We live in a time when problems we face are complicated but many of the answers proposed to address them are very simple.  I am suspicious of simple answers to complicated questions, both in general (this was the theme of my 2005 book Globaloney) and when it comes to the American wine industry.

Draining America’s Wine Lake

Wine Economist readers already know about the American wine industry’s general over-supply problem.  Despite several short harvests in a row in California, wine inventories remain very high and prices are falling. As Jeff Bitter pointed out at the Unified Wine & Grape Symposium last month, many thousands of acres of wine grape vines have been removed and more grubbing up is necessary before supply has been downsized to balance with demand. Similar adjustments are taking place throughout the world of wine.

I was interested to learn from Jeff that California’s Central Valley is perhaps closer to equilibrium than, say, the Central Coast. This is in part because growers in the valley can more effectively switch to alternative crops, which cushions the blow of vine removal. Indeed, many large growers already farm multiple types of crops, so the switch is a change of ratio and proportion, not a move into a new line of business.

Some growers would like to “furlough” their vineyards, to pause production until the market has stabilized. But, at least in some areas, this is made difficult because of water use regulations. Water rights can be withdrawn if the land is not actively farmed for several years. So in some areas, where alternative crops are not feasible and water rights are tightly controlled, vineyard removals or furloughs are hard to manage. No wonder there are reports of some vineyards simply abandoned! (I have also heard of one vineyard that was offered at a zero-dollar lease to anyone who would keep production going and, therefore, keep water rights safe.)

Unemployment: Cyclical, Structural, Frictional

The wine market situation is complicated in other ways, too. Both Glenn Proctor and Danny Brager talked about the problem at the Unified in terms of structural versus cyclical adjustments and this got me to thinking about the way economists explain unemployment as the interaction of three forces. I will explain briefly since I think these concepts apply to wine, too.

Cyclical unemployment is caused by cycles in the economy. Workers lose their jobs as firms scale back during a recession, for example, and gain them back (or get other jobs) when economic growth returns. Macroeconomic stimulus (tax cuts, interest rate reductions) are tools of choice to address cyclical unemployment.

Structural unemployment is joblessness due to changes in the essential structure of the economy. Changing patterns of trade, environmental shifts, and technological change are some of the causes of structural unemployment. Some newspaper employees, for example, suffer structural unemployment as demand shifts from physical to digital platforms for information, entertainment, and advertising. One of the concerns about artificial intelligence technology is that it might contribute to structural unemployment.

It is significant that policies designed to address cyclical unemployment such as interest rate cuts will do little to correct (and could even accelerate) structural unemployment problems.

Finally there is frictional unemployment, which is joblessness caused by inefficiencies in the labor market, as happens when there are jobs available in one city and jobless workers in another city, but information inefficiencies, high transaction costs, and other barriers prevent them from productive connection. The current housing market, with higher mortgage interest rates and historically high prices, is one source of frictional unemployment, for example. Job market policies tailored to either address cyclical or structural unemployment problems may have little impact on frictional unemployment. There aren’t many easy answers to complicated questions.

The American Wine Dilemma

These concepts apply to the wine industry in America and other countries today. The wine market has long been subject to medium-term (7- to 10-year) cycles, for example, although “wild card” events such as the COVID pandemic have distorted the pattern. Some wine industry folks have never seen the bottom of the wine cycle before. The fact that the previous “boom” part of the cycle was characterized by a ratchet-up of wine prices (premiumization) makes the down cycle more difficult to predict.

There are also structural changes at work. Demographic transition (baby boomer rise and fall) is part of the situation, but so is the structural shift in attitudes and behavior towards beverage alcohol generally.  There also seems to be a structural shift in consumer preferences away from red wines toward white wines. It is hard to predict how and when these structural forces might run their course and when or whether they might reverse.

Finally, there are frictional concerns that take many forms around the world, but here in the United States are perhaps most apparent in wine distribution and retailing. Wine distribution pipelines have narrowed in recent years. I have written that every industry organizes itself around its most important inefficiency (or “bottleneck,” if you know what I mean). Distribution is wine’s bottleneck, not growing grapes or making wine. The fact that this bottleneck has narrowed is significant and could well reshape the industry broadly.

The Age of Uncertainty

If you are looking for a simple answer to the dilemma of American wine, you are not going to find it here. The point, as stated above, is that complicated questions seldom have simple answers. Complexity leads to uncertainty because each of the cyclical, structural, and frictional forces is difficult to predict and their dynamic interaction is sometimes best modeled by chaos theory

So, as I wrote here a few weeks ago, we have entered the Age of Uncertainty. In economics, uncertainty equals risk and risk discourages investment, innovation, and growth. Not what the wine industry needs at this moment. But understanding uncertainty and risk is better than charging ahead in ignorance.

The Unified Wine & Grape Symposium, North America’s largest wine industry meeting and trade show, is only a few weeks away. I will be in Sacramento to moderate the State of the Industry session, which features an impressive lineup of wine industry experts:

• Jeff Bitter, Allied Grape Growers
• Glenn Proctor, The Ciatti Company
• Stephen Rannekleiv, Rabobank
• Danny Brager, Brager Beverage Alcohol Consulting

The panelists have decades of experience in the wine industry, which informs their analysis of current problems and future prospects. It is a tremendous opportunity to hear what the experts are thinking now and to talk about it with the other attendees.

