wine outlook aug 2010
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8/8/2019 Wine Outlook Aug 2010
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Also in this issue
Is the World Overflowing withWine? The Global Context for
California Wine Supply andDemand
Daniel A. Sumner.............................2
The Southern Hemisphere andGlobal Wine Markets to 2030:Case Study of Australia
Kym Anderson..................................6
European Wine Market Issues
and Prospects in the Context ofthe Changes to the CommonMarket Organization for Wine
tienne Montaigne.........................9
Looking Forward: Imagining theMarket For California Wine in2030
James T. Lapsely.............................12
V. 13 no. 6 Jul/Aug 2Special IssueThe World of Wine: Economic Issues and Outlook
Notes from the Guest Editor: Daniel A. Sumner
In conjunction with the 4th Annual
Meeting of the American Wine Eco-nomics Association, the Agricultural
Issues Center and the Robert MondaviInstitute for Wine and Food ScienceCenter for Wine Economics held aone-day symposium on Outlook andIssues for the World Wine Market.Robert Smiley, wine industry expert andformer dean of the UC Davis Gradu-ate School of Management, chaired theevent and coordinated the discussionamong 150 wine industry participants.The articles in this special issue arebased on the four main presentationsmade at the June 25th symposium heldat the University of California, Davis.
Daniel Sumner highlights potentialchanges in world wine production andconsumption that are likely to evolvefrom changing policy, population,income, and per capita consumption pat-terns around the world. He finds that theU.S. is soon likely to become the worldslargest wine market as consumption inthe traditional regions of Europe declines.
Kym Anderson explains how theSouthern Hemisphere industry has gone
from boom to bust in the recent cyclewith prices dropping as productionhas increased, especially in Australiawhere prices for bulk wines are nowwell below costs for many producers.
tienne Montaigne considers thebalance in Europe between reductionsin government-created incentives toproduce and reductions in governmentprograms to take wine off the market.The EU is paying producers to remove
vines and reducing price supports, whphasing out its long-standing programto pay for distillation of surplus wines
James Lapsley brings the world wisituation back to California. He analythe growing demand for wine amongdifferent demographic groups in theUnited States. He also shows that competitive challenges, in part from the sucess of the tree nut industry, may makit hard for wineries that use Californiwinegrapes to remain competitive witlow-cost wines produced elsewhere.
In addition to these presentations,the symposium featured remarks by tdistinguished wine industry leaders. JMoramarco, former CEO of Constella
as well as several other major interna-tional wine companies and now presiof Winebow, a major importer, providinsight especially about European andglobal issues. Tom Selfridge, former Cof Hess Collection and other premiumwine firms and now an industry consutant, opened the discussion of U.S. isswith perceptive comments about howhe saw the U.S. wine market evolving
The world of wine, especially in th
lower price categories that dominatetotal volumes, faces many challenges producers. The consumer base is growing and the quality of low-end winemay be better than ever. But, as oftenhappens in agriculture, producers facperiodic low prices and losses that mube made up during periods of higherprices. The current challenging periodwill end, but probably not before sevelosses drive many producers to the ed
Daniel Sumner and the otherauthors of this special issue
would like to express theirappreciation to John ThomasRosen-Molina for his valuablecontributions to all four articles.
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To set the stage for the regionalperspectives to follow, this articleprovides an overview of the situ-
ation and outlook for wine that affectall regions and may be particularly
crucial for California. Here I reviewrecent production and consumptionpatterns in order to better understandhow the future is likely to evolve.
I also use simple statistical projec-tions of consumption that can be thebasis for considering more complexchanges likely to occur over the nextfew decades. Finally, I consider somesupply and demand drivers and addi-tional factors that are likely to influ-
ence how wine markets evolve.One of the most interesting features
of wine markets is the differentiationby product characteristics and price. A
first step to getting our bearing in theworld of wine, however, is to consider
wine markets in aggregate withoutbreaking down the numbers by pricegrouping, variety, or other specifics. Weknow that not all wine markets movetogether, but getting a sense of theaggregates will provide a background
to discussions of the markets differ-entiated by product characteristics.
Production Patterns
Figure 1 shows that wine produc-
tion in the big production nations ofFrance and Italy rose through about1980, before declining by almosthalf. Production in Spain and Argen-tina (not shown in the figure) grew
during the 1960s and 1970s and, sincthen, has been variable. Over thesame period, production has grownin the United States (steadily), Ger-many (in the early years), and China(especially in recent years). Produc-
tion growth has also been rapid forthe Southern Hemisphere exporters:Australia, Chile, and South Africa.
