving a problem, he said, test each logical theory and eliminate them one by one. When you are done whatever answer you have left, no matter how unlikely, is the solution. Logic and illogic combined — a chimera theory, don’t you think?

It seems to me that Argentina has explored all the possible solutions to its problems and opted, at this point, for the illogical remaining possibility. President Milei combines radical rhetoric and outrageous behavior (he wielded a chainsaw at rallies) with remarkably conventional economic policies (the basic outline of his radical economic plan can be found in the IMF playbook).

It is not clear what will happen now. Milei wone the election, so he was a popular candidate, but his political base as president is questionable and there is strong resistance and opposition. A general strike to protest his programs is planned for later this month.

I am not a fan of President Milei, but perhaps this is the only remaining way forward. Fingers crossed that the short-term pain and disruption lead to longer-term stability and growth.

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Here are the Argentina wines we tasted for this report. We were attracted to these wines because, while they all feature Malbec, Argentina’s signature grape variety, each takes the wine in a different direction. All the wines were excellent, and a common thread of lifted acidity was easy to appreciate, but there was no cookie-cutter effect. Very interesting!
A blend of 50% Cabernet Franc, 45% Malbec, and 5% Casavecchia, a grape variety from Southern Italy that I didn’t know was grown in Argentina.  The balance of Cab Franc and Malbec plus the influence of high-elevation vineyards made this an elegant wine and at an affordable price point.
A blend of 45% Malbec + 18% Cabernet Franc + 18% Merlot + 19% Cabernet Sauvignon from three different vineyards. Grace and power are well balanced here. The Cab Franc and Merlot thoughtfully frame the Malbec and bring out bright notes.
A wine of place. One hundred percent Malbec from the Uco Valley vineyard. Pure Malbec intensity here. A different animal from the other wines.
A blend of 85% Malbec with 10% Cabernet Sauvignon and 5% Merlot. You can sense the BDX sensibility here.

Crisis & Change for Washington Wine

November 7, 2023 By in economic crisis, Washington wine, wine, wine markets 2 Comments

Is the Washington State wine industry in a crisis? How you answer this question depends on where in the industry you sit and how you define a crisis. Certainly the news this year, as reported at The Wine Economist and elsewhere, is not good news. About 10,000 acres of the 60,000+ acres under vine appear to be surplus to requirements. Serious adjustments on both the supply and demand sides of the market are necessary. Change is in the wind.

Crisis and change has been a recurring theme to my economic research starting with my 1990 Oxford University Press book Mountains of Debt. Vested interests, structural rigidities, and simple momentum often lock nations, industries, and people into particular paths while the conditions around them evolve. Sometimes the only thing that can break the pattern is a crisis.

So let’s put the Washington situation in context and think about the future. Herewith several brief points to stimulate thinking.

Crisis is a durable feature of global wine.

The history of wine is a history of crises, mostly local or regional but some (think phylloxera) both global and transformational. University of Adelaide wine economist Kym Anderson’s history of the Australian wine industry, for example, is told in terms of five cycles of boom and bust. If he were to revise his history today, Prof. Anderson would have to add a sixth crisis to the list: the collapse of much of the Aussie industry due to the loss of its biggest export market, China.

Prohibition created crisis in the United States and many other countries a century ago and it took decades for the wine industry to really recover. As I wrote in a chapter of my book Wine Wars II, wine consumption actually increased during the Prohibition period in the United States as consumers exploited a loophole in the law that allowed for home production of up to 200 gallons of wine a year for household use. The quality of much of the wine was very low and alcoholic strength was valued above all.

The legal wine market that emerged when Prohibition was lifted leaned toward sweet, high-proof wines; it took years (until the 1960s in many places) for production of conventional table wines to become the norm. This was as true in Washington as elsewhere, where wines like the NAWICO Port shown here were the popular choice.

Washington’s current wine crisis is part of a global problem.

Washington’s wine crisis hasn’t happened in isolation. It is best scen in the context of a global wine glut, which has been the focus of several recent Wine Economist columns. As global wine consumption first stalled and then declined after several decades of steady growth the market shifts mean there is too much wine produced and too many vineyards growing grapes. It happened slowly and then suddenly and it happened almost everywhere. In Washington and California. In Bordeaux and Rioja. A friend reports driving by abandoned vineyards in Tuscany.

Like Tolstoy’s unhappy families, the story of each afflicted wine region is different, but they all happen in the context of global over-supply. Exporting  your way out of a wine surplus is harder when so many others are trying to do the same.