There are many other sessions at the Unified covering all sorts of topics in winegrowing, winemaking, marketing, and business operations. I am particularly interested in the Thursday general session on Crafting a Positive Narrative: Promoting Wine in the Face of Challenges, which will be moderated by New York Times wine critic Eric Asimov. One of the biggest challenges, of course, is the rising anti-alcohol movement. Telling wine’s positive story is as difficult as it is important in the current environment.

There is something for everyone at the Unified (click here to view the complete program and click here to read the speaker bios). Sue especially appreciates the big trade show where more than 900 exhibitors will highlight what’s new in the wine industry from the biggest machines, smartest technology, and best products and services from vineyard to cellar to bottling line all the way to market.

Always the Age of Uncertainty?

I always start the State of the Industry session with a few remarks to set the stage and this year I have chosen a theme, the Age of Uncertainty. This is a time of great change in the wine industry and change makes people nervous.

Age of Uncertainty? I know what you are thinking. It is always the Age of Uncertainty in the wine business. Growing grapes is risky, making wine is risky, and selling wine is risky. There is no part of the wine business that does not have an uncertain component. Wine is a global business, too, and while global markets create opportunities they also introduce additional layers of risk.

I specialize in international and global wine markets, so I am especially concerned with how international economic policies add more layers of uncertainty to wine business today. We have been told to expect high tariffs (on wine and just about everything else) in 2025. Depending upon how they are structured, and how our trading partners react to them, tariffs can have a number of direct and indirect effects.  There’s a lot at stake and the final outcome is difficult to predict.

Indeed, the International Monetary Fund recently identified the threat of tariffs as a major global economic concern. The possibility of tariffs has driven up long-term borrowing costs around the world, according to the IMF, which will release its new report on the global economy later this week.

And this week’s Economist newspaper highlights uncertainty about tariffs and other policies as a main cause of global instability.

It is easy to see why uncertainty has spread. Will Donald Trump deport millions of people? Nobody knows. But if he succeeds inflation could jump as employers lose workers. The story is similar for tariffs, which would also increase prices. At the same time, potential Chinese counter-measures in a trade war, such as a devaluation of the yuan, could prompt a global deflationary shock.

The rising perceived risk, according to the Economist, helps explain falling bond prices, rising mortgage interest rates, and many other current trends. They say that what you don’t know won’t hurt you, but uncertainty clearly has a cost.

Not by Wine Alone

I know many people who think a tariff on imported wine would benefit American growers and producers and others who strongly oppose the idea. But it is important to remember that we aren’t talking about tariffs just on wine. Although it is hard to know right now (that uncertainty thing), it looks like the new administration will impose tariffs on most imported products from many or most of our trading partners, with the highest tax rates on China, Mexico, and Canada, the countries with whom we trade the most.

Border taxes on such a long list of imports have different effects than a tax on a specific product category like wine. That’s part of the uncertainty problem. U.S. producers may gain from protection from imports but lose from higher costs for imported supplies, equipment, and technology. Labor costs, interest costs, and insurance costs would all likely be pushed higher by rising inflation.

And U.S. tariffs aren’t the end of the story. How will other countries react? Will European nations retaliate with tariffs on U.S. wine? Probably not. I think they’d focus on spirits, not wine. Would Canada target U.S. wine? Yes, I think they might and that’s a problem because Canada is a good market for U.S. wine exports.

The  Dollar Also Rises

President Trump favors a falling dollar value on foreign exchange markets because that would reinforce his trade policy by discouraging imports and promoting exports. But tariffs tend to push the dollar higher as we have seen since the election results were announced. The dollar’s value rises when it sounds like tariffs will be used as a blunt weapon to keep out imports. The dollar falls, however, when the rhetoric suggests tariffs as targeted strategic tools to gain specific concessions. Which way will tariff policy lean in 2025? I don’t know, do you?

How are tariffs and the dollar related? Here’s one way. Tariffs tend to increase inflation, which forces the Federal Reserve to keep interest rates higher than they otherwise would be. This attracts foreign capital that boosts the dollar’s value, making imports cheaper in dollar terms and U.S. exports less competitive abroad.

Immigrant policies are the third element of the Age of Uncertainty for wine in my analysis. It is too soon to know how border controls and deportations might affect labor both generally and in industries such as agriculture and construction that are most exposed. So wine’s Age of Uncertainty is a complicated matter.What’s the bottom line? I’m saving that for the State of the Industry session.

Galbraith’s Uncertainty Principle

Why did I choose this theme for my remarks? The idea was inspired by an old book that strikes me as still relevant today. The Age of Uncertainty is the title of a 1977 BBC/KCTS television series and an accompanying book by the distinguished Harvard economist John Kenneth Galbraith. The book and videos, which survey two hundred years of economic history and the history of economics, were timed to coincide with the 200th anniversary of Adam Smith’s Wealth of Nations.

People tend to remember Galbraith as the sophisticated author, public intellectual, and Harvard professor that he became, but his personal story is more complicated. He grew up on his family’s small Ontario farm and seemed set for a farming career, graduating from Ontario Agricultural College in 1931. But the 1930s were not the best of times for farming and Galbraith soon found himself doing PhD studies in agricultural economics at the University of California and then working for the U.S. federal government’s Agricultural Adjustment Agency (AAA) trying to prop up farm prices.

I don’t think that wine is mentioned even once in Galbraith’s book, but his agricultural background and experiences are easy to trace. The world has changed a lot in the almost 50 years since The Age of Uncertainty first appeared (and nearly 250 years since Wealth of Nations), but American winegrowers and agriculture generally can certainly relate to Galbraith’s story and the concerns he expressed in this book.