Is the World Overflowing with Wine?
The Global Context for California Wine Supply and Demand
Daniel A. Sumner
Table 1. Wine Production 20081 andConsumption 20071, by Country
CountryProduction Consumpti
(billion liters)
France 4.7 3.3
Italy 4.6 2.6Spain 3.4 1.6
U.S.A. 2.3 2.1
Argentina 1.5 1.1
China 1.5 1.6
Germany 1.0 2.0
UK (minor) 1.2
Total of
listedcountries
19.1 15.5
World 27.3 24.0
Shareof listedcountries
70% 64%
Source: FAOSTAT. 2010. http://faostat.fao.org/site/636/Desktop/Default.aspx?PageID=636#ancor.1 Latest available data.
Wine consumption is shifting fromsouthern Europe to less traditionalwine regions while production is alsoshifting, but more slowly. Projectionssuggest leveling of per capitaconsumption, but major regions, suchas the Middle East will continue to belargely outside the wine world.
For the past few decades the maintrends in the world of wine have been
the continued rapid decline in wineconsumption in the traditional produc-
ing and consuming countries of Europe,especially the big threeFrance, Italy,and Spain. Over the same period, pro-duction in those countries has alsobeen steady or declined as well. Thesetrends matter because the world of
wine continues to revolve around whathappens in the big three, which pro-duce about half and consume about
30% of all the wine in the world.Table 1 shows the top eight wine-
consuming nations and the top seven
producers. These countries accountfor about two-thirds of production andalmost two-thirds of consumption.The United States is the number threeconsumer, the number four producer,and is a small net exporter. Germany is
a significant producer but a major netimporter. Within Europe, the UK is a
major consumer, but not a producer.Among the consumers outside
Europe, only the United States, China,
and Argentina make the list. China,with a huge population, growingincome, and a tradition of consumingalcoholic beverages, is the only nationoutside Europe and the Americas tomake the list of top consumers and
producers. Just outside the list of topproducers are significant wine produc-
ers with relatively small consumingpopulations, such as Australia, SouthAfrica, and Chile, and significantEuropean consumers and produc-
ers, such as Romania and Portugal.Important questions for the future
are where production and consumptionare going over the next two decades.First, let us consider the trends on pro-duction over the past half century or so.
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Figure 1. Production of Wine by Region, 19612008
BillionLiters
France
Italy
Spain
USA
China
Germany
10
9
8
7
6
5
4
3
2
1
0
19
99
19
97
20
05
20
03
20
01
19
63
1961
19
83
19
81
19
79
19
77
1975
19
71
19
69
19
67
19
65
19
91
19
89
19
87
19
85
19
95
19
93
1973
Source: International Organisation of Vine and Wine (OIV), 2010.
Most production is of relativelylow-priced wine that was typically con-
sumed locally and now may be shippedin bulk for packaging in larger con-sumer containers. (See the next articleby Anderson on page 6.) Behind theseproduction trends have been prices thatallowed production of winegrapes to be
competitive with other crops, spreadingof technology and knowledge of viticul-ture and enology practices, and expand-ing local markets outside traditionalregions. In addition, in Europe regula-tions to curb production or production
growth have affected the markets. (Seethe article by Montaigne on page 9.)
Demand Patterns
Figure 2 shows the trends in wine
consumption for the past five decades(somewhat less for some countries),
with time series projections to 2030.(China is not included in this figurebecause reliable historical data werenot available.) The historical datashow dramatic declines in Franceand Italy, with substantial declines
over the past 40 years in Spain andArgentina (not shown in the figure)as well. France and Italy had very
high per capita consumption quanti-
ties of more than 110 liters per personthat were simply not sustainable in amodern relatively urban society withadequate water sanitation and incomes.
At the same time that consump-tion was falling in southern Europe
(on a per capita basis and overall sincepopulation grew little), consumption
was growing in Germany and theUnited Kingdom in Europe, as wellas in the United States and othercountries where wine had beenmuch less important in the past.
The projections shown in Figure
2 are based on a simple model with alinear trend and weights such that mrecent years are more important in th
Figure 2. Annual Total Consumption of Wine by Region, 19602005, with Projections to 2030
2017
2014
2026
2023
2020
1963
1960
1993
1990
1987
1984
1981
1975
1972
1969
1966
2005
2002
1999
1996
2011
2008
1978
2029
Projected
USA
France
Germany
Italy
UK
Spain
7
6
5
4
3
2
1
0
BillionLiters
Source: International Organisation of Vine and Wine (OIV), 2010.Note: OIV data shows higher consumption for the United States in 2005 than FAO data in Table 1.Projections made using exponential smoothing with a damped trend.
