The Beginning of the End of the Old World Appellation System?

“Some New World regions are adopting European-style AOC rules,” the Italian journalist I met in Sardinia explained, “Do you think this is an important trend?”

“No. Just the opposite. I think the Old World appellation system is under attack and will need to change to survive.”

He looked at me like I had dropped down from Mars. This was clearly not the answer he was looking for, but I think it is true. I wasn’t able to explain my logic very well in the rush of the interview, so let me try to explain here.

We Have Met the Enemy …

New World wine appellations are geographical indicators that specify a wine’s origin and help differentiate a region’s products. Some of these designations are very valuable (Napa and Sonoma, for example) in terms of price premium. Others are of little economic value, but can sometimes be useful in other ways that I don’t have time to explain here.

The Old World appellation system starts with designation of origin and adds to that a system of rules that restrict grape choices, blend components and ratios, viticultural practices, and other factors. AOC rules can literally fill a book as Jancis Robinson shows us in the classic video above.

AOCs (and Italian DOCs, Spanish DOs, etc.) evolved as essentially protective structures based on the experience in Champagne, which was the model for the current system. (I wrote about this in my book Money, Taste, and Wine). The first goal was to protect regional reproducers from fraud by outsiders passing off their imitation wines as the real thing.

The second goal (and the reason for such detailed regulation) was to protect quality producers in the region from neighbors inside the region who might cut corners and sacrifice quality to increase profit while benefiting from the regional “brand”.

Very high yields, for example, might increase a particular winery’s profit, but the lower quality dilutes the value of the appellation to all others. It is a cut-throat situation. “We have met the enemy and he is us” describes this element of the AOC program.

So AOCs seek to defend the regional brand from threats from the unscrupulous both outside and inside the region. Today, however, there are two powerful forces that threaten this system and will force it to change. Indeed it is already changing.

Shifting Center of Gravity

The first force is the global market, where the fastest-growing segments and categories are not closely aligned with the AOC system and where the premiumization syndrome is strongest. American consumers have shifted their market’s center of gravity to higher price points, but not higher prices for the same products. They will pay more than before but the product has to be differentiated and appealing. So innovation, which is not a strong point of the AOC system, is increasingly important.

Sue and I saw this when we visited the Valpolicella region a few years ago. The AOC system basically provides opportunities for Valpolicella wines, Ripasso, and Amarone in ascending order of retail price (I am leaving out details to simply, but you get my drift).

We met producer after producer who responded to this situation by creating proprietary blends of grapes that were “downgraded” to IGT status (because the blends don’t strictly adhere to the rule book), but upgraded in terms of price because of their effective branding and high quality. These new IGT wines were designed to fit price points created by premiumization that were not easily attainable with existing AOC products.

There is nothing new about the IGT movement — remember when super-Tuscans were controversial, which feels like a very long time ago? But the IGT trend, which basically slips out of the AOC handcuffs, has gathered unstoppable momentum. We see these wines everywhere now — France, Italy, Spain, everywhere. And some of them of fantastic. AOC? We don’t need no stinkin’ AOC?

In a sense the rise of these “super-” wines represents a shift in mentality that is worth noting. If the AOC system if defensive at its core, the IGT movement is entrepreneurial, seeking out new opportunities and breaking rules to get them.

Climate Change Challenges

The AOC system can withstand these market forces, although some regions will find it in their interests to adapt as Chianti did in the face of super-Tuscan success. But a second force is harder to ignore and will be even more threatening in the long run: climate change.

AOC rules are often promoted as an evolutionary pinnacle. We’ve had hundreds of years to figure out what grapes and blends are the very best for our terroir and here they are laid out in the rule book! Best of the best. You cannot improve upon the AOC rules.

It is a nice argument, but what happens when the terroir changes due to new climate patterns? The answer is that the wines need to adapt and evolve to remain at the peak, which is hard to do if the rule book doesn’t change. AOC standards need to evolve with the climate or become irrelevant or, worse, counter-productive.

Bordeaux Adapts

Some Old World regions already see the writing on the wall, as Jane Anson reported in Decanter earlier this year. Bordeaux and Bordeaux Superieur producers now are able to experiment with “accessory grape” varieties that may better withstand climate change than the traditional (and designated) grape varieties such as Cabernet Sauvignon and Merlot.

“The red grapes for trial,” Anson reports, “will be Marselan, Syrah, Zinfandel and Arinarnoa. In white, Liliorila, Chardonnay, Petit Manseng Blanc and Chenin Blanc will be tested.” A recent VinePair article called this “a small revolution,” but I see it as something bigger and this is just the start.

