Thursday, January 24, 2008

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Grape Expectations has moving to a new location with a new name that more clearly reflects the blog contents. Click on the link below to visit the new blog (all the old blog contents will be found there, too).

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Mike Veseth

Monday, January 21, 2008

Washington and Oregon Wines in London

There is a special tasting of Washington and Oregon wines in London today, held at the Institute of Contemporary Arts at 12 Carlton House Terrace. More than 190 wines from 40 Pacific Northwest wineries are being sampled. Marty Clubb of L'Ecole 41 in Walla Walla is leading an educational seminar about the Washington wines and Howard Rossback of Firesteed is doing the same for the Oregon products. The event is funded in part by a $200,000 federal trade grant. I believe it is the largest organized effort (so far) by Northwest winemakers to break into the European markets. It will be interesting to see if this seedling can grow to bear fruit.

Washington and Oregon are important winemaking regions, of course, but their reputations and sales are concentrated in the United States. Although Oregon Pinot Noirs are always included in the discussion when people anywhere talk or write about new world Pinots, the fact is that not much of it is sold abroad. Oregon wine sales in the UK and France were just over 2000 cases in 2006, for example, out of total production of 1.6 million cases. The word may be out around the world about Oregon wines, but wine distribution and sales haven't followed -- yet.

I don't have figures for Washington wines, but I suspect that the situation is more or less the same. Washington makes excellent wines (better than Oregon wines, if you judge by the Wine Spectator and Wine Advocate ratings, where several Washington wines receive 95+ points), but so far Washington doesn't seem to have that one distinctive wine that could establish an international reputation. The state is too varied, I think, in terms of climate and geography for that to happen. Washington is Riesling country, judging by volume of production, but it hasn't yet established an international reputation with this wine (although it is trying to do so with the Riesling Rendezvous conference). A variety of reds do well here, including both the Bordeaux and Rhone varietals, but no signature style of wine has emerged as the champion. Marty Clubb is telling the people in London that Washington has the ideal climate for wine (that's the official Washington wine theme), which may be true but doesn't really define the product for confused international buyers.

Washington does have one advantage over Oregon in the export market: distribution muscle. The Washington wine industry features a few very large players that have the financial clout to potentially open up foreign distribution channels. Money is necessary; it isn't easy to establish a brand abroad in this crowded market and margins on exports are necessarily lower than for domestic sales, at least at the beginning. I have read that export sales by small scale winemakers are "vanity" projects and there may be some truth to this. That doesn't mean it's not worth doing, however.

The Chateau Ste Michelle family of wines have penetrated some European markets. I was surprised to discover a large display of CSM wines in an upscale supermarket next to the train station in Riga, Latvia, for example. I haven't been able to find out how the wines got there yet -- my guess is that CSM's deal to distribute Antinori wines in the U.S. may be reciprocated by Antinori in Europe but I don't really know. Other Washington wines including Columbia, Covey Run and Hogue are part of the Constellation Brands portfolio, which may aid in their international distribution, too.

The London tasting isn't the first effort to get Northwest wines attention in the UK. I remember being in London in about 1990 and walking into Fortnum and Mason only to be shanghaied by an excited clerk who was directing anyone she could to a lonely wine tasting display where they were sampling wines from Hogue Cellars of Yakima. Needless to say, no one had any idea where Yakima was located, but they were amazed that such a unlikely place could produce good wine. Today's London event is a much larger project than that Fortnum display, but the goal is much the same, to make friends, establish relationships, and get our foot in the door.

I hope the London tasting goes well. Many of the wineries are apparently looking for UK distribution, which makes sense. The UK is the most important wine market in the world. It is a good market to sell wine and to establish a worldwide reputation. A disproportionate number of the world's leading wine writers and experts are based in London, including Jancis Robinson, Oz Clark, Michael Broadbent and Steven Spurrier. A good word by any of these celebrity wine critics would encourage wine enthusiasts in the UK and around the world to give Northwest wines a try. But the real prize would be a distribution deal with Tesco or Sainsbury's, which dominate supermarket sales, or one of the big high street wine store chains, since you can't try wines you can't buy.

