What Next for U.S. Wine? Unified Symposium’s “State of the Industry”

January 26, 2016 By Mike Veseth in Economic impact, emerging wine regions, wine, wine markets 2 Comments

Sue and I are in Sacramento for the annual Unified Wine & Grape Symposium trade show and meetings that start today and run through Thursday. This is the Western Hemisphere’s largest wine industry gathering and there is a lot going on this year, both on the trade show floor and in the ambitious seminar program.

I will be moderating the “State of the Industry” panel on Wednesday and also speaking about the global wine market “big picture.” Nat DuBuduo of Allied Grape Growers will explain what’s happening in the vineyards (Allied’s most recent newsletter suggests Nat will have some dramatic statistics to reveal), Steve Fredricks of Turrentine Brokerage will examine bulk wine market dynamics and Jon Fredrikson of Gomberg, Fredrikson & Associates will break down the U.S wine market and name his Winery of the Year.

It will be a great session. There’s a lot happening in U.S. wine and this may be the best place to go to learn about it.

Uncertain Prospects

The Economist cover shown here captures the essence of my part of the program. The global economy faces uncertain prospects as we enter 2016. Where will economic growth come from in 2016? I will examine the usual suspects and come up with a surprising answer.

I will also highlight four global trends that I think will be important for the U.S. wine industry in 2016. (1) The slowdown in the Chinese economy, which is likely to have significant direct and especially indirect effects. (2) The possible renaissance of the Argentina wine export machine (I have written about this in my last two columns on The Wine Economist).

(3) The “Euro-Doillar Twist” that is taking place as U.S. interest rates rise slowly this year and European interest rates continue to move into negative territory. No one really knows how this will play out in terms of direct and indirect effects, which adds a major element of uncertainty to any economic forecast for 2016.

A Very Good Year?

Finally (4) I’ll talk briefly about the possibility of contagion as economic events in one part of the world cascade through the system. With some countries on the brink of crisis, it wouldn’t take much to set off a chain reaction.

I will conclude my very brief remarks by asking if 2016 will be a very good year for the U.S. wine industry? The answer? Maybe! (Which may come as an optimistic surprise after all the gloom and doom of my previous points.) There are definite positive prospects for U.S. wine this year, but lots of potential problems, too.

What next? Lots of uncertain possibilities. Get ready!

>><<<

A very good year? That calls for Sinatra. “I think of my life as vintage wine …”

Legendary Fred Franzia to Speak at Unified Symposium Luncheon

December 1, 2015 By Mike Veseth in Two Buck Chuck, wine, wine history 4 Comments

Sue and I will be at the Unified Wine & Grape Symposium in Sacramento on January 26-28, 2016 where I will once again moderate the State of the Industry session featuring presentations by Steve Fredricks of Turrentine Brokerage, Nat DuBuduo of Allied Grape Growers and Jon Fredrikson of Gomberg, Fredrikson & Associates.

I always look forward to the Wednesday “State of the Industry” panel because the speakers are so well-informed and the information so timely and interesting. But if I am honest, this year I am even more excited about the Tuesday luncheon gathering because that speaker will be the legendary Fred Franzia (a.k.a. Mr Two Buck Chuck) of Bronco Wine. Wouldn’t miss this for the world!

Bronco By the Numbers

Bronco Wine Company is a major force in the U.S. wine industry. According to the most recent Wine Business Monthly report, Bronco’s 20 million annual case volume makes it the fourth largest U.S. wine company after Gallo, The Wine Group, and Constellation Brands. Although Charles Shaw (a.k.a. Two Buck Chuck) is the best known Bronco label, the company has more than 50 brands. One of the products that Bronco does not make is Franzia, the popular box wine, which belongs to The Wine Group. Franzia doesn’t make Franzia? It’s a long story that I will tell another time.

Bronco’s history began in 1973, when Fred Franzia and his brother Joseph met with their cousin John and pledged to go all in to build a new wine company. Equipped with a tiny bank loan, their knowledge of the business side (Fred and Joseph) and of winemaking (John), plus a major measure of determination, they set out on the twisting road that has brought them to their current position.

Their accomplishment is quite breathtaking when you think about it. Bronco today boasts impressive winemaking facilities, a packaging and distribution center in Napa and about 40,000 acres of vineyards. No, I didn’t make a mistake, the number is 40,000, making Bronco one of the largest vineyard owners in the world.

The Miracle of Two Buck Chuck

One of Bronco’s greatest achievements, of course, is the success of the Charles Shaw wines sold at Trader Joe’s stores. These clean, balanced, and affordable wines played an important role in the democratization of wine in the United States. So many previously intimidated consumers were drawn into the wine market by Two Buck Chuck and the other wines it inspired or provoked.

I wrote about “the miracle of Two Buck Chuck” in my 2011 book Wine Wars. The quality of these inexpensive wines forced other winemakers to raise their game and give better value, which in turn gave consumers more confidence and expanded the wine market’s reach. If you think about the U.S. wine world before 1973, well it really is a miracle that we have come so far. The Franzias played an important role.