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forecast. Parameters for the projectionmodel are estimated from the consump-tion data for each country separately.The projections are for continued
decline of consumption in Italy, France,and Spain but slowing of the rates ofdecline. At the same time, consumptionis projected to continue to rise in theUnited States, the United Kingdom, andGermany. Given population size and
growth rates, these projections have
total wine consumption in the UnitedStates topping the chart by 2015.
Note that the OIV data indicateconsumption in the United States ofabout 2.8 billion liters in 2007 com-
pared to only about 2.1 billion litersaccording to the FAO. These projec-tions use OIV figures because OIV dataare more consistent with U.S. data onconsumption from The Wine Institute.
Thus, if these simple projections
hold, over the five decades from 1980to 2030, the share of world wine con-sumption in southern Europe willhave fallen from more than half to lessthan one-third of world consump-
tion. The share in northern Europeand the United States will have risenfrom less than 15% to more than one-third. Moreover, China and some otherimportant markets outside the scope of
these projections will have increasedtheir share of the market as well.
Wine Demand Drivers
Behind these consumption trends aregradual changes in world population
and incomes. Global population isprojected to peak in about 2060 at justabove nine billion people. Until then,almost all the population growth isprojected to occur in the poor coun-
tries of South Asia, Africa, and theMiddle East. None of these are signifi-cant traditional markets for wine.
For most food products, popula-tion growth signals substantial demandincrease. World demand growth forwine will be increasingly limited if
major parts of the globe remain outsidethe world of wine. Furthermore, whilethe population of the United Stateswill continue to grow, the population
of Europe, and especially the majorwine-drinking regions, will begin
to decline and shares of the elderlyand very old will rise. These popula-tion trends by themselves imply thatthe share of the worlds populationthat will be significantly engaged inthe world of wine is likely to shrink.
These population trends do notbode well for global wine demand.
The other broad driver of demandis income. As shown in Figure 3,
Europe accounted for about one-thirdof world income in year 2000. The U.share was about 29% and the Asianshare was about 21%. The other one-sixth of world income was in LatinAmerica, Africa, and other regions.
By 2030 global income patternswill be very different. The Asian andEuropean shares will reverse, theU.S. share will fall to about 23%, andthere will be gradual increases in theincome shares of the other regions.
These income trends (partly driven bypopulation) are significant for winebecause it means that the most impor-tant wine-drinking parts of the worldwill shrink relative to other regions.
World wine markets may stillexpand as incomes grow gradually intraditional markets and wine consumption is introduced in other places withrapid population and income growth.However, in order to expand in pro-
portion with world income growth,wine consumption must take an ever-increasing share of the budget in theslow-growing traditional markets ormust significantly expand in less tradi
tional markets. Some places with rapiexpansions of aggregate incomes, suchas South Asia, have tiny wine marketsand little cultural base for expandingconsumption. That is not to say thatsignificant markets will not develop,only that it will be difficult to create a
mass market for wine in these regionswith little traditional base. (The Lapsearticle, page 12, explores the role ofcore consumers in the U.S. market.)
Other markets, such as China, whialso has a cultural affinity for wine co
sumption, will experience slow popultion growth but rapid per capita incomgrowth. Because wine consumption islikely to be highly responsive to incomincreases in middle-income countriesthese factors are conducive to rapid
expansion of wine consumption andshifts towards higher priced wines.
Figure 3. World GDP Shares in 2000 and 2030 (Projected) by Region
Source: World Bank World Development Indicators, International Financial Statistics of the IMF,Global Insight, and Oxford Economic Forecasting, as well as estimated and projected values devel-oped by the USDA Economic Research Service, all converted to a 2005 base year.
Note: Asia does not include Oceania, which is grouped in Other.
2030
Middle East4%Africa
3%
Asia35%
Europe22%
LatinAmerica
7%
United States23%
Other6%
2000
Middle East3%Africa
2%
Asia21%
Europe34%
LatinAmerica
6%
United States29%
Other5%
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Other Asian markets are more
mixed. For example, in Japan, thereis potential to increase the currentlylow per capita wine consumption,but income growth is projected to beslow. Conversely, in Korea, there isa potential for rapid demand growth
because income growth and diet shifts
are likely to be rapid and the baseconsumption is low in a country thathas a tradition of alcohol consump-tion and increasing wine awareness.