One reason this is a good time to try to break into the UK and European markets is that the exchange rates favor U.S. exports. The dollar fell dramatically in 2007 against both the Pound and the Euro, making U.S. wines relatively less expensive. This will help, but it will still be difficult to get British wine drinkers to think beyond Gallo and one end of the market and Napa Valley at the other.

It's tough to break into foreign wine markets. Ernie Hunter famously did the DIY way -- he brought his wines to London and entered them in the Sunday Times wine festival, where they won the people's choice award. Ernie was from New Zealand and his surprise victory paved the road for Marlborough Sauvignon Blanc's dramatic rise in the world of wine. Washington and Oregon are taking a direct and organized approach, with tastings and seminars. Every case is different. My next post will tell an unlikely story of how Washington wines first came to Sweden.

Friday, January 11, 2008

Globalization, Wine Value and the Two Buck Chuck Index

Has the globalization of the wine industry given us the best of wines, as many wine drinkers believe, or the worse of wines, as the film Mondovino suggests?

Two economists from the Whitehead School of Diplomacy at Seton Hall University address this question in the December 2007 issue of the Journal of Wine Economics (see full reference below). Their conclusion? Globalization has benefited American wine drinkers, who have a broader choice of quality wines at lower prices.

That's pretty much what my supermarket empiricism leads me to conclude, but can it be proven scientifically? Here's how the article's authors arrived at their results.

First you need to define what it is that American wine drinkers are buying. The authors decided to focus on the Wine Spectator annual Top 100 list of wines. This has the advantage of limiting the study to a reasonable number of widely available wines. The Top 100 list is chosen each year on the basis of price, wine rating, availability and "excitement." Many people use rankings like the WS 100 to guide their purchases, so I suspect that there really is some correlation between what is on the list and what is on store shelves and restaurant wine menus. The disadvantage of limiting the study to the Top 100 is of course that most of the wine sold in America -- the inexpensive Gallo, Yellow Tail and Two Buck Chuck wine -- does not make it to this or any other "top" list. If we want to know if globalization has improved choice at the middle and bottom of the market we will need more research.

The authors examined the WS 100 lists from 1988 - 2005 to determine (1) where the wines came from, (2) how much they cost and (3) their quality as measured by the WS ratings. They then calculated measures to determine changes in the geographical concentration of the wines (more or less choice in terms of countries of origin), the average quality rating and the relative value to consumers as measured by rating points per dollar.

What we learn from this is that the overall quality of the top wines has stayed relatively constant over the years, but the real price has fallen and the range of offerings has increased. It cost $4313 (in today's dollars) to purchase the entire WS100 in 1988, for example, but just $2622 to buy the Top 100 wines in 2005. The cost per "point" of ratings in 1988 was 46 cents, so a hypothetical average 90-point wine cost $41.40. The per point cost was 28 cents in 2005 and so a hypothetical average 90-point wine cost just $25.20.

The top wines came from just six countries in 1998 versus 11 countries in 2005, an indication of the globalization effect. A great majority of WS100 over the years have come from four core wine countries: Australia, France, Italy and the U.S., but the proportion of non-core wines has increased, too, from just 5 percent in 1988 to 24 percent in 2005.

The authors divide the wine world of this study into Old World (France, Italy), New World (Australia and the U.S.) and "New-New World" (New Zealand, South Africa, Argentina and so on). Globalization has brought American wine drinkers more and more excellent New World and now especially New-New World wines that provide the same quality at lower average prices, according to the study.

Research like this is interesting both for the questions that it answers and for the new questions that are raised. It would be interesting, for example, to find how important the four criteria for selection are -- price, rating, availability and "zing" -- and if the relative weight they are given has changed. As the wine market has expanded, for example, greater emphasis may have been put on price and availability, leading to a Top 100 that leans more toward (global) good value wines.