The View from Bronco Wine

What will Fred Franzia talk about at the Unified Symposium luncheon? Obviously I don’t really know, but I hope that he will look back at some of the inspiring figures that he has known in his life in American wine and look ahead at some of the challenges he sees for the future. I’m hoping to be informed, entertained, and inspired.

Sue and I had an opportunity to talk about the past, present, and future of American wine with Fred Franzia back in September. Fred invited us to come down to see what a large-scale grape harvest looks like. Fred’s son Joey took us to see the night harvest at a 4000-acre vineyard ranch near Lodi — quite an experience to see the big machines at work under the stars.

We also visited the Napa bottling and distribution center and the main winery in Ceres, where we had lunch with Fred, Joseph, and John Franzia. Then John took us through the working winery (he designed it and supervised its construction), which was receiving grapes picked the night before (more than 300 big truck loads a day at that time).

Big and Bigger

The scale of the Ceres operation got our attention, of course. We saw some tanks that held 350,000 gallons of wine each. Big as they are, they were dwarfed by other tanks that held twice as much. Amazing.

Once we got used to the scale of the Bronco winery we began to appreciate the tremendous attention to detail, which was apparent in all of the other Bronco operations we visited. So many moving parts coordinated so efficiently. Very impressive. We enjoyed the opportunity to sit and chat with Fred in his modest trailer office and to hear some stories from the past and his vision of the future. I’m hoping to hear more along these lines when Fred gives his luncheon talk.

The Name is Shaw, Charlie Shaw

Let me share one story. Fred told us that he was making a call at a Trader Joe’s store — he still handles that account himself — and struck up a conversation with a young man who was stocking a Charles Shaw display. Fred asked about how the wine was selling and what customers were saying and so on and the clerk asked who he was and why he wanted to know. Well, Fred replied, I’m one of the people who help make this wine — I work at the winery.

Wow, the clerk exclaimed. You’re Charles Shaw? You’re Charlie Shaw! No, no, my name’s not Shaw, Fred tried to explain, but it was too late and a minute later the store PA system announced that Charles Shaw was visiting the wine aisle. Amazed customers surged to the Two Buck Chuck display to thank their hero and Fred spent the rest of his visit happily autographing wine bottles. A rock-star moment!

I hope I have the details of that story right (and I apologize if I’ve messed up) because it says a something about the pride and personal touch that we found everywhere at Bronco and about the warm enthusiasm that Charlie Shaw inspires in his fans.

>><<<

Sue’s photos above show the blur of the Charles Shaw bottling line at the Bronco Napa facility and a tractor driver during night harvest.

Wine’s Future: Tighten Up

April 24, 2012 By Mike Veseth in tight fat uncorked, wine markets, wine price 6 Comments

“Tighten Up” was a big hit for a Archie Bell and the Drells back in 1968. If you aren’t familiar with this R&B tune and its trademark dance you might want to take a moment to learn it because Tighten Up is where the U.S. wine market is headed.

[This is the second in a series of articles on Tight, Fat and Uncorked, the three trends I see shaping the wine industry in the near future.]

Up and Down Economics

There is nothing new about tight wine markets (where shortages pull prices higher) or slack markets either. Wine is an agricultural product subject to the sort of persistent cycles that economists have long studied. Today’s high price encourages farmers to plant more even as it discourages growth in demand. Result: future surplus and falling price when the new crops hit the market. Low prices discourage production but encourage consumption growth, resulting in shortages and future price hikes.

Up and down — that’s happens in wine markets. The Turrentine Brokerage’s “Wine Business Wheel of Fortune” illustrates the U.S. wine cycle — click here to view a detailed pdf version that will be helpful in understanding what follows.

This Time Really Is Different

If tight and slack wine markets are not uncommon, what’s the big deal? The answer is that we are coming off an unusually long period of low prices and most likely headed into a long period of tight supply. It is the length of the cycle, not the fact of it, that is striking and important.

The current Turrentine Wine Wheel shows the most recent cycles. The figure shows that prices started falling in 1982, for example, hitting bottom in 1986. By 1989 prices were at their peak again, setting up the next cycle, which ran from 1990 until 1999. It took seven years for the first cycle to work itself out and nine years for the second cycle.

Now let’s look at the current wine cycle, which Turrentine says began in 2000 and that they project will last an incredible 18 years! The slack side of the cycle was exceptionally long — 2000 to 2011 — because it combined several factors. First was the typical domestic surplus that results as vineyards planted at the previous cycle’s peak begin to bear fruit. The second factor was increased global wine production, which served to keep prices low even as some domestic producers cut back. This extended the period of falling price.

The Great Recession is the final factor, depressing prices and further extending the slack side of the cycle past 2010. As you can see from the figure, Turrentine originally expected the down side to last only through 2006, but a “perfect storm” kept prices low through 2010 as demand and supply slowly moved into balance.