Anson’s article continues,

Veronique Barthe of Chateau la Freynelle, who is working on the project with the Bordeaux and Bordeaux Superieur Union, told this was not a form of sacrilege.

‘We are not trying to make 100% Syrah in Bordeaux, but to test which grapes work best on which terroir in the region with the intention of introducing them only if they offer real quality,’ she said.

This sounds like exactly what a winemaker should be doing, don’t you think? “When the facts change, I change my opinion. What do you do?” according to Keynes. When the climate changes, what will the AOCs do?

So the AOC system is under attack from the inside by IGT wines and from the outside by climate change. The system will adapt, but it won’t be the same. We can debate whether this is a good thing or not (I’m on the good thing side), but it is going to happen. And that’s what I wish I had time to explain to that Italian wine journalist.

Unhappy Families: Wine Cooperative Failure and Success

Tolstoy wrote that happy families are all the same, but each unhappy family is dysfunctional in its own special way.  I think wine cooperatives might be the opposite of Tolstoy’s families: the unhappy ones are all the same, but each happy one succeeds in a different way.

Made when Alto Adige was Austrian.

This is not a theory, only a working hypothesis (a.k.a. educated guess) based upon some recent fieldwork. We all know the story of unhappy cooperatives (which I summarized in my last post on Invisible Wineries), but what about the successes?  Answering this question was one of my goals during our recent visit to Italy’s scenic Alto Adige wine region.

A Recipe for Failure?

If I describe the Alto Adige wine economy to you it will sound like a recipe for failure. The region is tiny in terms of wine, producing a total of only about 40 million bottles each year, which is less than one percent to Italy’s total output (and about 1/20th of Gallo’s annual output). Although I don’t have data on this, I am pretty sure that wine is not even the most important agricultural product in the region — I suspect that apples are #1.

The vineyards are tiny and ownership is impossibly fragmented. Typical vineyards are a hectare; the top 100 account for only about 5 percent of the total. And, although popular international varieties are grown here, production is dominated by indigenous varieties such as Schiava (aka Vernatsch), Lagrein and Gewurtztraminer.

Historic barrels at Elena Walch

Against all odds, the Alto Adige cooperatives are among the happy families of the wine world. Seventy percent of Alto Adige’s wine is produced by its 14 cooperative wineries. Although this wine varies in price and quality, of course, it must be said that the best of the cooperative wines rank among the best wines of their type in Italy and perhaps even the world and the cooperatives we visited were prospering.

Thumbing through my copy of the 2007 Gambero Rosso guide to the wines of Italy, for example, I encounter a long list of cooperative wines with the highest “three glasses” ratings. Here’s a list of the cooperatives so honored: Cantina Calterenzio, Cantina San Michele Appiano, Cantina Convento Murie-Gries, Cantina Santa Maddelena/Bolzano, Cantina Viticoltori di Caldaro, Cantina Valle Isarco, Cantina Terlano, and Cantina Termeno/Tramin. Several others earn ratings nearly as high. These are my happy cooperative families.

[By comparison, only about 25 percent of the wine made here comes from 37 private wine estates, which purchase grapes to supplement their estate fruit. They are small wine firms, obviously, but some have international reputations and distribution  — Tiefenbrunner, Elena Walch and Alois Lageder, for example.]

Getting the Incentives Right

Why do cooperatives work here when they seem often to fail elsewhere in Italy and Europe? My very tentative conclusions (based on visits to three cooperatives — Cantina Santa Maddelena/Bolzano, Cantina Termeno/Tramin and Cantina Valle Isarco) can be sketched this way. On one hand, the cooperatives we visited avoided the key errors in institutional set up: they require that members bring all their grapes to the cooperative rather than allowing them to keep the best and dump the rest in the cooperative vats. And they carefully monitor member wine grower practices and grape quality.

Many cooperatives are organized so that the collective cellar is the “buyer of last resort.” Members can keep the best grapes for their own production and dump the rest in the cooperative’s vat. If coop members have a choice, they will keep the best grapes for themselves (putting private interest ahead of collective interest) and the result is that after a while only the worst grapes go to the cooperative and the wines necessarily suffer both in the bottle and in the marketplace. With no alternative but to sell all their grapes to the cooperative,  however, Alto Adige vineyard owners have an interest in raising quality in both their own plots and those of other members.