It would also be interesting to see if the editors respond in any way to external forces. A lot of people read and study the Top 100 list, so perhaps they use it as a way to build the wine market (and thereby indirectly build their potential subscriber base). A focus on value would be consistent with this goal. A Top 100 list that you can't find or can't afford doesn't build the wine market and won't sell many magazines. The fact that there are more New-New World wines might reflect rising quality and availability of these wines or it could indicated that the WS editors desire to add these wines to keep costs down, value up and the market growing. In other words, the WS100 might show more choice and continuing good value because that's what the WS editors want it to show. I suspect that the truth is that the market has evolved toward global good value and that WS has been part of that process, encouraging people to try New-New World wines by putting them on the Top 100 list.

Exchange rates could also play a role here. The dollar has fallen against most currencies (increasing the cost of imported wine), but the depreciation is not uniform. The Euro is much more expensive but the Argentine peso has not changed as much. If would be interesting to see to what extent the WS100's New-New World globalization has offset exchange rate driven increases in Old World wine costs.

Another interesting question relates to the idea of value in wine purchases. It does seem to me that people often find themselves buying WS points or Parker points more than the wine itself because they are unsure of their ability to judge quality. One local wine merchant had a sale of wines rated 90 points or more for $20 or less. The idea was that the wines must be good value because of the low cents per point ratio. But there is more to wine than rating scores, as anyone who has tasted high-scoring wines will tell you.

It might be interesting to try to put together a slightly more sophisticated wine value index using WS and other ratings. I don't think that cents per point is a good measure because it assumes a linear relationship between money and quality -- and we all know that is not the case. Very expensive wines frequently receive much lower ratings than their cheaper competitors. I understand that a $100 Chardonnay came in last at the tasting where Two Buck Chuck won the Gold Medal.

Even where price and quality are correlated, the relationship isn't necessarily linear. The average price difference between an 86 point wine and a 88 point wine may be pretty small, for example, but it might cost a great deal to go from 92 to 94 points if the demand for the very best wines is particularly strong as is often the case in winner-take-all markets.

The price-quality relationship, even using imperfect wine scores as a measure of quality, is certainly non-linear. No wonder wine buyers are so confused -- and depend so much on ratings and lists like the WS100.

Here is a simple alternative to cents per point as a measure of value. Let's adjust price and quality for a baseline wine: Two Buck Chuck. You could call it the TBC index. Suppose that you can purchase a 70-point (to just make up a number) TBC Chardonnay for $2 (or $3 here in Washington State). The question we want to answer is how much does it cost to improve on TBC? A wine that gives you a lot of additional value for only a little additional money is a good deal.

In other words, the TBC index would be a relative index of value calculated by asking would be how many points in excess of 70 (or whatever the quality of the baseline wine you choose) you can buy for the dollars you spend in excess of the baseline cost. Here's a numerical example. A 88 point wine for $20 would have a TBC rating of (88 - 70 points)/($20 - $2) = 18 point/$18 or a dollar a point. An 86 point wine for $10 would be a better value because (86 - 70)/(10-2) = 16 points /$8 = two points per dollar. It seems to me that this is a better (but still badly flawed) indicator of relative value. (Economics students have already realized that I am applying the principle of decision-making on the margin to this problem).

Perhaps I will find some students to work on the TBC index, perhaps using a different base wine for each varietal or wine type. I predict that their research would find that the "optimal" TBC point is being pretty close to the heart of the premium wine market -- right on the center shelf in the supermarket -- where so many wine brands compete for your wine dollars.

Wine ratings are very important in some parts of the wine market and very controversial, too, so I think I will see what I can learn about them. With this in mind I have subscribed to six different wine-rating publications: Wine Advocate (Robert Parker), Wine Spectator, Wine & Spirits, Wine Enthusiast, the British Decanter and Wine Press Northwest (for Washington/Oregon wine news and ratings). Watch this space for a comparative analysis of these influential publications.

References: Omer Gokcekus and Andrew Fargnoli, "Is Globalization Good for Wine Drinkers in the United States?" Journal of Wine Economics 2:2 (December 2007) pp. 187-195).

Monday, January 7, 2008

The China Wine Syndrome

I've never tasted Chinese wine, but that's going to change quite soon. I have two bottles, both hand-carried from China by my former student Brian West. One is a 1999 Cabernet Sauvignon from China's oldest winery, Changyu (founded in 1892). The other is a 2003 Tasya's Reserve Cabernet Franc from what many people say is China's best winery, Grace Vineyard (or Shanxi Grace Vineyard to differentiate it from a Japanese winery with the same name -- Shanxi is the region of China where Grace Vineyard is located).