Ebb Tide

Now we have finally entered the tight market phase where demand exceeds available supply at the current price and this part of the cycle is likely to be extended as well. Vineyard capacity did not expand sufficiently during the long down cycle and in fact it contracted dramatically in particular places. The EU wine market reforms removed some capacity in Europe and the collapse of part of the Australian industry has done the same there. In the U.S. some Central Valley producers, tired of low or negative margins, switched from wine grapes to more consistently profitable crops like tree nuts.

In theory it should take only a few years to rebuild vineyard capacity but in practice it will take longer for several reasons. First, the length and severity of the slack part of the cycle will naturally make some who have left the market in the U.S. and elsewhere hesitate to reenter it. The supply response in the U.S. will be delayed for this reason and also because of what I am told is a shortage of nursery stock needed to establish new vineyards and renew old ones. It will take a few years to rebuild stocks needed to rebuild vineyard capacity.

Prices for grape contracts and bulk wine have already risen (dramatically in some specific cases) as they must do to eventually bring the market back into balance, but this will be a slow adjustment process. Domestic wines must compete with imports, which act to limit price increases in some segments of the market. And of course consumers have become accustomed to lower prices and are not generally expected to “trade up” (except in response to bargain pricing) as much as they may have previously traded down.

Hysteresis: Winding and Unwinding

Rising grape costs are good news for growers, who have borne the brunt of adjustment costs during the long slack cycle. Now the big squeeze will move up the supply chain in the form of tighter margins and the effects are expected to be substantial precisely because the length of the tight market cycle will be so long.

What will the wine industry look like when we get back to the top of the cycle? One thing we can be sure about is that it won’t look the same as it did back in 2000. Economic adjustments are not necessarily symmetrical — they don’t wind up the way they unwound. (Economists have a name for this property: hysteresis.) The history that unfolds in the intervening years matters a lot and there has been a lot of time for things to change since the last market cycle began.

In particular, the long slack tide brought new products, new consumers and new consumer behavior into the market. This doesn’t change everything, but it changes a lot — as I’ll explain in next week’s post.

Wine’s Future: Tight, Fat, and Uncorked

April 17, 2012 By Mike Veseth in globalization, ordinary business, tight fat uncorked, wine research 1 Comment

Hot, Flat, and Crowded was the title of New York Times columnist Thomas Friedman’s bestselling 2008 book about the future of globalization (Friedman released an upgraded 2.0 version of the book in 2009 — times change, I guess).

Global climate change, the rising global middle class and population growth were the three key issues that he identified in the book, which advocated a “green revolution” that would renew America.

In an interview with Fareed Zakaria (excerpted on the book’s Amazon.com home page), Friedman exlains that

There is a convergence of basically three large forces: one is global warming, which has been going on at a very slow pace since the industrial revolution; the second–what I call the flattening of the world–is a metaphor for the rise of middle-class citizens, from China to India to Brazil to Russia to Eastern Europe, who are beginning to consume like Americans. That’s a blessing in so many ways–it’s a blessing for global stability and for global growth. But it has enormous resource complications …

And lastly, global population growth simply refers to the steady growth of population in general, but at the same time the growth of more and more people able to live this middle-class lifestyle. Between now and 2020, the world’s going to add another billion people. And their resource demands–at every level–are going to be enormous. I tell the story in the book how, if we give each one of the next billion people on the planet just one sixty-watt incandescent light bulb, what it will mean: the answer is that it will require about 20 new 500-megawatt coal-burning power plants. That’s so they can each turn on just one light bulb!

Recently I’ve been thinking about the “big picture forces” that are shaping the future of wine and Friedman’s unholy trinity keeps coming to mind. If the world is becoming hot, flat and crowded, then obviously these forces will affect the world of wine, too. But what other forces are involved? What are the key wine-specific factors that should be considered when looking to the future?

After giving this question some thought, I’ve settled on a trio of trends that are inspired by Friedman’s book and in fact overlap with his list just a bit. Over the next few weeks I’ll explore the the implications of a wine world that is Tight, Fat, and Uncorked. Here is a brief introduction.

Tight [Markets]

Wine markets go through the sorts of cycles that are so common with agricultural products. The Turrentine wine brokerage firm has formalized wine’s particular cycle in its famous “Wine Business Wheel of Fortune.”

The period of low and falling wine prices, which brought so many consumers into the wine market (and pushed some growers and makers out of it) has come to an end here in the U.S. and prices are on the way up. Markets have already started to tighten up and some are close to seizing up. The low price part of the cycle was unusually long (for reasons I’ll discuss in my next post) and the cycle’s tight turn may be long, too.

Tight markets will affect the whole wine supply chain and impact different parts of the market differently. We haven’t seen wine markets this tight in a while and it’s going to be interesting to see what happens.

Thick Around the Middle

The World is Flat is the title of another Thomas Friedman book and when it came out I boldly declared it “Globaloney“ (which is the title of one of my earlier books).