(I was surprised to learn that the well known Prunotto winery, which we visited in Piedmont, was originally a cooperative, which failed when a harvest of exceptional quality produced almost no cooperative grape deliveries. All the growers apparently kept the grapes for their individual wines rather than add them to the cooperative fermentation vat. The crippled winery soon fell  into private hands. It was eventually acquired by the Antinori family, who have guided it to higher and higher levels of quality.)

Old and new at Cantina Valle Isarco

Getting the incentives right is clearly important, but this is often easier said than done. What happened to the Alto Adige cooperatives to cause them to adopt effective collective arrangements?

Every Happy Cooperative is Different

I think the unique history of the Alto Adige wine region has something to do with it. Alto Adige has been a wine growing region for thousands of years. Production seems to have peaked around 1910 when nearly 10,000 hectares (25,0000 acres) of vines covered the region, which was then part of Austria. The local industry was devastated by the combination of World War I, the Treaty of Versailles (which transferred the territory from Austria to Italy) and then the Great Depression. Alto Adige producers found that the couldn’t sell their wines in Italy (which still thought of them as the enemy) or in Austria or, well, anywhere given the Depression.

The Alto Adige wine industry collapsed except for rather limited production for local consumption. The valley floors were taken over with more profitable apple orchards; vines grew only on the steeper hillsides.

When DOC regulations were instituted in the 1960s, the lines were drawn to reflect this history. Wine grapes were limited to the hillsides, where quality was generally higher, and apples ruled the valley floors, crowding out vineyards there. Apples were still more profitable than grapes in the 1960s, so the DOC lines reflected local economic reality.

Vineyards today occupy about 5300 hectares (13,000 acres), half of the peak level and, as noted above, they are fragmented into tiny plots of surprisingly high value. The limited vineyard area combined with the success of the cooperatives and wine estates makes these small plots some of the most valuable vineyards on earth — second only to those in Champagne, one winery owner told me. When the tiny vineyards change hands so do hundreds of thousands of euro. Wow!

This is not to say that all the wine made in Alto Adige is of the highest quality. I would say that the majority of the production of the cooperatives is still simple low cost Schiava — these easy-to-identify pergola-trained vines are everywhere. But the trend is clearly up and — unlike the worst of the wineries elsewhere — there seems to be a local market for even the most modest bottlings.

Wines of the Cantina Bolzano

Lessons for Europe’s Cooperatives

What lessons can the successful cooperatives of Alto Adige provide for the struggling cooperatives elsewhere in Europe — the ones who have produced the lake of surplus wine and who are threatened by EU reforms on the wine hand and New World competition on the other?

I would like to say that it’s really simple — just adopt the sort of incentive structure that these Italian cooperatives have used so successfully. This is good advice and perhaps a place to start, but I do not think it is as simple as that. We used to talk about Path Dependency in economics. Path Dependency is the theory that “you can’t get there from here.” The road ahead depends on the path you have already taken.

It may not be possible to backtrack on the road that Europe’s unhappy family of cooperatives have taken, which has left many of them dependent upon subsidies and crisis distillation.

My working hypothesis is that Alto Adige’s unique history (and geography, too) put them in a position that  allowed them to succeed (or forced them to do so?).  The “unhappy family” cooperatives may not be able to transform themselves, but rather may be victims of their own history. Perhaps, like the Prunotto case, their future lies in private ownership.


The photos I have inserted in this post show the contrasts we found in Alto Adige cooperatives and wine estates.

Invisible Wineries: Europe’s Controversial Cooperatives

If, as I suggested in my last post, there are “invisible” wines, then it makes sense that there are also invisible wineries. Here in the U.S. for example we are accustomed to”virtual” wineries that are invisible in the physical sense. They frequently exist as brands in the portfolios of larger wine companies, but have no distinct location or particular terroir.

The wines are often sourced from many regions, wherever the price-quality mix is right, and the blends are determined by supply and demand. Some virtual wineries become durable brands, but most are like ghosts — they appear and disappear as wine buying trends or market opportunities change.

(Just now, for example, I’m noticing a lot of red blends from invisible wineries — an opportunity to dispose of surplus Syrah?)

One-Fourth of the Global Glass

Virtual wineries are an interesting phenomenon but they’re not what I want to discuss here. The invisible wineries that concern me are Europe’s cooperative wine producers.

The Oxford Companion to Wine (2005) gives a sense of the importance of European cooperatives as a production sector. Here are excerpts.

“Since 1975, more than half of the wine produced in France has been produced by co-operatives, and the total area of vineyard owned by their members is also more than half the French total”

“Nearly two in every three German vine-growers today belong to the local co-operative, although their vineyards are often a small, part-time activity which therefore, cumulatively, represent almost a third of the total German area under vine”

“In Italy, the cantina sociale is no less important, accounting for over 60 per cent of the country’s production.”