Washington’s Wine Crises: California Wine Bill

Washington is no stranger to wine crisis, as I have written on The Wine Economist, and it is interesting to review two cases in particular: the California Wine Bill of 1969 and the Langguth wine bust of the 1980s. Both situations were damaging at the time, but proved useful in the longer-term evoluations of the industry.

Wine sales became legal with the end of Prohibition but the market in Washington was not completely open. Washington producers gained a measure of protection from out-of-state (that is, California) producers because they could work directly with distributors whereas “foreign” wine had to go through the state liquor agency.

The California Wine Bill of 1969 (I have heard it called the “Gallo Bill”) leveled the playing field and took away the home-state advantage. Washington producers could not compete with the inexpensive wines that flooded in from California and so they were forced to turn up-market for sales. A quality wine indsutry emerged since that was the only kind that made sense.

As The Wine Economist reported, the Washington industry’s long-term decline as a protected industry reversed course and the modern wine sector emerged. The transition was far from painless and some producers disappeared. But Chateau Ste Michelle, Washington’s leading wine producer, can trace its roots back to the NAWICO and Pommerelle wines that the California Wine Bill crisis helped erase from store shelves.

Langguth Boom and Bust

The successful German wine giant F.W. Langguth boasts a brand portfolio that includes the famous Blue Nun brand. Langguth was attracted to Washington state by the success of Chateau Ste Michelle’s Riesling wines (which are still today, I think, one of the most popular on-premise by-the-glass wine selections).  Seeking to ride Riesling’s rising tide, they became the first important international investors in the Washington wine industry when they entered the market in the early 1980s.

Vineyards and a winery were required and soon appeared. The owners of Sagemoor Farms agreed to develop the 221-acre Weinbau vineyard on the previously vine-free Wahluke Slope. A state-of-the-art $5 million winery was constructed near Mattawa, far away form Chateau Ste Michelle’s big facility near Seattle.

Five million dollars doesn’t seem like a lot of money for a winery today, but back then it was big bucks (Ste Michelle’s big complex in Woodinville, built just a few years earlier, cost about $7 million). To build such a big winery out in the middle of nowhere on speculation of future market growth must have seemed crazy.

And, in fact, the project collapsed in just a few years and the Langguth family pullled out of Washington state. The history of the project makes good reading. Opinions vary about what caused the collapse. Maybe the project was ahead of its time (dry Riesling, for example, when sweeter wines were the market sweet spot). Maybe the project was poorly managed, with too much distance between those pulling the strings and those actually doing the work.

In any case, the Langguth label disappeared. The Weinbau Vineyard became a key element of a growing Wahluke Slope vineyard scene. The shiny new production facility was sold to Snoqualmie Vineyards, which was then an important producer and is now a value label in the Ste Michelle portfolio. Mattawa might still be pretty much out in the middle of nowhere, but now there are several shiny facilities producing lots of wine.

Creative Destruction

This brief account of wine industry crises in Washington and around the world has only scratched the surface of the topic. What are the lessons we can learn from this history? The first, which is where this column started, is that crises are a durable feature of the wine industry and once a given crisis is over the best thing to do is to beging preparing for the next one! Some of the crises from a century or more ago (think phylloxera and Prohibition) cast a long shadow that still affects us today in some respects.

But there is another lesson here, which was suggested to me when I talked with Seattle Times writer Erik Lacitis, whose report on Washington wine appeared in the Seattle Times’s Pacific NW Magazine over the weekend. Lacitis didn’t write about wineries closing their doors, although some have done so. Instead, he focused on winery start-ups and the many new folks who enter this business every year.

In fact, as Lacitis makes clear, the industry is remarkably resilient and each painful crisis lays the foundation, in one way or another, for future growth. The California Wine Bill, for example, destroyed part of the Washington industry but set a course for premium wine that was exactly in line with the way the market developed.

The Langguth collapse was painful, too, but left us with those production facilities near Mattawa and the vines that became the Wahluke Slope AVA, one of the state’s most important wine regions.

Is this an overly-optimistic way to think about Washington’s wine problems today? Perhaps. But I note without comments that the Langguth winery near Mattawa is now a custom crush facility, the sort of place where the next generation of Washington wineries get their start.

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Want to dig deeper into Washington wine industry history? I recommend two classic books:

The Wine Project: Washington State’s Winemaking History by Ronald Irvine with Walter L. Clore (1997) and

Washington Wines & Wineries: The Essential Guide 2/e by Paul Gregutt (2010).

Global Wine Glut: The Return of Crisis Distillation

September 26, 2023 By in economic crisis, wine, wine history, wine markets 1 Comment

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.