Friedman’s “flat” back then referred to global competition and the mythical “level playing field” where everyone competes with everyone else. Geography didn’t matter any more, Friedman seemed to suggest, because some smart guy in Bangalore could take your job in an instant by offering to do it better or cheaper or while you are asleep. The book was really a call for America to invest in itself — in education and technology — and the flatland analogy was supposed to motivate politicians and policymakers to take action.

When Friedman says the world is flat today, he means it in the sense of flat organizations. He specifically argues that the rising middle class around the world is a powerful force for change and this I believe is not globaloney, although I wonder if he would say exactly the same thing today, with the “occupy” movement still active and the gap between the 1% and the 99% so prominent in the public mind.

The world wine market isn’t getting flat so much as fat. Even though the prices of some “1%” wines have fallen, there is still a gap big enough for the 99% to want to “occupy.” The impact of the growing global middle class will be very important in the long run. The wine market is becoming “fat” in the sense of being “thick around the middle” — middle class, middle market, middlebrow. That’s global trend #2.

Now Lose the Cork

The cork in question is a symbol of the practices and traditions associated with an aristocratic view of wine that will not be swept away but that will be joined by many other, more “democratic” practices as the era of tight and fat unfolds.

Generational transition, the adoption of wine by new global middle class consumers, the lingering impact of the economic crisis and America’s continuing recover from its Prohibition hangover will all play a part in this story.

Tight, Fat and Uncorked: if this sounds terrible for the future of wine, please relax. It’s not all bad (or good either), it won’t all happen at once or in the same way and it it’s not [just] about the wine.

I invite you to read along over the next few weeks as I try to work out these ideas in Friedman-esque style. I hope to benefit as I usually do from the comments, critiques and creative ideas of my readers.

State of the Wine Industry: Global Perspectives

February 1, 2012 By Mike Veseth in globalization, wine markets 8 Comments

I’m back from Sacramento where I moderated two panels at the Unified Wine and Grape Symposium, North America’s largest wine industry gathering. I chaired the morning “State of the Industry” session (estimated audience = 2200 according to one news report) and a smaller afternoon break-out on “Leveraging Global Supply.”

You can find a list of the session speakers at the end of this post and you can read a comprehensive news report here. I thought I would use this space to outline what I said in the morning session. My job was to try to provide a global frame for the speakers who followed.

Silver Linings and Dark Clouds

Global Perspective. Wine is a global business. When David Ricardo wrote his economics textbook almost 300 years ago the example he used to illustrate international trade was the wine trade between Britain and Portugal. It has always been important to have a global view of wine, but now more than ever as the wine world gets smaller and more tightly connected.

Silver Linings. This is a year with much good news for the wine industry, especially for winegrape growers as the shortage phase of the wine cycle unfolds and prices rise after years of structural surplus.

But as an economist, it is my responsibility to channel Alan Greenspan and to caution growers to avoid irrational exuberance. Silver linings don’t always come wrapped in dark clouds, but sometimes they do. There are dark clouds a plenty for the global economy and some of them will affect the wine industry.

A Dangerous Phase

A Dangerous Phase. The global economy has entered a “dangerous phase” according to the International Monetary Fund. It is a time of great uncertainty and risk because global growth is slowing, albeit unevenly, at a very inconvenient time.

The problem, of course, is the debt crisis. And while each country has built “mountains of debt” in its own way, there is only one route down from the summit: stop adding to the debt and then try to outgrow the debt burden.

Europe, the U.S. and Japan are all struggling to contain growing debt. Stopping the bleeding is the first priority, of course, but no one seriously expects the debt to be paid off. The only solution is for debtor countries to grow faster than their compound interest bills and to slowly make the debt and its burden a smaller and smaller proportion of GDP.

Catch 22: Slowing growth (and the probability of recession in Europe) means that even more emphasis must be put on cutting budgets, which unfortunately makes it even more difficult to generate growth.

The Growth Squeeze. So everyone will be desperate for growth, but where will they find it? Consumer spending? Not likely with unemployment high and the housing crisis still unresolved. Business investment? Not with credit so tight and business confidence so low. Goverment spending? Please! The pressure is on to cut government outlays, not expand them.

This leaves only international trade and it seems likely that many countries will try to stimulate exports through currency depreciation to get the growth they so desperately need. This has worked for the U.S., which has had a secret “weak dollar” policy. Look for currency wars as many countries try to follow suit by depressing their exchange rates.

Wild Cards. There are many “wild cards” in the global economic scenario — factors that could change everything. The Euro is probably the biggest wild card, since a collapse of the single currency would be a financial earthquake with global repercussions. The U.S. economy is another wild card, especially in an election year.

A Tight Squeeze for Wine

A Tight Squeeze. The wine industry is connected to the global economy but not perfectly synchronized with it. The wine industry is in for a tight squeeze in the coming year. There will be increased competition on both ends of the market — for wine grapes (and bulk wine) and for wine drinking customers and retail accounts.