“As in Italy, co-operatives are extremely important in Iberia, where grapes are so often grown alongside other crops. According to Metcalfe and McWhirter, more than 60 per cent of each vintage was delivered to one of Spain’s 1,000 wine co-operatives or Portugal’s 300 … in the late 1980s and this has not changed substantially. However, the percentage of bottled wine sold by co-ops in Spain remains tiny—between 10 and 15 per cent of their total production, the rest being sold in bulk, with a substantial percentage going directly to distillation”

The numbers will be different today, of course; probably lower because of the effects of the EU reforms, but that’s still a lot of wine. Since France, Italy, Spain Portugal and Germany together account for roughly half of total world wine production and all of these countries have substantial cooperative sectors, I estimate that as much as a quarter of the global glass is filled by wine made by cooperatives, an incredible amount given how little attention these producers usually receive (that’s the invisibility part).

The Invisibility Cloak

One reason cooperatives are often overlooked is the “high quantity, low quality” stereotype that they wear like a Harry Potter invisibility cloak. No one much wants to think or talk about mediocre wine when excellent wine is so much more interesting.

The stereotype that cooperative wines are cheap plonk can be blamed in part on the relatively few cooperatives that have established “visible” brands that define the category. There are cooperatives that achieve real excellence (watch for my next post), but most people are likely to think of Tavernello or Riunite when they think of cooperatives, not Cantina Sociale dei Produttori del Barbaresco, for example.

Italy’s best selling brand, the ubiquitous Tavernello, is a product of the Caviro cooperative.  In the United States the most famous branded cooperative wine is probably the product of Cantina Sociale Riunite. That’s right, the sweetish fizzy Lambrusco that was for many years the best selling Italian wine in the country: Reunite on ice. So nice!

So the stereotype is understandable, but it is also unfair (as stereotypes tend to be). In fact, taking the long view, it is important to appreciate that cooperatives as a group actually improved wine and wine-making throughout Europe.

The cooperative wineries that appeared in the first three decades of the 20th century represented a vast improvement over the cellars they replaced.  Collective investment (plus government subsidies and easy farm credit terms) allowed the purchase of newer and better equipment and facilities overseen by trained professional wine-making staff. Individual winegrowers farming a hectare of two of grapes could never have produced commercial quantities of wine at the standard of the new cooperatives. No doubt about it, in their heyday cooperatives were a step up in wine quality.

They Never Would be Missed

But the cooperative form of business organization also created incentive problems. In many cases the cooperatives were compelled (by agreement or custom) to purchase whatever grapes that their members presented. When they could, members would often retain the best grapes for their own private production and turn the rest over to the cooperative. When many members did this, the quality of the collective wine necessarily fell along with its probably market price. This increased the incentive to keep the best grapes in house and to deliver masses of low quality grapes to the cooperative.

It was a race to the bottom that ended for many wineries with wine so foul its only buyer was the “buyer of last resort” — the government-subsidized “crisis” distillery. This made the cooperatives even more invisible, as Tim Atkins has noted. “If co-operatives were to disappear tomorrow — and there are plenty of people who wish they would — so would Europe’s wine surplus.” Like the people on Ko-Ko’s little list in the Mikado, they’d none of them be missed. You can’t get more invisible than that!

The stereotype of cooperative wines is very depressing but, as Atkins also notes, it is a mistake to define any group by its least attractive member. Some of the best wine in Europe is made by cooperatives and I was fortunate to taste some of it during our recent visit to Italy. What makes these cooperatives different? (And can other wineries copy their formula for success?)  Good questions. Look for answers in the next Wine Economist post.


I have three books to recommend if you are interested in the history of European wine cooperatives. The Red & The White: The History of Wine in France and Italy in the Nineteenth Century by Leo A. Loubére (1978), The Wine Revolution in France: The Twentieth Century also by Loubére (1990) and Vintages and Traditions: An Ethnohistory of Southwest French Wine Cooperatives by Robert C. Ulin (1996). The Red & The White is one of my very favorite wine books.

Myth of the Level (Vineyard) Playing Field

Terrain matters, both in wine and in markets.  Many of the world’s best vineyards  cling to hillsides or follow natural contours (like the famous Pewsey Vale vineyard shown here).

While wine people seem to appreciate the challenges and opportunities that complicated terrain presents, economists are drawn (at least metaphorically) to tabletops. We think of the world in competitive terms and seek out “level playing fields” where our favorite theories are most applicable.