I have heard a lot of stories about Chinese wine -- about how bad it is, how prestige-seeking Shanghai yuppies mix expensive first growth Bordeaux with Coca Cola and of vast vineyards in China that threaten to flood world markets with cheap wine (as Chinese exports have flooded some other markets already). The prospect of drinking Chinese wine for the first time gave me an incentive to see what I could find out about the Chinese wine industry and market. Here is a brief account of what I have learned.

Wine has a long history in China, reaching back more than 2000 years to the first wine imported from Ferghana in what is now Uzbekistan. It wasn't until the 19th century, however, that more than a trickle of wine was produced or consumed. Western missionaries brought grapes and wine to China along with their bibles (as they did in California, Argentina and Chile). The real roots of today's industry were planted in the late 1800s, however, when Changyu and other wineries were founded, mainly to produce wines for the foreign communities in the commercial centers.

The communist government expanded wine production after the 1949 revolution. Wine was promoted as a form of alcohol made from abundant fruit sources (grapes, both vitis and indigenous Asian varieties, and other fruits) in order to reduce use of precious food grains for alcohol production. Wine was meant to replace beer or grain spirits in the diet. Wine was typically made from a combination of grapes and other fruits. I understand that it is still sometimes necessary to specify grape wine in China, since generic wine may be made out of any number of fruits. It is probably not surprising that Chinese who were brought up on these mixed-fruit wines might today mix dry grape wine with fruit juice or Coke to get a more familiar flavor.

China's vineyards are indeed vast, totaling six percent of the world total. There are 453,000 hectares of vineyards in China, which is roughly equal to the U.S. (380,000 hectares) plus Germany (98,000 hectares) or just over the half the vineyard area of France, the world leader. But 80 percent of the grapes are grown as fruit for the table grape market. About 10 percent of the grapes are dried to make raisins. The remaining 10 percent are wine grapes. China's wine production is relatively small -- 730 million liters compared to 2,546 million liters for the U.S. and 898 million liters for Germany. China produces about as much wine as Moldova and Romania combined -- a lot of wine, but still just 2.6 percent of the global total.

Comparative wine production statistics for China are a bit problematic because (1) much of the wine produced is not pure grape wine but may be mixed fruit wine and (2) the rules on what can be labeled Chinese wine are quite lax. Grape wine needs to be only 50% grape and Chinese wine needs to be only 50% from Chinese-produced juice, according to one report I found. This means that a great deal of the bad wine that tourist report being served is not really grape wine and may be a blend of a little Chinese grape wine and a lot of imported bulk wine of undetermined origin. Rules get bent and outright fraud is not uncommon, I understand.

China has about 450 wine producers, which is approximately the number here in Washington State. The industry is highly concentrated with four wineries accounting for 60 percent of domestic production and sales. The big four are Great Wall, Dragon Seal, Changyu and Huadong. Foreign partnerships are common, giving Chinese winemakers access to international technology and expertise. The French multinational Pernod Ricard helped create Dragon Seal in 1987, for example, and Seagrams and Remy Martin have also been involved in joint ventures.

If the quality of the large scale wineries is disappointing, as many tourists report, the reason can be found in the supply chain. Wine is only as good as the grapes that go into it, or so growers tell me, and the grape supply situation in China is difficult. Most of the wine grapes are grown by families that lease about an acre of land from their local agricultural commune. That acre is tyically divided into four or five small plots that are planted with different crops so as to minimize risk. One or perhaps two of the plots may be wine grapes in the vineyard regions. So vineyard scale is impossibly small -- smaller even than in the south of France.

These small growers insist on calling the shots, which is natural since they are so dependent upon the success of their tiny farms. The wine producers have no control over what these hundreds of thousands of micro-vineyards produce, how they are cropped, and when the grapes are picked. Researchers suggest that the grapes are chosen and grown to maximize quantity not quality and that the grapes are picked as soon as possible to minimize risk of poor weather than could destroy the crop. So small crops of flavorful fully ripe grapes -- the winemaker's dream -- that's not going to happen in a typical Chinese vineyard. One study I found suggested that the grapes sell for as little as $80 a ton.