[The intensity of the squeeze, as detailed by the other speakers in this session, was probably the biggest news to come out of the State of the Industry panel. Vineyard plantings have been stagnant for several years, so there is not enough supply to meet rising demand in many market categories.]

The shortage of grapes and bulk wine will force wineries to search high and low for product to sell. The higher costs that result will put even more pressure on margins and this may be the biggest squeeze of all since buyers are now accustomed to discounts and, having reset once down to lower prices, will be not quickly reset back up again across the board. The pressure on margins will increase because of rising competition for market share.

Currency Wars. Exchange rate shifts will make this situation more complex. The U.S. has enjoyed a weak dollar for several years — this stimulated wine exports and kept the price of import competition high. The dollar strengthened in 2011 and is likely to continue to strengthen in 2012 and this will reverse some of those effects, making the U.S. wine market more attractive to foreign wine firms. These effects will loosen the big squeeze in some places and tighten it in others, creating both dark clouds and silver linings.

Wild Cards. There are lots of wild cards, but the most interesting one for me is China. We expect China’s growth to slow in 2012 — perhaps to 8% or less — if Europe’s recession is more serious than projected and if U.S. growth stalls.

The “bicycle theory” of Chinese economic growth holds that China must grow by at least 8% in order to overcome structural weaknesses and social instability. If growth falls below 8%, the theory holds, a “tipping point” effect might cause rapid deceleration.

No one knows if the bicycle theory really holds for China, no one knows if 8% is the tipping point number. And no one wants to find out.

A Chinese slump would have some direct effect on wine sales there, but the biggest impact on global wine would be indirect, spread through trade flows and financial flows. The Chilean Peso, Australian dollar and South African rand would all likely fall in value dramatically altering the competitive structure of global wine trade.

All this could happen, but of course it might not. That’s the biggest squeeze this year — uncertainty.

>>><<<

Thanks to the Unified Symposium’s organizers for inviting me to take part. Special thanks to my fellow panelists, who helped me so much, and to Jenny and Lisa for their guidance and support. Here are the details of the two sessions.

State of the Industry

The State of the Industry session will provide a comprehensive look at every aspect of the wine industry, from what’s being planted to what is selling. This 2½ hour session features highly regarded speakers and will offer incredible value for attendees who need to understand the market dynamics of the past year and are seeking insight into the market trends that will define the year ahead.

Moderator:
Mike Veseth, The Wine Economist Blog/University of Puget Sound

Speakers:
Nat DiBuduo, Allied Grape Growers, California
Steve Fredricks, Turrentine Brokerage, California
Jon Fredrikson, Gomberg, Fredrikson & Associates, California

>>><<<

Leveraging the Supply Side of the Global Wine Market

This session will focus on supply to Brazil, Russia, India and China (BRIC) as well as to Chile and Argentina.

Moderator:
Mike Veseth, The Wine Economist Blog/University of Puget Sound

Speakers:
Steve Dorfman, The Ciatti Company, California
Liz Thach, Sonoma State University, California

Boom Boom! On Money and Wine

October 25, 2011 By Mike Veseth in wine investment, wine research 2 Comments

I’m just back from the San Francisco Treasury Symposium where I gave the luncheon keynote speech on “Wine Boom and Bust — With Lessons for Finance in the 21^st Century.” You might well ask what business a wine economist has speaking to a group of treasury executives (I asked that question myself!), and the answer has two parts.

First, I actually know a little bit about global finance from my day job as a university professor. I’ve written frequently about global financial flows and especially the periodic crises that seem to plague them.

The other reason is that the conference organizers thought it would be interesting and different to hear someone talk wine, but in a way that would still be relevant to their treasury executive audience. So that was my challenge.

Money into Wine? Easy! Wine into Money … Not So Much

Money and wine are closely tied, although it is an asymmetrical relationship. It is pretty easy to convert money into wine, for example. In fact, it may be a little too easy to do this. Some of my friends report that the whole “money into wine” thing has gotten way out of hand for them. You probably know the problem from personal experience if your cellar has grown bigger than your bank account.

It is harder to convert wine into money, especially if you are in the wine business. The best way to make a small fortune in wine, people tell me, is to start with a large one. I focused on three aspects of wine economics for my talk: globalization’s opportunities and threats, the “new rules of the game” and the need to embrace (or at least accept) volatility. All these points apply to both wine and 21st Century finance.

Globalization: Opportunity and Threat

Globalization offers a world of opportunity to winemakers and financial managers alike, but it is a complex world and a very competitive one. New markets open their doors … but your market doors are open wide, too. Optimists will see the wine glass more than half full and seize the opportunities that present themselves, hopefully taking the associated costs and risks into account.

One problem with globalization is that the risks are so difficult to fully evaluate. The Australian wine industry, for example, is currently suffering from a bad case of globalization gone bad and part of the problem has nothing directly to do with wine.