The Difference Between Vineyards and Soccer Fields

As a wine economist, I can appreciate the flat and the steep of the wine world and I have come to upon a particular irony.  Wine market reforms in the European Union are intended to create a level playing field and to encourage, induce and sometimes force winegrowers to compete. The days of big subsidies and routine “emergency” distillation are gone, or will be soon, we are told.

But wine markets are as complicated as the vineyard shown above and establishing a flat competitive arena is not a simple matter.  Wine markets are more like vineyards than we like to think.  Tariffs, quotas, subsidies and selling regulations can be brought into line, of course, but that is just the beginning. The uneven contours of the market run very deep.

Whither/Wither the Vines?

I was reminded of this by a recent post on the Tablas Creek Vineyard Blog titled “Whither inexpensive, artisanal California wine?” (Tablas Creek is a well regarded maker of Rhone-inspired wines in California’s Paso Robles area.)

The question that the article posed was whether it made economic sense for the winery to develop a new vineyard property to produce high quality reasonably priced wine (the $20 price point plus or minus a few bucks). The answer? Probably not, but with a rather thorough cost analysis provided so you can see how the various factors (land cost, debt service, planting cost, operating cost, even opportunity cost) factor in.

It’s a really good article for anyone who thinks that the decision to start of vineyard or a winery is an easy one.  (The sommelier  in the video above would do well to read it!)

At the end of the day, the single most important factor was the cost of the land. Even in a depressed market, land costs create a hurdle too high to overcome in Paso Robles.

(Note: I was also struck by planting and operative cost differences associated with dry farming the vines. Much lower cost, somewhat lower yields — worth serious consideration where feasible given the growing water shortage.)

Why are vineyard land prices so high that they make the vineyards themselves uneconomic?  Well, the land has many uses aside from the obvious one of growing wine grapes. Speculators might want to buy it to hold and resell, not operate for the long run. Lifestyle investors push up the price because they consider the amenity value of a vineyard home more than the economic value of its grape crop. These alternative demands can push the price above the level growers can afford.

Tilting the Playing Field

This distorts the playing field on which international wine markets operate. Land costs are a big factor for many expanding New World wineries because those costs are so recent that it is difficult to ignore them.

Land costs are often ignored for Old World producers, I am told — especially the thousands of small winegrowers who have owned their land for several generations. Ignoring the cost of capital allows them to sell for less, depressing prices (and therefore, ironically, the value of their land, too).  Poor economic choices in the Languedoc tilt the playing field against Paso Robles.

But the loudest cries I have heard in this regard are from Australia, not California, where vineyards that produce grapes for bulk wine find themselves more directly in competition with those economically untutored Languedoc vignerons. The low prices that result when French winegrowers ignore the cost of vineyard capital are not the only or even the biggest source of Australia’s current crisis, but they are certainly a contributing factor.

Australia at the Tipping Point

I’ve been writing about Australia’s developing wine crisis for a couple of years now and I’ve often felt like Chicken Little, warning that the sky was falling. The problems kept accumulating, to be sure,  but the ultimate crisis never seemed to come. Was I being too negative, too dismal, exaggerating the woes and ignoring the underlying strength of the industry?

Unfortunately not. It’s just that the tipping point hadn’t been reached. But we’ve arrived there now, at least according to a report called “Wine Restructuring Action Agenda,” which suggests that the crisis is already here and there’s nothing to do but deal with it.

Cold Hard Facts

The report was issued yesterday in the form of a joint statement by four industry groups, the Winemakers’ Federation of Australia, Wine Grape Growers of Australia, the Australian Wine and Brandy Corporation and the Wine Research and Development Corporation. It went out to all winemakers in Australia and will be followed by regional meetings in the coming weeks and months. The statement makes sobering reading.

Structural surpluses of grapes and wine are now so large that they are causing long-term damage to our industry by devaluing the Australian brand, entrenching discounting, undermining profitability, and hampering our ability to pursue the vision and activities set out in the Directions to 2025 industry strategy.

Coupled with inefficient and/or inappropriate vineyard and wine operations, oversupply is amplifying and exacerbating fundamental problems in the industry, notably our decreasing cost competitiveness. As such it is compromising our ability to adopt new pricing structures and market solutions and adapt to changing market conditions.