There is not much incentive for individual growers to sacrifice quantity for quality because their grapes are sold by weight to agents who lump together fruit from dozens or hundreds of individual growers. Good fruit would quickly get mixed with inferior fruit, so why pay more? The local agents often then resell the fruit to regional agents who sell again to the large winemakers. You can just imagine the condition of the fruit by the time it finally gets to the winemaking facility having passed through so many hands. This system is worse than the European cooperatives I have read about (and I didn't think anything could be worse than that).

Wine is sold in all sorts of ways. The Changyu website offers to let me buy wine by the barrel, which is perhaps what I would do if I owned a restaurant or a village drinks shop where I could decant the wine into bottles, jugs, or any other available container. Economists who study the Chinese wine market are increasingly focusing on supermarkets as a growing distribution vector. Partly I think this is because grocery store sales of wine are increasing, but also I think because these economists are interested in the potential for foreign wine imports. I don't think relatively expensive French or California wines have much chance of penetrating the traditional bulk distribution system where a lot of Chinese wine goes, so supermarkets are their best bet. Supermarkets may also eventually play an important role in educating Chinese consumers about wine in general and foreign wine in particular.

A small number of boutique winemakers have appeared, often financed by Hong Kong Chinese families and using international "flying winemaker" expertise. This is the basic story of my Grace Vineyard Cabernet Franc. Hong Kong businessman C.K. Chan invested USD 7 million to build a French-style Chateau. He hired Bordeaux winemaker Gerard Colin to supervise production full time. Output is now more than 40,000 cases. My bottle of reserve wine says that it is estate bottled from grapes grown on the estate and this may suggest why Grace Vineyard wines are often rated the best in China: control of the supply chain. If Grace controls the quality of the grapes then they can better control the quality of the wine. People say that Grace Vineyards is the best French wine made in China. I'm looking forward to trying it.

The bottom line is that the future of wine in China is difficult to predict. Surely wine consumption will grow as China gets richer and Chinese adopt more western consumption habits. Wine production will grow, too, and quality will rise as better technology is adopted. But it will be interesting to how quickly Chinese consumers accept dry western grape wines after their long experience with mixed fruit wines. And it will be interesting to see how quickly the quality of grapes can be raised.

It seems to me that the biggest barriers to quality wine are not in the stores or even in the habit of mixing red wine and Coke. The biggest problem remains the sorry state of rural Chinese agriculture -- a good reminder that wine is fundamentally a product of the soil.

Note: Special thanks to Brian West for bringing wine back from China where he was teaching with a University of Montana law school program. Thanks as well to Judy Leissner, who runs Grace Vineyard, for her assistance in locating Grace Vineyard products. Click here to view an interview with Judy about running a family wine business in China.

Special Note (added 1/13/2008). Click here to read an interview with Judy Leissner on the a blog called The Grape Wall of China, which is a good resource on the changing Chinese wine industry. Thanks to Jim Boyce (a.k.a. Beijing Boyce) for this link.

Sunday, December 30, 2007

The End of Cheap Wine?

It is becoming increasingly clear that a golden age of sorts (for American wine drinkers) is coming to an end. Good quality wine has been amazingly affordable for the last several years and New World wine consumption has risen as a result.

This is changing (or has already changed, as Jancis Robinson writes in Saturday's Financial Times) and a quick look at the economics of the wine market explains how and why.

The demand for wine in the United States has increased for a number of reasons. Studies that show that moderate consumption of wine (especially red wine) is healthful gave consumers license to experiment with table wines. The existence of Two Buck Chuck (the Charles Shaw wines sold at Trader Joe's stores) and other value brands made this experimentation affordable.

The increasing emphasis on wine brands helped demand grow by making the wine purchase itself somewhat less mysterious. The wine aisle is the most complex choice space in any grocery store -- there are more options at more price points than anywhere else. Brands reduce uncertainty and so encourage consumption. The enormous success of [Yellow Tail] brand wine from Australia is testament to this fact. Costco, the nation's largest wine retailer, has used limited selection and its Kirkland Signature own-brand wine to achieve spectacular results.