Although the Crash of 2008 slowed down the global economy, China continues to surge ahead, its demand for natural resources (one of Australia’s strong sectors) growing year after year. Australian has come down with a bad case of the “Dutch Disease” where success in one sector causes chaos elsewhere. As mineral sales have increased, the strong Australian dollar has depressed the already weakened wine industry by discouraging exports. Click on the “Dutch Disease” link to see my report on this problem.

The [New] Rules of the Game

Global finance is dominated by a number of key financial centers that set the “rules of the game” for money. Wine works the same way, but the centers have shifted and the rules of the game have changed.

Producing nations (think France and Italy) once determined the rules of the game with their AOC designations. The center shifted to Great Britain, Germanyand the United States in the last 20 years and now the rules are written by those who sell wine (think Tesco, Costco and Aldi) more than by those who produce it. The most successful wine sectors so far are those that have best adjusted to the new rules.

The rules will change again soon, I suspect, as the BRIC and new BRIC nations make their wine market influence felt. I think finance will also experience shifting centers with new rules and have to adjust accordingly.

Volatility was my final point and wine markets have plenty of it. Boom and bust cycles seem to be “baked in the cake” in both money and wine. I talked about Australia’s five big wine booms and busts in the past 150 years and characterized them in terms of Hyman Minsky’s famous “seven stages” description of financial crises.

Beyond Boom and Bust

Booms and busts are bad enough, but wine markets also suffer from medium-term cycles of surplus and scarcity as illustrated by the Turrentine Brokerage “Wine Business Wheel of Fortune.” High prices today sow the seeds of low prices a few years down the road, according this analysis, which is based on the well-known “cob-web” model of lagged adjustment in agricultural markets.

Anyone who has tried to guide their 401k portfolio (much less manage corporate financial affairs) knows how volatile financial markets can be – the wine world’s bubbles and cycles must seem pretty peaceful by comparison.

Wine and money may be very different, but the problems they face bear a certain resemblance, don’t you think? What can wine teach money in these uncertain times?

One lesson, I proposed, is to “think global but drink local.” This sounds pretty simplistic, but it captures trends that I see in wine today. Economic imperatives have made both global and local markets more important than in the past. Developing direct sales vectors and developing and maintaining personal relationships is high priority today. Wine (like money) is a relationship business that needs constant attention.

Boulding’s Law

But it’s useful (and often necessary) to keep a global mindset even as you cultivate local markets. The world is getting bigger and smaller at the same time and the rules of the game continue to change.

The second lesson is what I call “Boulding’s Law” after Kenneth Boulding, the famous economist. Boulding once made a study of the history of the future. He looked at what people thought about the future at various points in time and then did a “fast forward” though the history books to see if they were right.

His conclusion? When the future came around people were usually surprised. It wasn’t what they expected at all (even if it was exactly what they predicted years before!).

Hence Boulding’s Law: The best way to prepare for the future … is to prepare to be surprised. That holds for wine, I think, and for money, too.

>>><<<

Thanks to the San Francisco Treasury Management Association for inviting me to speak at their symposium. Special thanks to Jim Lindsay and Larry Goldman.

Malbec Boom … and Bust?

April 18, 2010 By Mike Veseth in Argentina, Supply and Demand, wine markets 6 Comments

Malbec is hot and Argentinian producers are harvesting the benefits of a boom market. The Nielsen Scantrack multi-vector retail sales data reported in the April issue of Wine Business Monthly tell the story.

Total U.S. table market sales up 3.0 percent in dollar value over the last 12 months and up 3.5 percent in the quarter.

Argentinian wine sales (mainly but not entirely Malbec) are up 41.4 percent for the year and 36.6 percent in the last quarter. That’s a rate of growth unmatched in the current wine league table — much higher than other New World producers like Chile (5.2 percent growth for the year), South Africa and Australia (falling dollar volume sales).

Only New Zealand is remotely in the same sales growth ballpark with an 18 percent increase in the last quarter.

That’s Why They Call It the Dismal Science

Only an economist would look at this picture and wonder if Argentina’s Malbec boom might foreshadow a coming Malbec bust. Sorry to be so gloomly … can’t help it. That’s why they call it the dismal science. When economists see silver linings they start looking around for the dark clouds that come with them.

Personally, I hope the boom continues for a while at least. It has to come to an end some day, of course, since 30+ annual percent growth quickly compounds its way to All The Wine in the World. Only someone named Ponzi could sell that vision of Argentina’s future.

The idea that bust follows boom isn’t just my dismal side talking, it is a persistent feature of agricultural markets. High prices are great, but when everyone expands production the result is a collapse. Low prices convince producers to invest elsewhere, so supply fails to keep up with demand the prices rise again. Rinse and repeat.

World Wine Wheel

I learned about this cycle back in Econ 101 in the form of the cobweb model of market dynamics. The Turrentine Wine Business Wheel of Fortune (click here for the pdf version) applies this idea to the U.S. wine market in particular.

The 2007 version of the wheel shown above predicted that the U.S. wine industry would be deep into the Emerging Shortage zone in 2010. This obviously didn’t take into account the Great Recession, which has created substantial surpluses of wine today, but I think the general logic still holds.