Comprehensive analysis and consultation suggests at least 20% of bearing vines in Australia are surplus to requirements, with few long-term prospects. On cost of production alone, at least 17% of vineyard capacity is uneconomic. The problems are national – although some regions are more adversely affected – and are not restricted to specific varieties or price points. The industry must restructure both to reduce capacity and to change its product mix to focus on sales that earn viable margins.

Bailouts are not an option and neither governments nor industry bodies should be expected to provide the answers; tough, informed decisions must be made by individual growers and wineries, from as early as the 2010 vintage.

Mountains of Wine

Australia has an accumulated surplus of 100 million cases of wine that will double in the next two years if current trends continue, according to the report. The annual surplus is huge – equal to all UK export sales and there is no clear prospect of finding additional demand, either domestic or foreign, to fill this gap.

New Zealand Sauvignon Blanc, I understand, is now the best-selling white wine in Oz. Not the best selling import, but outselling any category of Australian white wine!

In fact, wine exports have fallen by 8 million cases or more than 20 percent in the last two years, according to the statement, with the largest declines in the high value wines that Aussie winemakers hoped would be their future.

Inexpensive and bulk wine sales have grown, but at prices that are unsustainably low. One of the messages here is that a great deal of the Australian industry is the red, unable to meet operating costs. Even the domestic market is under attack, with falling consumption and rising imports.

The problem is structural, not cyclical or temporary. The surplus won’t be cured by a return to global economic prosperity, for example. The demand is not responsive enough to rising income.

Better weather will make the surplus worse, of course, by increasing supply and not even bad weather will make much of a dent in it. Drought, water shortages, global warming – these factors that continue to plague Australia — would reduce the surplus by 10 percent at best.

Continued over-production will put further pressure on price, the report says, making all the problems worse. There is only one solution: restructuring.

Grubbing Up

So Australian wine producers will be meeting in the coming weeks and months, getting the bad news and hopefully acting on it so that restructuring, including grubbing up uneconomic vines, can begin. Here is the timetable:

• From 23 November 2009, detailed and confidential supply data summaries will be provided to regional associations. These will examine each region in isolation and in relation to the national picture, with a focus on levels and patterns of viability.

• From 30 January 2010, a package of tools will be available to help individual vineyard operators assess their performance and viability. This will include: a checklist; an upgraded Deloitte Ready Reckoner to assess winery profitability by market, channel and price point; and an upgraded Vinebiz program to assess vineyard profitability.

• From early next year, briefings will be held in 14 regional centres (covering all states) to discuss regional data and issues and offer business stress testing to assist with decision making.

The Federal Government has been approached to help facilitate this initiative, and state input is being sought.

• WFA and WGGA will hold discussions with the Federal Government about improved exit packages for growers and small wineries seeking to leave the industry along the lines of drought and small block irrigator exit packages.

Chicken Little Talk

So now we have two of the most important actors in the world wine game committed to restructuring — Australia and the European Union. The EU reached its tipping point a couple of years ago and adopted a restructuring program in the slow, torturous EU policy way.

Many people were disappointed with the final EU reform package — too little, too late. But maybe that’s Chicken Little talk. It will be interesting to see if the Australian producers are more decisive and if they can find a way to pull themselves back from the tipping point.

Will the EU Wine Reforms Work?

The September 2009 issue of Decanter arrived today and it features three articles about the European Union wine reform regime that went into force last week (on August 1).  I wonder if the reforms will work and dry up the EU’s wine lake by making this important economic sector more competitive?

The EU wine regime is part of the larger Common Agricultural Policy (CAP), which is not so much an agricultural policy as an incomes policy — a set of regulations and subsidies designed to support the incomes of European farmers. The CAP payments have provided income security and, in some areas, social stability, for regions where winegrowing is a marginal economic activity, but where there are few viable alternatives.

Bottle Shock

The subsidies have also served to delay what we now see as inevitable structural adjustment to a declining EU domestic wine market. The new reforms are meant to pull out the props and force adjustment. It’s not exactly shock therapy, but it will have some of the same effects.

You can see the problem if you just look at some of the vineyards in Spain and the South of France where the surplus wine originates. Many of the wines that are produced are poor products, without much market potential, which flow the into EU wine lake and end up in crisis distillation. These winegrowers need to get into a different business. Structural adjustment in this circumstance doesn’t mean changing from grapes to olives or some other crop, however, it probably means selling out, packing up and moving to other regions, a very expensive and disruptive process for both the individuals and their communities.

It’s like an economic Dust Bowl; if you have read  The Grapes of Wrath you know what I am talking about. No wonder there is so much opposition and foot-dragging.

