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?

Decanter’s Wine Power List

Decanter, the self-proclaimed “World’s Best Wine Magazine,” takes its rankings very seriously. Wine rankings, of course,  and, in the July 2009 issue, Power rankings. Who are the most powerful people in the world of wine and what does the power list tell us? Let’s see if we can find the message in this bottle.

The Power List

The names on the power list are very interesting but the story that they tell about wine today is perhaps more important. Here are the first ten (top ten) people on the list.

  1. Richard Sands, USA, Chairman, Constellation Brands
  2. Robert Parker, USA, wine critic
  3. Mariann Fischer Boel, Denmark, EU Commissioner for Agriculture
  4. Mel Dick, USA, Southern Wine & Spirits (wine distributor)
  5. Annette Alvarez-Peters, USA, Costco wine director
  6. Dan Jago, UK, Tesco wine director
  7. Jean-Christophe Deslarzes, Canada, President of Alcan Packaging
  8. Jancis Robinson, UK, wine critic, author and journalist
  9. Nicolas Sarkozy, France, President of France
  10. Pierre Pringuet, France, Pernod Ricard

Since Decanter is a British magazine with very small US distribution you might be surprised that three of the top ten positions (and both of the top spots) are held my Americans, but don’t be. Constellation Brands is the largest wine company in the world and accounts for one out of eight bottles of wine sold in the UK. And Robert Parker is best known for his ratings of French wine, not Napa bottlings, which is important to British buyers and merchants. The presence of Sands and Parker at the top of the list does not reflect any sort of US-centrism, just the realities of the global marketplace. It really is a global list. Or at least, like those famous New Yorker cover illustrations, the globe as seen from London.

I won’t list the second ten names (out of 50 in total), but the I think they illustrate the global reach of the wine market today: America, China, Chile, Australia, Spain and so on. Even India, an emerging wine market, makes the top 50 ranking.

The list is complete and up-to-date (Gary Vaynerchuck, the US internet wine guru, shows up at number #40), but there are some interesting gaps. Fred Franzia, the godfather of Two Buck Chuck, is nowhere to be found, for example, despite his obvious influence on the US market, while Judy Leissner of Grace Vineyard in China, who perhaps represents the future of Chinese fine wine, makes the “Ones to Watch” list.

No wine economists make the list, alas. Greg Jones, the respected Southern Oregon University wine climatologist, is the only professor (#33). Maybe next year …

The Story

It is fun to see who makes the list and who doesn’t (why Jancis and not Oz?), but the ranking is more interesting if you strip out the personalities and consider what market forces they represent. Herewith my version of this  story.

The world of wine is very unsettled. Although wine is one of the most fragmented global industries (much less concentrated than beer or spirits, for example), size matters more and more as consolidation continues. [Hence the power of Constellation Brands, Pernod Ricard and Southern Wine & Spirits.] Reputation matters, of course [Parker and Robinson], but the world is changing and everything is up for grabs from how and where wine is sold [Costco and Tesco] to how the bottle is sealed [Alcan].

Although change is generally associated with New World wine, this is no longer the case. The biggest threats to “business as usual” for Old World wine come from inside the European Union itself. On one hand, the new EU wine regime [Mariann Fischer Boel] will pressure Old World wine to compete with the New World head-on and without continuing EU support. On the other hand we have an unexpected prohibitionist movement [symbolized by Sarkozy] that seeks to regulate wine like the Americans do (even as some parts of America are changing) — as a dangerous controlled substance. It is thus imperative for Old World wine to master the tricks of the New World industry — tricks that Constellation and Southern and Costco symbolize.

These changes take place, of course  within the context of the expanding global market, global climate change and a continuing global economic crisis (that’s where a wine economist would have been a useful inclusion).

I won’t pretend that the Decanter Power List is a scientific ranking (Decanter doesn’t claim this in any case), but it is an interesting peek into how wine insiders view their industry. I’ll be curious to see how the names and the story lines change when the next Power List appears.