The demand for wine has not just increased it has also evolved as many consumers have moved to higher quality (or higher price,anyway) and developed specialized wine expertise. Wine is more than a beverage, it is a lifestyle for many people who collect wines, take wine tourist vacations and subscribe to wine publications such as
Wine Spectator or The Wine Advocate and read the wine columns now found in many newspapers. There is a pretty steep learning curve when it comes to wine. Knowing more about wine and having more experience with it increases the pleasure that wine provides and makes further learning more efficient. In economic terms, the specific investment in wine knowledge makes the demand for wine more inelastic -- less sensitive to changes in price since buyers are less likely to switch from wine to other products or beverages where they have less expertise.

The supply of wine has also changed to create higher prices. The falling U.S. dollar has increased the cost of imported wine, which contributes to rising domestic prices both directly, as those costs are passed along to consumers, and indirectly, as higher import prices allow domestic producers to raise price, too. I don't think that we have seen the full pass-through effect of the exchange rate changes yet, so expect dollar-driven price increases to continue.

But domestic prices would have increased even without the dollar's decline. Wine buyers in recent years benefited from a global surplus of wine grapes that drove down price and pushed up quality. Faced with accumulated surpluses that sometimes amounted to a year or more of sales, winegrowers held back on expansion plans (except for hot varietals like Pinot Noir). Demand has slowly grown into the existing supply and may soon exceed it for some wine types. Falling prices due to surpluses are coming to an end and rising prices seem likely, even in Australia where drought and disease have further reduced production. The new EU wine regime, if it is effective, should further reduce wine surpluses and tighten supply.

When you combine these factors along with a few others, such as growing interest in wine in Asia, the result is a new market environment and it will be interesting to see what happens next. The latest round of wine magazines seem to take higher prices in stride.
The Wine Advocate reports that the cellar door price of California cult wine Screaming Eagle is now $500 per bottle -- if you can get some -- and a long list of wines are listed with prices above $100 or $200. Wine Spectator and the wine columnists in the Wall Street Journal and the New York Times all seem to be struggling to keep a lid on their definition of an inexpensive or good value wine -- a $12 or $15 or even $20 ceiling no longer provides much choice! You can still buy cheap wine, but the good value bargains are disappearing.

It will be interesting to see how the American wine culture, which has been built in part on good quality at low prices, copes with this new world of wine. In the meantime, enjoy those bargains and good values when you find them, but don't count on your good fortune lasting forever.

Monday, December 24, 2007

Draining Europe's Wine Lake

Europe is afloat in a sea of bad wine and the European Union agriculture ministers agreed last week to do something about it. But is it too little and too late?

Marian Fischer Boel, the EU Agriculture Minister, proposed a number of fairly radical reforms in 2006 and these were the basis of the discussion. She wanted an immediate end to distillation subsidies and a vast program to encourage small winegrowers to pull up their vines -- one million acres -- replacing them with other crops or, in some cases, with more marketable grape varieties. Perhaps predictably, the policies agreed last week are much weaker than the original proposals. Distillation subsidies will be phased out over five years and as many as 400,000 acres of vines will be "grubbed up." Four hundred thousand acres seems like a lot, but given the size of the problem is it, as
Wine Spectator reported, just "a good start?"

Current EU policies are as useless as the old wine barrels shown above. At the top end of the market, national and EU policies tend to stifle innovation and prevent effective market adjustment (the counter argument is that they preserve tradition and prevent destructive commercialization). I have read any number of stories about high end European winemakers who have expanded abroad in part to escape regulations on what they can produce, where, and how they can market it.

In the mid-market, where current attention is focused, EU and national regulations seem to prevent winemakers from achieving the transparency that an increasing global market requires. It is hard enough to know what's in a bottle of wine without the complicated rules that government European wine labeling. French wines are typically "branded" by place of origin, not grape varietal, for example. Buyers who are not confident about their French geographical knowledge and the relationship between place, grape variety and wine style, are likely to choose New World wines with more easily understood characteristics. Australian wines sell well in France partly for this reason.