The current economic crisis both compounds and confuses the problem. Solving the long term problem demands that crisis distillation disappear, for example, but the short term crisis makes a case for keeping the price supports just a little bit longer. With the Cash for Clunkers program so popular right now it is hard to rule out Cash for Carignan on principle alone. It is difficult to know how these political and economic forces will shake out in the future.

Label Laws

The first evidence of the new EU regime will show up on the labels of some European wines quite soon.  AOC (Appelation d’Origine Controlée) is being replace by AOP (Appelation d’Origine Protegée) on French wine labels, for example, and Vin de Pays wines will now be labeled Indication Geographique Protegée as EU standard terminology in introduced.These changes will confuse some buyers, I think, but the damage shouldn’t be too severe.

The Decanter story uses the English versions of these new classifications: PDO (protected designation of origin) and PGI (protected geographical indication). The PIG wine acronym is thankfully avoided.

More useful is the fact that wine producers will be able to list grape varietals on their labels, bringing them into line with New World market practice. Since Old World wine consumption continues to fall (and imports of New World wine now crowd European supermarket shelves) leveling the playing field this way makes good sense, even if it is not a perfect solution.

The new label and designation rules are just one part of the EU reform package (other elements including payments for grubbing up and support for export marketing programs), but you have to ask if they go far enough. While labels will be streamlined and made a bit more market friendly fears that hundreds of geographical designations would be eliminated have proved groundless. The confusing thicket of EU wine regions remains and will act as a barrier to supermarket sales, which is where this war will ultimately be fought.

Get Smart

An industry group in the UK that includes Tesco and Bibendum and 23 other retailers and importers want European winemakers to go beyond the EU reform template. They have produced Plan B, which calls for France’s regional wine authorities to set aside their seperate interests and differences and unite to collectively market their wines. The idea is that the French regions don’t compete against each other so much today as they compete with the rest of the world. A united front is needed and regional bickering only gets in the way.

The proponents of Plan B admit that it is unlikely that French producers will give up their local designations and controls and pull together, but they think it is the only way to reverse that country’s continuing decline in the British market. Plan B, whatever you might think of its merits, is about as likely to succeed as any of the “Plan B” schemes in the old Get Smart television series.

The EU is convinced that European winemakers can compete and will compete with New World makers under the new regime. I suspect that are right but, for now, it is too soon to tell.

The wine market has a way of surprising even the most hardened sceptic. Who would have thought 50 years ago that France would be considered a basket case in the wine business? Who would have thought 10 years ago that Australian wine would be considered passé?

I have great respect for innovators in the Languedoc and other threatened EU wine regions. But even with the recent reforms, things could still go either way.

The End of France?

The rumors of my death are exaggerated — Mark Twain

Rumors are flying about the death of the French wine industry. One source reports that France has fallen to third place in the key UK wine market (behind Australia and the US) and is losing ground to surging South Africa. Other rumors whisper that France will seek authority for crisis distillation payments to deal with the growing lake of unsellable wine. And now a new book with more bad news!

Michael Steinberger writes about wine for Slate and other publications. We share many interests so when I heard about his new book, I just had to get a copy. It’s called Au Revoir to All That: Food, Wine and the End of France. The end of France? Gosh. Although just one chapter deals explicitly with French wine, it seems to me that the whole book comments in one way or another on the French wine dilemma.

We have met the enemy …

French cuisine, like French wine, once ruled the world, Steinberger argues, but not any more. Spain has taken the culinary lead, it is said, and many rivals compete on the wine shelf. Who is responsible for this sad situation, Steinberger asks? The answer is clear: the French themselves.

French economic regulations are one factor. They make it very difficult to operate restaurants profitably in France and so encourage the top chefs to look  abroad. Flying chefs are like flying winemakers, I guess, leveraging their skills (and celebrity) on a global scale.

Critics are part of the problem, too. Not Robert Parker this time — the Michelin Guide. The pressure to earn and keep precious Michelin stars is enormous, Steinberger argues, making nervous wrecks out of France’s culinary elite. Worse, Michelin has “a certain idea” of French cuisine and service and it is not clear that it encourages the best from French chefs.

The French invented critics like the Michelin Man and now Robert Parker, it seems, and today suffer from their “tyranny.” Exquisite irony!

… and he is us.

France suffers as well from its distinctive institutions, we learn in the chapter about French wine. The French invented the appelation system which now seems to be running amuck as winemaking regions large and small seek the status that geographical indicators allegedly provide. The French have made appelations so important, Steinberger argues, that they have backfired.