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.

New World Meets the Old in Argentina

The latest news from Argentina is good — exports are up 40%, according to a report on A New World wine success story! Or is it?

Old World versus New World

Everyone who writes about wine ends up talking about Old World versus New World wines at some point. It is convenient shorthand, I guess. The OId World usually refers to the European heartlands of wine, France, Italy, Spain. The New World is pretty much everyplace else, but especially the US, South Africa, Australian and New Zealand, Argentina and Chile.

Simple dichotomies are often problematic and I think Old World versus New World raises some issues. Old World is often code for tradition, terroir and sophisticated taste while simple industrial wines are associated with New World producers. But it is easy to find counterexamples on each side of the divide. It’s hard to think of Beaujolais Nouveau as embodying the three Ts of Old World orthodoxy — Nouveau seems like the classic Chateau Cash Flow McWine. There are many New World producers, on the other hand, who seem to take the traditions of wine very seriously. John Williams at Frog’s Leap comes to mind. So sometimes it is difficult to know where Old World ends and the New one begins

This is particularly true of Argentina. Winegrapes came to Argentina in 1541, a couple of hundred years before vines showed up in Australia and New Zealand. We tend to think of Argentina as a New World producer because it seems like its wines have only appeared on world markets in the last ten years or so. In fact, however, if you look back a few years you find a much different narrative– a classic Old World wine story.

Old World Argentina

Argentina was settled by migrants from the Old World wine countries, especially Spain and Italy, so it is not unexpected that wine has long been part of its culture. But it might surprise you to know how much Argentina reveals its Old World roots. Argentine wine consumption has until quite recently been very high — Old World high. Looking back to the early 1960s, for example, the heaviest wine consumers in the world were the French (122 liters per person per year), Italy (107), Portugal (100) and then Argentina (83). Spain (61 liters per capita) and Chile came next. No other country came even close.

Argentine wine production was necessarily quite high, too. While France and Italy dominated global wine output in the 1960s, producing almost half of all wine between them, Spain (10%) and Argentina (7.5%) came next (followed by the North African countries that exported mainly to France). Argentina was the Australia of the 1960s.

But with one big difference. Australia (and to a lesser extent Chile) are significant wine nations today because of their high export volumes. Argentina, however, has always produced mainly for domestic consumers (it was actually a net importer of wine in the 1960s as near as I can tell). So it is Old World in terms of wine production and consumption, and has only recently become New World in terms of its global export market presence.

Argentina shares two other important wine attributes with its European relations, both of which are related to wine crises. Argentina’s first crisis, from which it is still emerging, was caused by protectionism. Starting in the 1930s, Argentine winemakers sought and received protection from foreign competition and then subsidies to support domestic production. Arthur Morris of the University of Glasgow wrote a good article on this a few years ago in the Journal of Wine Research. Winegrowing in the subsidized, protected market focused on quantity rather than quality and bad but very cheap wine was the result. There was no incentive to favor quality in the vineyard because good grapes and bad grapes were all mixed together in the cheap bulk wines that urban workers gulped down. Argentina made a lot of wine, but didn’t export any. Who would buy it? This produced, predictably, a crisis of over production.

Don’t Cry: Market Reforms

The big change occurred, according to Professor Morris, when Argentina’s economic policies changed course in the 1990s. The subsidies dried up and decent wines began to trickle in from abroad, establishing a higher standard. An aggressive grubbing up program reduced vineyard area by a third.

The game was up for inferior domestic brands. Competition changed the wine market dynamic, shifting it from quantity to quality. It took only a few years for higher quality Argentine wines to reach the world market, where you see them today. That’s when Argentina became a “New World” producer.

The market reforms that the Argentine industry implemented in the 1990s remind me of the EU agricultural market reforms that Old World wine producers will experience in the next few years. The Argentine reforms seem to have worked, which may be a good omen for the Old World producers, but the industry had to live through a deep crisis first.