Data suggests that vineyard plantings are down (at least one major grape vine nursery has shut its doors). My sense is that wine producers have scaled back supply to the level of current demand and that the persistent overall market surplus is mainly the overhang from previous years. Once that is dealt with (easier said than done!) and demand begins to come back, that “emerging shortage” situation could come to pass.

Having a Good Crisis

Meanwhile, Argentina is having a good crisis, at least in terms of wine, as their good value Malbecs have benefited from consumer trends to trade down and trade over. WineSur (a great source for Argentinian wine news) reports new vineyard plantings and winery expansions, calling it “a risky supply and demand game.” Risky and high stakes.

The Catena Family group exported 12 million liters of wine in 2009, according to the article, but has expanded its capacity so that it can produce 19 million liters this year to sell in 2012. “We are running a risk and investing according to our estimates,” chief winemakers Alejandro Vigil reports, “We also continuing buying vineyards … This year we’re planning to implant around 200 hectares … 75% of which will be implanted with Malbec.”

You’ve got to think five or six years ahead in Argentina’s dynamic Malbec market. New vineyards today, more grapes in three years or so when the vines have matured, market-ready wine a couple of years after that. I wonder what the wine market will look like then? No wonder they say that the only person crazier than a winery owner is his banker! Easy to get caught leaning the wrong way under these circumstances.

Will Argentina’s Malbec boom lead to bust? Possibly, but there is reason to think it might not. Nicolás Catena, head of one of the largest firms, is a recovering economics professor (he taught at UC/Berkeley at one point). He came back to wine and Argentina at his family’s request. If, as I think, skepticism is hardwired into the economist’s brain, then perhaps Catena’s big investment in the future is more cautious than it seems and will pay off handsomely.

Conventional Wisdom versus Mark Twain

The decision to expand output and exports forces a second risky choice: focus (on Malbec) or diversify? It is conventional wisdom not to put all your eggs in one basket. But Mark Twain once advised the opposite: Put all your eggs in one basket and watch that basket!

A new article on WineSur addresses this question and the majority viewpoint seems to be with Mr. Twain but this is perhaps understandable since it is Malbec that has put Argentina on the world wine map. Malbec has established Argentina’s identity and reputation and winemakers are understandably reluctant to bet against their own success.

But it must be said that rapid export expansion focused on a single varietal does magnify the risks. I would advise Argentinian wine industry leaders to watch that basket very carefully — invest in their markets so that Malbec becomes a durable phenomenon with good length and not a short sharp boom/bust fad.

Vineyard Economics: Boom and Bust in the Global Wine Market

September 18, 2007 By Mike Veseth in wine markets Leave a comment

Anyone who studies the economics of the wine business eventually comes to realize that wine is fundamentally an agricultural product with the boom and bust market cycles that ag markets are prone to experience because supply cannot quickly adjust to changes in price and demand.

Here’s what I mean: When demand for Pinot Noir (PN) rises growers must decide whether to pull up Chardonnay and plant more PN. They may delay doing this, creating a short term shortage of PN (and rising prices), because they are unsure whether the Pinot Noir boom is real. If they do switch, it takes maybe five years before the new vines are ready to make wine. By that time the PN craze may be ended and so the market will collapse under the weight of the extra wine. Even if demand stays firm all the extra PN coming to the market at once may result a surplus of wine and falling prices. Then growers have to decide whether to stay in PN or switch to something else (Pinot Grigio?) and so the cycle begins again. Rising price, rising production, surplus, falling price and so on.

The winemakers in Oregon are currently worrying about this cycle. Oregon Pinot Noir has been hot in recent years, which has been good for their businesses. But what’s going to happen when the new vineyards they’ve planted begin to produce in a couple of years. Will Pinot Boom be followed by Pinot Bust?

(Economics students will recognize the vineyard boom-bust cycle as a market cobweb, one of my favorite examples of economic dynamics. Cobwebs can be stable and converge slowly, or they turn unstable and explode.)

Pinot Noir aside, most of the talk in wine markets these days is about surplus, not shortage. Australia is still stuck with large surpluses of bulk wine. California is in surplus, too. And the European Union has been forced to introduce a new wine regime in an attempt to drain its wine lake and reverse the structural forces that created it.

It is very interesting, therefore, to read about the coming wine shortage. This is the message of recent studies by the people at Turrentine Brokerage, a Novato, California firm that does wine market research and also brokerage services (go to their Marketplace section to get a real feel for supply in the bulk wine market!). I’m very impressed with their analysis of wine market dynamics.

Turrentine Brokerage has created the Wine Wheel to describe the boom-bust cycle of the wine markets. According to their analysis, we are currently in the stage called Emerging Shortage for many wines where supply is stagnant or falling (no one’s really planting much Cabernet Sauvignon in California right now) but demand is slowly growing. There isn’t a shortage yet, but there could be or will be in the future and the market isn’t taking action now to deal with the problem when it comes.