Appelations should be a guarantee of quality or typical style if they are to be very useful economically. But, according to Steinberger, the pressure is on to give the stamp of approval to all the wines in a given region because the economic consequences of losing AOC status is so great. Result, bad wines as well as good ones earn the designation, diluting the commercial value of the brand for all (pun intended).

Stressed out

So it seems as though the French have only themselves to blame for their problems, but I think they are not alone in this. We are all frequently our own worst emenies.

Steinberger’s book does a nice job of plotting his personal love affair with France and his ultimate disappointment reflects his great admiration for what French cuisine at its best can be. It is a good read; I recommend it, unless you are trying to diet!

I love France, too, and I am dismayed by the state of the French wine industry, but I think that rumors of its death are exaggerated. The combination of EU reforms and the current economic crisis will certainly stress French winemakers over the next few years. I am hopefully that this stress will produce less wine but better wine. That’s happens when vines are stressed, isn’t it?

Wines of Spain: Not Lost in Translation

Spain has the largest area devoted to vineyards of any country in the world and has achieved considerable international success, both critical and commercial. But it also confronts the many challenges typical of Old World producers. As I write The Wine Economist blog and work on my new book* I am increasingly convinced that much rides on the ability of Old World wine producing countries like France, Italy and Spain to adjust to and succeed in changing market conditions.

Spain is an especially interesting case study in this regard. On one hand Spain faces  many of the problems we associate with Old World wine. Although overall production has fallen in recent years it is still well above consumption (which has fallen, too). The surplus — poor quality wines with no market — have been sent to the distillery in recent years, but this is about to end as the new EU reforms kick in. These reforms will benefit wine regions and producers that increase quality and are able to adapt to the new more competitive global market environment.

Map of Spain’s Wine Regions

The Spanish wine industry is well positioned in some ways to take advantage of this situation. Consumers are looking for good value in wines today and I have found a number of interesting and distinctive wines from Spain in the competitive sub-$14 price range, where demand is still relatively strong as buyers trade down from more expensive products. White wines from Spain are attractive options for the growing number of consumers who have lost interest in Chardonnay and the reds would be a good choice for those who’ve grown tied of Australian Shiraz. Jaded ABC (Anything But Chardonnay) and ABS (Anything But Shiraz) buyers are up for grabs and Spanish producers are making their case.

Today’s market, for all its economic discontents, is a good opportunity for Spanish wines to move deeper into the American market, but there are problems that must be addressed. American wine buyers have learned to speak Italian, French and, well, Californian when it comes to wine in terms of varietals and appellations. They have trouble, both literally and figuratively, translating Spanish wine.

Spain has an unusually rich heritage of native grape varieties, which is both an advantage and an obstacle to be overcome. Unfamiliar varietal names are not an insurmountable barrier, although you won’t know if you like Tempranillo, Albariño and Garnacha and other native grape wines until you try them, so getting consumers to take that first taste or make the first purchase is very important. Appelations are a bigger hurdle. Spain has more than 50 regional appellations – Denominaciones de Origen or DOs – and mastering this system and understanding the differences is a challenge – an educational challenge.

The Spanish wine industry has wisely decided to confront this problem directly this summer by organizing a series of 3-day educational seminars around the country organized by The Wine Academy of Spain in association with Catavino. Wine professionals and enthusiasts will meet in Denver, Houston, Chicago, Boston, New Haven, Atlanta, Seattle, Portland, San Francisco, San Diego, Cleveland, Washington and New York (click here to see dates and registration information) and learn about the wines of Spain. Three days? Well, yes. Looking at the schedule it seems to me that it will take at least three days to learn the basic of Spain’s regions and their wines, appellations, terroirs, varietals, history and production and market structures.

Mario Battali once said that there is no such thing as Italian food, there are only the regional cuisines of Italy, which is why Italian food is endlessly interesting. I suspect that the same can be said about Spain and its wine. There is no Spanish wine, only the wines of Spain – and American wine enthusiasts have a lot to learn about them.

Mastering the Spanish wine vocabulary will take work, but it should be pleasant work. I am hoping to be invited to participate in the Seattle workshop (Chateau Ste Michelle and Dr. Loosen invited me to the Riesling Rendezvous last year and I found that experience very valuable) so that I can report on it here and write about the Spanish industry with more authority in my book. I hope to gain a better understanding of the wines of Spain and where they fit into the future of wine.

* The working title of my new book is The Future of Wine: Globalization, Two Buck Chuck and the Revenge of the Terroiristes.

Special thanks to Steve De Long of for alerting me to this interesting and ambitious program.