At the low end of the market, EU policies designed to support farm incomes have produced the famous "wine lake." Each year the EU spends about $2 billion to buy up unsold wines and turn them into industrial alcohol. This vast reliable market for poor quality wine keeps thousands of small scale producers in business. The distillation subsidy insulates low-end producers from market forces with the result that the vineyards remain uneconomically small, the practices favor quantity over quality, and the wine, while it may reflect local tradition, finds few buyers in the marketplace. Cheap New World wine is preferred to bad Old World plonk.

The new EU policies are designed to drain the wine lake by making the wine sector more responsive to market forces. Label laws and regulations will be reformed so that European wines can be sold by regional and grape varietal just like New World wines. The distillation subsidy will be phased out over four years, with some of the subsidy funds returned to regional groups to be used in wine marketing and promotion efforts. And up to 400,000 acres of vineyards will be included in the new "vine-pull scheme." New plantings will be allowed over time, but they will be market-driven not subsidy-driven.

The top end of the market is unlikely to be affected very much by these policies, since by definition they already have established brands and distribution channels. New label laws and subsidy reductions will have few direct effects on these producers, although they may be able to gain indirectly as vineyard consolidation takes place and Australian-style brands grow in importance. I predict that the most visible early effect of the new rules will be expansion of European brands both at home and in export markets.

The clear gainers are the mid-market producers -- the wines that sell for about $12. There is great potential profit in this part of the market, which is expanding rapidly in the New World. Freed from the constraints of tradition, European winemakers should be able to compete in this market quite well. It is, however, a hotly contested market segment. European producers will need to use their new freedom well to succeed and those who choose not to adjust may suffer as the European market realigns itself.

The real problem is at the bottom of the market. Losing the distillation subsidies will hurt many producers and I don't know how enough about the cost-benefit of the vine-pulling schemes to comment. Pulling 400,000 acres out of wine production should help stabilize the market by reducing the annual surplus, but I don't know if it is enough and I don't know if the incentives provided are strong enough.

Four hundred thousand acres -- how big is that? Huge if you are thinking New World -- Australia had just 388,000 acres of vineyards altogether in 2003 according to my
Oxford Companion. But tiny if you think Old World -- and of course this is an Old World problem. Italy and France had more than 2 million acres of vines each in 2003 and France had nearly 3 million more. (The Languedoc region in the south of France has 528,000 acres by itself.) Taking 400,000 acres out of production in Europe is like removing Moldova and Switzerland from the market. The effect on the regions where the vines are grubbed up will be large, but the impact on the global market is likely to be quite small -- reducing the global surplus, but not eliminating it. I don't know if it will be enough.

Will it work? Much of the discussion that I have read focuses on the size of the vine-pull scheme -- 400,000 acres versus the million acres that Marian Fischer Boel proposed two years ago. Although I think the size of the grubbing up program is important, I believe that the market-driven reforms and the elimination of distillation subsidies are more important. The 1988 vine-pull scheme took over a million acres out of production but, as we see today, didn't eliminate the surplus because of the difficulty of selling the good wines and the incentives to keep make bad ones.

Saturday, December 8, 2007

A Wine Research Gap?

If there's one thing that I have learned about wine markets it is that they are dynamic. Although there is much about wine that is classic and timeless, there is a lot of change, too, and winemakers and growers need to take account. Global wine markets are changing, the social function of wine is changing and the natural environment of winegrowing is changing, too.

How do you cope with a rapidly changing market environment? Innovation is one answer and that requires research. Is the U.S. wine industry doing enough to keep up with foreign wine producers in basic wine research? That's the cover story in the December issue of Wines & Vines magazine and their answer is No.

Wines &Vines is a wine industry trade journal; whereas Wine Spectator and Wine Advocate are aimed at consumers, collectors and enthusiasts, W&V's audience are industry insiders. It's a very good publication -- I rely on it for information about emerging trends in the industry. If you are seriously interested in wine you ought to take a look at it.