Moving around the wheel, Emerging Shortage is followed by Acute Shortage, with rising prices, which stimulate new plantings and new vineyards and wineries. This large scale expansion leads inevitably to and Emerging Surplus and then Acute Surplus. And then we start again. If you think of wine as a tiny craft industry or as a giant industrial business, these cycles don’t make much sense. But when you realize that fundamentally agricultural nature of wine, it all falls into place.

So don’t be surprised if wine prices start to rise back up as the surpluses disappear. But don’t expect prices to go through the roof, either (except for those high end collector wines that you read about in the magazines – their prices are already stratospheric). The world wine market is very small these days and this may keep prices from getting out of hand. Boom and bust cycles happen everywhere, but I’m not sure that they are entirely synchronized, so shortages in one part of the world may still be partially offset by surpluses elsewhere. This cushions the cycle somewhat as far as consumers are concerned – for now at least.

But what about the future? I wonder if the cycles will become more or less severe in the future? That’s a question for a future essay!

Bargain Wine and the Big Mac Index

August 5, 2008 By Mike Veseth in emerging wine regions, globalization, Supply and Demand, Washington wine, wine price Leave a comment

These are interesting times for a wine economist! I’ve recently been interviewed by a national newspaper (wearing my international economist hat) about the presidential candidates’ policies and then by a popular supermarket cooking magazine (in my wine economist role) about exchange rates and rising wine prices.

The Dollar and the Wineglass

The dollar hit a new low against the Euro earlier this summer and although it has rallied a bit of late, Euro-zone imports are still very expensive. This affects the wine market in a number of way.

Old World wine import prices are being pushed up as the strong Euro works its way through the distribution system. Producers and distributors have tried to postpone price increases, but I think they have run out of wiggle room, especially with high energy costs pushing up transportation costs, too.

There is pressure to raise domestic wine price, too. Increased exports (the benefit of a weak dollar) have drained some of the domestic surplus. Those surpluses were a reason for low wine prices earlier in this decade, but they will soon be gone as we move through the Turrentine boom and bust wine cycle. (Unexpectedly large 2008 harvests in Australia and New Zealand, however, will moderate price pressures a bit in some market segments).

The cheap dollar is probably also at least partly responsible for soft Euro prices of French en primeur wines and the recent sale of the iconic California producer Chateau Montelena (of 1976 Paris tasting fame) to a French buyer. The Euro’s high cost has discouraged U.S demand for wine contracts (although indications of a weak vintage are also a factor) while the cheap dollar makes U.S. wine assets a relative bargain for foreign investors.

Exchange rates affect all international businesses and wine is no different. This is one reason why large wine companies go global, sourcing products and managing brands from many regions. Troubles in one area can be offset by opportunities elsewhere.

The McWine Index

Wine prices in the U.S. appear to be heading up – what’s a bargain-seeking shopper to do? That’s the question I was asked by the wine and spirits editor of a major cooking magazine. The answer is to try to make the exchange rate work for you, not against you. The Economist magazine’s Big Mac Index can help.

The Big Mac Index, which appears in the July 26, 2008 issue of the magazine, is a simple indicator of whether a currency is over-valued or under-valued relative to the U.S. dollar based on the price of the ubiquitous fast food entrée. The Euro, for example, is estimated to be overvalued by about 50 percent. A $3.57 Big Mac costs the equivalent of $5.34 (50 percent more) when purchased at Euro-zone prices at the prevailing exchange rate. European Big Macs are overpriced for dollar-holding buyers by this measure and so is just about everything else, including European wine. (The worst place to buy a Big Mac, according to the index, is Norway, where it costs the equivalent of $7.88 – ouch!).

The Big Mac index is a crude way of measuring the relative purchasing power of different currencies (to do this properly is a very complicated process), but the burgernomic indicator is generally surprisingly robust. It is pretty closely reflects the perceptions of tourists and traders and is often consistent with the more scientific results of detailed academic studies. Who knew that hamburgers could be so useful?

Bargain Wine Hunt

Where are most favorable exchange rates in the wine world for dollar buyers? The Big Mac index points to Argentina, Chile, Uruguay and especially South Africa. The South African Rand is undervalued by 37 percent according to the Big Mac index – that $3.57 hamburger sells for the equivalent of just $2.24 in Capetown. The cheaper Rand results in cheaper South African wines, even taking into account high transportation costs. That is helping these wines break into the U.S.market, although there is more than exchange rates involved in this process (watch this space for an upcoming report).

But Southern Hemisphere wines aren’t the only bargains. Washington State wines are exceptional values at every quality level and I included them in my cooking magazine recommendation list. Washington wines don’t benefit from an undervalued currency. Instead they suffer somewhat from an undervalued reputation, which results in relatively lower prices for the quality. There is so much focus on high profile California wines in the U.S. that great wines from other regions don’t get the attention they deserve. This condition, like today’s exchange rates, won’t last forever, so take advantage of it now.