Other Features of theEvolving World Markets for Wine
This article has explored trends thatare likely to affect wine production
and consumption globally. Manyadditional factors will also affect the
characteristics of wines consumed andwhere those wines will be produced.
For example, wine regulation andtaxation is changing in Europe and
elsewhere. Modification of regula-tions on wine production may allowEurope to be more competitive asprograms to remove low-priced winesfrom the market are relaxed. Taxa-tion and regulation of wine consump-
tion is driven partly by government
revenue demands and partly by per-ceived social costs of alcohol abuse.As the role of government in restrict-ing consumption expands, we maysee reduced consumption among core
consumers, which would require abroadening of the consumer base tomaintain or grow aggregate demand.
Many interesting issues facing theglobal market for wine relate to prod-
uct differentiation. Wholesale prices
for wine range from less than onedollar per liter to more than $100 perliter. Obviously, across this range, theproducts are really not the same andthe discussion above has been most
relevant to the low end of the pricerange, which accounts for the greatbulk of wine volumes. Significant winerevenues are generated by higher-pricedwine markets and those wines confront
Daniel Sumner is the Frank H. Buck, Jr., Profe
in the Department of Agricultural and Reso
Economics at the University of California, D
and the Director of the University of Califor
Agricultural Issues Center. He can be conta
by e-mail at dasumner@ucdavis.edu.
For further information, the
author recommends the followinOIV. 2010. State of the Vitivinicul-ture World Market OIV Reportand Note on the World Situa-tion. International Organisationof Vine and Wine. www.oiv.int/
uk/statistiques/index.htm andhttp://news.reseau-concept.net/images/oiv_uk/Client/2010_note_conj_mars_tableaux_EN.pdf.
special issues of unique locations,climates, and marketing strategies.
Wines in the higher price rangesalso compete in a global market, butthe dynamics of that market are differ-ent from the market for the lower-end
wines. Overall, income growth, espe-cially the growth of per capita incomes
of now middle-income consumers, willhelp determine the size of the globalpremium wine market. The otherfactor, of course, is the willingness of
higher-income consumers to use someof their new incomes on winenotas a beverage, but as a component oftheir luxury good consumption bundle.Given rising disposable incomes,increasing the acceptance of wine as
a significant part of the high-income
consumption style for new consumersis crucial for expansion of this market.
The expanding market for premiumwines will be shared among competitorsbased on reputation. Reputations for
quality, generated mainly by the ori-gins of the grapes, are crucial for winesto compete successfully in the higherprice categories. But, even within well-known regions, some districts andbrands command substantial price pre-
miums. Reputations evolve slowly andnew regions or brands compete vigor-ously to establish themselves amongthose that capture price premiums.
Over the past few decades, somecoastal parts of California, led by Napa,
and a few places and brands in Austra-lia, such as the Barossa Valley and Pen-folds Grange, have been able to com-pete successfully with the elite wines
of France and Italy. Other regions, insuch places as Spain, Argentina, Chil
and less famous locations in Califor-nia and Australia, claim to match thequality of the more famous places anbrands. The evolution of reputationsof non-traditional regions competingin the higher price categories (not ju
the elite prestige wines) will determimuch of the economics of the overallwine industry in coastal California anmany other places. Marketing effortsare important, but more fundamentais to create accepted wine character-
istics that gain respect of influentialcritics and to reach this stage at costsconsistent with competitors. Whilethe markets are different, the chal-lenges are therefore similar for both
premium and basic beverage wines.
...in order to expand inproportion with world
income growth, wineconsumption must take an
ever-increasing share of thebudget in the slow-growingtraditional markets or must
significantly expand in lesstraditional markets.
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Twenty five years ago, the SouthernHemisphere contributed 12% ofthe worlds wine production and1% of global exports. By 2009, however,
it accounted for 18% of global produc-tion and a huge 27% of global wineexports. Australias export-led growthis particularly striking, its shares rising
from barely 1% to more than 4% ofglobal production and from a mere 0.2%to 9% of global exports. Australia nowexports two-thirds of its output (upfrom 2% in 198084), and is now the
worlds fourth largest wine exporterafter France, Italy, and Spain. The huge
vineyard expansion needed to deliverthat dramatic transformation also hascaused the stocks-to-sales ratio to spike.
In light of the current global over-
supply situation, and drawing also onlessons from past booms, this paperfocuses on how the Australian wineindustrys international competitive-ness and market shares might evolveover the next two decades. The longer
term should see Australia trading its
way out of the current surplus and backto expanding its global market share,especially in value terms as produc-ers seek to differentiate their productmore and focus on raising quality.