The cover story argues that there is relatively little public research on wine industry problems in the United States. "Public" research is research that is available to all winemakers and growers and is different from proprietary research that individual winemakers undertake for their own use. Australia, with a wine industry about half the size of the U.S., spends about $23 million for public research, with funds raised from levies on winemakers and growers matched by government funds. By comparison,
W&V reports about $2 million for public wine research in the U.S. (although total research levels are much higher when private R&D expenditures are included). The argument is that increased funding for applied research would strengthen the U.S. industry in an increasingly competitive global market.

What would increased research funding buy? I think I got a taste of what research can do in an electronic newsletter I received recently from the Australian Wine and Brandy Commission. The AWBC (a.k.a. Wine Australia) is the Australian government agency that was created in 1981 to support the wine industry. One of their current research projects involves the problem of rising alcohol levels in wine.

Everyone knows that alcohol levels have been going up for some years. Climate change is part of the problem -- warmer climate and longer growing seasons increases sugar levels and therefore alcohol levels. This is beneficial to wine quality up to a point, but beyond that point there are real problems both with wine balance and with consumer attitudes towards alcohol. How do you bring alcohol levels down without bringing quality levels down, too? Premature harvesting means less sugar and alcohol, but less character. De-alcoholization (usually through a reverse osmosis process -- did I get that right David?) is common in California and elsewhere but there are quality trade-offs here as well.

The AWBC reports that their alcohol reduction research is focusing on the yeasts -- trying to find yeast strains that will make wine with lower alcohol levels without sacrificing balance and character. They even mention the three little letters that I think everyone in the wine business is afraid of -- GMO. No genetically modified yeast varieties have been used in Australia (and are unlikely to be used there ever, thay say), but research into yeasts and even GMO yeasts is an example of the sort of public research that could have wide-ranging benefits for the wine industry. The Australians are out in front on this sort of research,
Wines & Vines suggests and it may be so. I know that I rely almost exclusively upon AWBC economic research on global wine market patterns.

The November issue of
W&V has an article on dry farming of vineyards that reminds me that innovation and research can take many forms. Once upon a time most quality vineyards were dry farmed (farmed without artificial irrigation), but as irrigation technology improved the focus turned to scientific irrigation practices. I guess the idea is that because technology allows a winegrower to carefully control water availability then this must be the right thing to do. The people who make Mollydooker, the big-boned Australian wines with the huge Parker numbers, attribute their success to the trade-marked Marquis Vineyard Watering Programme, for example.

But John Williams, whose Frog's Leap wines are also recognized for quality, has taken a different approach, going back to dry farming. He manages the vineyard soil (see photo above) so that it retains moisture effectively and encourages the sort of deep vine growth that gives character to the finished product. The W&V article explains ...

Williams pointed out that a vine grown on drip irrigation is essentially a potted plant sitting in the middle of a field, with moisture and nutrients delivered through the drip system. He believes that is a problem. "What kind of flavor do you get from a hydroponic-grown tomato? Very little. Same thing with a grapevine. When the winemaker comes out to taste the berry at 22° or 23° Brix, the flavor isn't there. So the decision is made to leave it on the vine a little longer, more hang time until it reaches physiological ripeness at 26° or 27° or even 28° Brix. You still aren't getting a lot of flavor, so you have to start manipulating the wine--micro-oxygenation and lots of oak--to try and get it to taste mature. And you end up with high-alcohol wines."

He added, "If we talk about when wine went from its historic place as a mealtime beverage that deeply reflects the soil and climate from whence it comes to killer, jammy monsters that advertise that they will 'melt your panties,' I think you will come to the same conclusion that we did 18 years ago: that the real wines are made by deeply connecting them to their soils and that dry farming is fundamental to that."
John Williams' statements suggests that dry farming, where it is practical, might solve the alcohol problem and yield other benefits at the same time. This suggests to me that, while research tends to focus on winemaking as a science (hence the search for high tech solutions), we need to remember that wine is made in the vineyard and the craft of winegrowing can yield answers, too.

Innovation -- doing new things -- is one answer to rapid change, but doing the old things more effectively sometimes works even better. Kinda makes you rethink the question of a wine research gap.