It is a good thing that Argentina has made the shift to a wine exporter because of the second crisis it shares with the Old World: collapsing domestic demand. Wine consumption has fallen by about half in France since the 1960s, for example, as consumers have shifted from wine to beer, spirits, sodas and now water. Wine demand declined proportionately more in Argentina, from 83 liters per capita in the 1960s to only less than 30 liters today. The article reports that this trend continues. Argentina has dodged this bad news bullet to a certain extent, however, because of its new focus on quality-driven export markets.

The map of world wine consumption is changing fast. You could define the Old World as the part of the map where high consumption rates have collapsed– France, Italy and Argentina are all there. The New World is where wine cultures are actually growing. Wine market reforms, like those that Argentina has taken and the EU now plans, seem necessary to rebalance the map and align global demand and supply.

Older, Newer: The Wine Lexicon Evolves

Pretty soon we are going to have to invent new terms to describe planet wine– Old World and New World have just about run their course. China and India are obviously not Old World wine countries (although China has made wine for nearly 2000 years) and not exactly New World, either. Perhaps, taking a cue from financial markets, which talk about emerging market economies, we will call them Emerging Wine countries.

And then there are countries like Georgia, Romania and Moldova that produce huge amounts of wine, some of which is now finding its way onto global markets. Old World or New? Old World, if you go by history. Georgia is where wine was first made, according to some historians. But the wine industries in these countries are still recovering (emerging) from the dark Soviet years, when quantity ruled and quality pretty much disappeared. Now, as their industries modernize, they are beginning to enter the market, too. So are they the Oldest World — or maybe the Newest one — and confronting the biggest challenges?

Grubbing Up

Grubbing up is one of my favorite wine economics terms. It means to pull the vines up by the roots and replace them with other agricultural crops. I It is a harsh term, just as it sounds, because it is the opposite of wine — it is anti-wine. Grubbing up isn’t something that a wine lover contemplates with ease, but sometimes it is necessary. The European Union’s Council of Ministers has recently finalized a grubbing up scheme for the EU and it is probably a good idea, even if it may not work.

Watering Down the Wine Lake

The problem is that EU wine production vastly exceeds demand with the result that thousands of liters of wine must be bought up by the EU each year and distilled into alcohol to prevent prices from dropping through the floor. The distillation price support only encourages continued production, waste and expense. It is a mess — a wine lake, as people say — and it has to stop.

A fairly radical plan was introduced a few years ago, one that would have paid farmers to grub up thousands of hectare of vines and introduced market reforms to allow (by deregulating) and to encourage (through supporting programs) European winegrowers to compete more effectively with New World winemakers who are taking their markets.

The package that the Council of Ministers agreed last week is significant even if it is less radical than the original initiative (Decanter magazine called it “watered-down” — never a good thing when you are talking about wine). The program called for subsidies to encourage winegrowers to eliminate up to 175,000 hectares of vines (versus 400,000 hectares in the original proposal), limit chaptalisation (the addition of sugar in the wine-making process) rather than eliminating it, and market-based reforms that encourage and enable winegrowers to compete on world makets (through varietal labeling of wines) rather than hide behind protective barriers.

I’ve been reading up on the details of the final EU plan and it is pretty interesting — the best analysis I’ve seen so far comes from the USDA Global Agriculture Information Network, which you can download in .pdf form at this California Wine Export Program website. The program includes money for grubbing up, of course, and deregulation of wine labels, removal of some vine planting restrictions (so marketable grape varieties can replace uneconomic grubbed up varietals), funds for wine promotion abroad, and so forth. Like any EU program, it is a complicated balance of economic reality, fiscal feasibility and political necessity.

The idea is to help the European wine industry transition to a new market environment, where export markets are growing, domestic markets shrinking and competition is fierce. It is not unreasonable to think that policies like this could work. They worked in New Zealand in the 1980s, for example.