The Wine Industryin the New and Old World
The spurt of vineyard plantings fromthe mid-1990s, first in Australia and
early 1980s (to 18%), and its share ofglobal exports has risen from 1% to27%. That export growth has been at
the expense of not only Western Euro-pean suppliers, but also the rest ofthe world whose share of global wineexports has dropped from 22% to 9%.
The decline in consumption in tradtional wine-exporting countries (and inArgentina) has been matched by con-
sumption growth in other New Worldcountries, in wine-importing countriesof Europe, and, most recently, in EastAsia.
Winery Size and Concentration
Another important feature thatdistinguishes the Old and New Worldproducers is the size and ownershipof wineries. In the New World, it isnot uncommon for the largest firm toaccount for one-quarter of sales. In
the cases of Chile and South Africa,the biggest firms share is close to one-third. The share of the two or three
next-biggest firms also is huge exceptin South Africa, such that the manymedium and small wineries account
for only a minority of sales. The latterare mainly family companies, but thelarge firms are typically listed nationacompanies or multinationals operatingin several countries. By contrast, inthe traditional producing countries of
Europe, the shares of the four largestwineries are tiny, accounting for
between 4% and 20% of total sales. (InChina the top four account for 28%.)
This difference in firm concentra-tion may well be important as both
the Old and New World producersseek to obtain retail shelf space in aworld in which large supermarketsare becoming ever-more dominant asoutlets for wine sales. If negotiatingstrength is related to size, small and
The Southern Hemisphere and Global Wine Markets to 2030:Case Study of Australia
Kym Anderson
then followed by other New Worldcountries, has led to wine produc-tion growing far faster than wine
consumption in the Southern Hemi-sphere. Initially, that output growthwas driven by perceived export growthprospects as baby boomers reachedmiddle age and supermarkets becamea major outlet for retail wine sales.
However, the expansion in those
export markets has been temporarilyhalted by the recessions on each side ofthe North Atlantic. The Southern Hemi-sphere has thus added to the chronic
surpluses in Europes wine-exportingcountries (due to steeply declining wine
consumption and slow adjustment byproducers in those traditional markets).It has resulted in major declines recentlyin prices of grapes and wine, and invalues of vineyard and winery assets inAustralia, New Zealand, and elsewhere.
Booms and crises are not new toSouthern Hemisphere wine producers,nor to wine markets in the rest of the
world. Indeed they are normal for capi-tal-intensive perennial crops, albeit withlong cycles. That does not make the pain
any easier for current producers though.Nor does it mean the pathway and speedof return to profitability are obvious,for the forces behind the latest cycle aredifferent from those associated with pre-vious cycles. In particular, the worlds
wine markets have become far moreglobalized over the past two decades,
which has both broadened the marketopportunities and increased the chal-lenges from international competition.
Even as export volumes have grown,
the share of global exports from thetop five European suppliers has fallenfrom just over three-quarters to justunder three-fifths. The Southern Hemi-sphere share of global wine produc-
tion has increased by half since the
Much like wine industries across the world, the Australian and Southern
Hemisphere wine industry has beenhit hard by the global recessionand declining prices. Nonetheless,the Australian wine industry is well-positioned to recover from the currentmarket situation.
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Figure 2. Volume and Average Price of Export Sales of Australian Wine,198081 to 200809 (Million Liters and Australian Cents per Liter)
Source: Authors derivation from data at www.awbc.com.au.1982-83
1980-81
2004-05
2002-03
2000-01
1998-99
1996-97
1990-91
1988-89
1986-87
1984-85
2008-09
2006-07
1994-95
1992-93
Price
Volume
600
500
400
300
200
100
0
900
800
700
600500
400
300
200
100
0
TotalWineExports(million
liters)
medium-sized wineries may strugglein negotiating with such retailers.
As well, in the United States thenumber of wholesale distributors in eachstate has fallen dramatically, so theretoo it may be the biggest wineries thatcapture the lions share of the import-ers attention. On the other hand, listed
companies are always under pressureto deliver good news in their quarterlyreports to shareholders, so some ofthe large wineries may look to shedassets or even vacate the industry if along recovery period from the current
over-supply situation appears likely.Such moves could provide oppor-
tunities for those smaller, oftenunlisted firms that are in the busi-ness for the long haul: they may
be able to acquire selected assets atfire-sale prices, thereby underwrit-ing their prosperity as the industryrecovers from its current surpluses.
Booms and Busts
The share of bulk wine in a countrys
table wine exports is a good indicatorof the current oversupply situationfacing the world wine market. ForAustralia, since its latest boom began,
bulk shipments were always below15%, and for New Zealand below
5%. In recent years that share hasbeen rising steadily, and by 2004 itwas 20% for Australia, the U.S., andArgentina. By 2009 it was 20% for NewZealand, almost 40% for Australia,
and even higher for other SouthernHemisphere exporters (Figure 1). Someof these bulk sales are to supermarketsdeveloping their own labels. But much
of that trade is a symptom of over-supply, and therefore can provide a
rough indication over time of how farthe industry is out of equilibrium.
Australias wine exports have boomedseveral times in the past. In each case,those booms subsequently plateauedand the expanded acreage meant grape
growers and winemakers went backto receiving low returns. Indeed, the
industrys prospects were sufficientlydire as recently as 1985 to induce the
federal and South Australian govern-
ments to fund a vine-pull compen-sation program to encourage grapegrowers to move to alternative crops.
That long history of fluctuatingfortunes gave reason to expect Aus-
tralias latest wine boom would be fol-lowed by yet another crash, such as acrash in wine export prices (and thuswinegrape prices), if not in wine pro-duction and export volumes as hasindeed begun to happen (Figure 2).
The latest boom differs from theearlier booms in several respects. Onedifference is that the latest boom is over-whelmingly export-oriented. Anothermajor difference between the recent
and earlier booms is that the qual-ity of wine output has improved dra-
matically during the past two decades
relative to the cost of production.For the first time, the industry has
been in a position to build brand,regional, and varietal images abroad tcapitalize on those improvements in t
quality of its grapes and wines. Thatimage building has been partly generibut mostly from the promotional actities of individual corporations and thlocal representatives abroad. Australiawines have also over-delivered in term
of value for money in Northern Hemisphere markets.
Australias average export price rosthree times greater than the global aveage over the 1990s. However, Austral
Figure 1. Surplus Indicator: Rising Share of Bulk Wine in Value of Export (%)
Source: World Bank, 2010. World Integrated Trade Solution.Available at: http://wits.worldbank.org/witsweb/ (requires registration).
60
50
40
30
20
10
0
Percent
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Argentina
United States
South Africa
New Zealand
Chile
Austr
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2008-09
2007
-08
Figure 3. Volumes of Wine Exports by Price Segment, Australia,199900 to 200809 (A$ per Liter, FOB Prices)
$2.49 and under$2.50 to $4.99$5.00 to $7.49$7.50 to $9.99$10.00 and over
400
350
300
250
200150
100
50
0
MillionLiters
2000-01
1999-00
2004-05
2003-04
2002-03
2001
-02
2006-07
2005
-06
Source: Authors derivation from data at www.awbc.com.au.
was not alone (that rise was exceededby other New World wine export-
ers, albeit from different bases). Since2001, its average export price even innominal terms has fallen (see Figure2)a consequence in part of the Yel-lowtail phenomenon. Moreover, since2006 the volume of exports has grown
only for wines priced below A$2.50per liter (Figure 3). This is the resultof a surge in the share of bulk wine inAustralian exports documented earlier.
Australian Efforts toStrengthen its Competitive Edge
Looking beyond the immediate dif-ficulties, there are reasons to be cau-tiously optimistic about the future forwine industries in some regions. Majoradjustments will be required for many
participants. However, if there is a will-ingness to continue to invest for thelong term (rather than just focusingon quarterly returns to shareholders),
and if the earlier spirit of collaborationwithin the industry can be re-invigo-
rated, a return to at least normal levelsof profitability should be possible.
For Australia, another neededchange that is beginning to showup in the statistics involves diver-
sifying exports beyond the fourEnglish-speaking countries that have
been the dominant destinations for
Australian exports in the past.
The Asian region in particular showsgreat promise for Australian wineries:it is relatively close, Australia alreadyhas a strong trade and investment pres-ence there in other product areas, it is
booming economically, and the numberof alumni returning there from Austra-lian educational institutions is grow-ing rapidly. The region accounted forbarely 5% of Australias wine exportsuntil a few years ago, but since then
sales have grown rapidly. With percapita consumption still very low inAsia, there is considerable potential forsteady long-term growth in demandand in returns from marketing invest-ments. Several of these characteristics
apply to other New World wine export-ers, including Chile and California.
During the past two decades, theAustralian wine industry improved itscompetitiveness in no small measure by
large investments not only in vineyards,wineries and wine marketing, but alsoin the creation and dissemination ofproduction and market knowledge.