Lessons from Kiwi Wine History

New Zealand today is famous as one of the great success stories in the world wine market. A small nation in an unlikely location, it punches above its weight in the global wine market, holding the title as champion exporter. Not in quantity, obviously, but in price. New Zealand has the highest average export price of any wine producing country.

But such was not the case 25 years ago. New Zealand suffered from a surplus of mediocre wine that could only be sold domestically behind high protective barriers. The industry collapsed with many failed firms from a combination of bad wine and surplus production. The government paid to grub up vines and then opened the market to international competition. Cheap but better wines from Australia flooded in to fill the domestic bulk wine market, leaving New Zealand producers only one choice — make better wine for export. They have done so brilliantly. Their success inspires the EU reforms.

It would be a mistake to think that what worked so well in New Zealand in the 1980s will work equally well in Europe today. It is unlikely that the EU would be willing to let its wine sector reach the sort of crisis that New Zealand experienced and that motivated the dramatic reforms implemented there. If big change comes from big crisis, as I believe (I wrote a book on this theme), then Europe is unlikely to see big change. The social cost of crisis is just too great. The guiding principle of EU policy is to prevent crisis, which makes change that much harder to effect.

Comparing New Zealand to Europe is problematic in other ways, too. New Zealand’s wine production is tiny — a drop in the bucket, really — whereas European producers account for well more than half of all the wine in the world. New Zealand’s grubbing up program may have been difficult, but only 1500 hectares were uprooted rather than the “watered-down” 175,000 set for the EU.

Changing the Rules of the Game

The principle of the EU wine reform scheme is sound, yet many reports that I have read are pessimistic. I think this is mainly because the final reforms are so much more timid that the initial proposal. But there are other reasons for concern.

One thing that economists have learned over the past 25 years is that institutions matter. This is another way of saying that economic forces do not always produce the same results. If the “rules of the game” are different the laws of economics will produce different results. Institutions are the rules of the game in life. Dani Rodrik, my favorite development economist, makes this point in his recent book One Economics, Many Recipes. The nature of local institutions, public and private, formal and informal, shapes the economic landscape in important ways.

This idea applies to the EU reforms in particular. Take the grubbing up scheme, for example. An incentive to repurpose large but unprofitable vineyards in Australia, for example, might well meet with an enthusiastic response because the institutions of wine growing there are different, with large vineyards and a consolidated industry. But European vineyards are much different and represent a completely different model.

Many vineyards (where much of the inferior surplus wine originates) are tiny inherited plots of a hectare or so, frequently on sites with few viable alternative uses. The rules of the game here are much different. A hectare might produce 20-30 tons if badly overcropped and, at perhaps $500 per ton at the local cooperative, gross revenues are too small for a family to live on but too great (compared to alternative uses) to give up. It’s an institutional trap that might be solved by consolidation, but making large vineyards out of these scattered small plots is necessarily costly and difficult.

Under these circumstances growers are likely to hang on to their vines for years rather than accept a modest one-time payment. Grubbing up might need to be forced, not voluntary, to have much effect.

New regulations to allow wines to be labeled according to grape variety (rather than the traditional local geographic designation) might be attractive to a large and distinctly commercial wine producer, but much wine in Europe is still produced by cooperatives that have little to distinguish their wines from others apart form the local designation. What advantage would they have as simple varietals in a world awash with good varietal wine?

A Certain Vision of Wine

It is possible to envision a future where the reforms can work, where the marginal vineyards have gone out of production, where consolidation has increased efficiency and where branded varietals can compete with the world market. (I have even seen some early attempts at EU branded varietals in the discount bins of a local store — more about this in a future posting.) I think it is possible that this vision may be realized — eventually.

But oh, it is such a big jump. The institituions of the small family vineyard and the local wine cooperative seem to me to make these reforms much more difficult. New Zealand’s success will be difficult to repeat.