Investments in R&D has been espe-cially important for competitiveness.The return to R&D in the next two
decades may be even higher than inthe past, bearing in mind marketplacechanges and long-term uncertainties
such as climate change, water andother environmental policy reforms,
and prospective alcohol tax changes.Transgenic biotechnology offers muchpromise for accelerating the researchdiscovery process, but consumer resis-tance to genetic engineering is limitingthe exploitation of that opportunity.
A return to prosperity for theSouthern Hemisphere wine indus-try is certainly possible, but it is notlikely to be fast or easy. Like severalcompetitors, the Australian wineindustry is well-positioned to sell in
the bulk wine market. The country island- and capital-abundant, so it cansupply large volumes of consistent,low-priced, branded premium wine.
Australian wine producers also hav
some advantages in marketing to theexpanding Asian marketproximityand existing market shares in thesecountries. Australian wine quality andmarketing expertise has also increasedconsiderably in recent years, as it has i
Chile and a few other places. Yet a retuto prosperity will also require a willingness to continue investing for the longterm, especially in R&D and marketing
Kym Anderson is the George Gollin Profesof Economics at the University of Adelaide aaffiliated with the Wine Economics ReseaCentre at the University of Adelaide. He cancontacted by e-mail at kym.anderson@adelaiedu.au.
For further information, the authrecommends the following:
Anderson, K. 2010. Contributions othe Innovation System to AustraliaWine Industry Growth, Ch. 4 inInnovation and Technological CatchUp: The Changing Geography of WiProduction, edited by E. Giuliani, AMorrison and R. Rabellotti, LondoEdward Elgar (forthcoming).
Intangible Business. 2010. The Pow100: The Worlds Most PowerfulSpirits and Wine Brands, 2010.London: Intangible Business. wwwdrinkspowerbrands.com.
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The European wine market hasundergone two recent economicdislocations. The first startedin 2004, with oversupply of wine onworld markets, and the impact of this
oversupply continues to affect mainlylow-cost wines. The second slumpstarted in 2008, with the global finan-cial crisis and recession in Europeand America, which reduced incomesand increased uncertainty. The high-quality wines, such as Champagne and
the famous wines of Burgundy andBordeaux, were the most significantlyaffected by this demand shock.
The long-evolving changes to the
European Union (EU) Common MarketOrganization for wine (CMO) were
finally agreed to in 2008 in the contextof these severe market concerns. Thesepolicy and program changes have notyet been fully implemented, but areintended to improve the economic
prospects of EU producers by reducingoverproduction and increasing the com-petitiveness of EU wines on the worldmarket. Under the CMO, member states
in the EU that produce wine, such asSpain or France, choose a set of specific
mechanisms among a common menu.The most important program is
the replacement of up to 175,000hectares of winegrapes with othercrops in just four years. Currently,planting of vines is tightly restricted
to specific parcels of land in mostregions. Therefore, this removal of
winegrape acreage, by removing vines,is designed to lead to smaller harvests.
The CMO will also include sup-
port programs aimed to increase thecompetitiveness of the European wineindustry through promotion, a single-payment program, and increasedinvestment. New regulatory measuresin the CMO are also intended to help
revitalize the European wine industry.
Supply, Demand andTrade Background
Viticulture is a traditional and impor-
tant European agricultural activity,particularly in the south of Europeand in the new member states of thesouthern central and Eastern Euro-pean countries. In the EU, Spainhas about 30% of the Europeanwinegrape area, whereas France has
20%, and Italy 22% (Figure 1).The gap between European wine
production and consumption has
widened in recent years. In the2008/2009 wine year, the EU produc17.3 billion liters, including about
10.5 billion liters of ordinary wineand 6.8 billion liters of higher qual-ity wines. That year, EU consumptioamounted to 13.5 billion liters of win
In 2006, the last year for which cosistent data are readily available, the
wine industry exported 6.2 billion litof wine, of which about 4.5 billion liwere shipped within the EU, and abo1.7 billion liters were exported to coutries outside the EU. In 2006, coun-
tries in the European Union importe5.8 billion liters, of which 1.2 billionliters came from non-EU countries.
European viticulture is facing globcompetition and the wine industrymust adapt to a changing world. Durthe last half-century, vineyard area h
been decreasing in Europe, but still tlarge Mediterranean countries accoufor most of the winegrape area. (The
European Wine Market Issues and Prospects in theContext of the Changes to the Common Market Organization for Wine
tienne Montaigne
The European Union introduced itsnew Common Market Organization
(CMO) to reduce production, reducegovernment disposal, and increasemarket demand for low-priced wines.It is not clear if European wine exportswill decrease as a result of the CMO.
Figure 1. Area Occupied by European Vineyards, in Thousand Hectares, 2009
Source: OIV 2010.Note: Includes vat vines, table wines, dried grapes, in production or awaiting production.
Italy818
Portugal243
France840
Others485
Romania205
Spain1,113
Total = 3,70thousandhectares
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changing role of Europe and countries
within Europe in global wine produc-tion and consumption was highlightedin the Sumner article in this issue.)
As shown in Figure 2, wine exportsfrom France and Italy have stabilized
over the last decade, while exportsfrom Spain have almost tripled. Look-ing beyond these countries, however,one can see that among the mostimportant supply issues facing Euro-pean producers is the increasing role
of imports from outside Europe.The European wine industry is also
facing changes in demand for wine.Two trends characterize observedper capita consumption patterns.Many traditional wine-producing
countries of the southern EU havegreatly reduced per capita and totalconsumption of wine. Conversely,other European countries, includ-ing Germany, continue to show rising
per capita wine consumption.Although European wine produc-
tion has been falling, consumptionhas fallen more rapidly, contribut-ing to the large European and globalgap between wine production andconsumption. As a result, there has
been no commercial market for manywines at any acceptable price con-sistent with costs of production.
Changes in EU Wine Policies
In response to the continuing demandand supply situation that has left manyproducers with market losses, and tohelp prevent market oversupply, the
European Union introduced changes inthe CMO for wine. The new CMO forwine was implemented during thecouncil meeting on agricultural andfisheries policy in December 2007, andis specified through the two official
texts which offer guidelines for imple-mentation. As noted above, the newpolicy includes policies to removewinegrape acreage, eliminate productremoval, support demand, and reviseregulations.
The proposal to remove wine-grape vineyards from production isvoluntary and gives grape growers afinancial incentive to pull their vines.The subsidy is available to all EU
producers in member countries thatproduce more than five million litersof wine and targets an area of about175,000 hectares (or about 5% of EUwinegrape area) to be removed fromwine production. The 2009 budget forthis removal plan was 464 million
about 5% of the value of total EU wineexports in 2008, or 2,650 per hectare,or $1,400 per acre. Clearly, this is a
relatively low one-time incentive andwill attract only relatively low-yield
areas that produced low-priced winesand areas that might have shifted outof grape production in any case. Thesfunds were provided to member statesto distribute according to their ownnational specifications to meet the
purposes of the new policy. Given itslarge acreage of low-priced wine andlow-yielding vines, Spain alone receivhalf of the programs budget in thefirst year. Italy received about one-fourth of the funds, consistent with it
grape area within the EU (Figure 3).Another aspect of the new CMO is
support programs with a budget of 5billion between 2009 and 2013. Durinthat period, the most important com-
ponents of the support programs arerestructuring, promotion and invest-ment, which make up a combined60% of the programs budget. Distil-lation and other programs to removewine from the market have a reduced
role in the new CMO and account forabout 21% of the support programsbudget before the scheduled phase-ouof distillation by 2013. Currently, thebudget provides about 910 million fo
potable alcohol distillation, by-producdistillation, or crisis distillation. Inthe past, these distillation plans haveutilized up to 5% of wine volume inmember states (FAS 2004), divertingthis amount from the wine market.The Single Payment Scheme (available
across essentially all crop areas anddesigned to be compatible with WorldTrade Organization (WTO) commit-ments), together with harvest insur-
ance, mutual funds, and green harvesting (removal of immature grapes), are
limited to 15% of the support budget.The choice among support program
allows member countries to select dif-ferent paths towards adjustment. TheSingle Payment Program support isutilized mainly by Spain, while suppo
for concentrated grape must, whichremoves wine from the market, is
Figure 2. European Wine Exports by Country, 19602008
Source: OIV 2010. Note: Including trade within Europe.
1998
1996
2004
2002
2000
1962
1960
1982
1980
1978
1976
1974
1970
1968
1966
1964
1990
1988
1986
1984
1994
1992
1972
2006
2008
ItalyFranceSpainGermany
2.5
2.0
1.5
1.0
0.5
0
BillionLiters
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utilized by France and Italy. There arepayments for green harvesting, which
also removes production from themarket and occurs primarily in Italy.
Overall, the CMO allows eachmember state a large degree of freedomin spending its budget, which may bethought of as a form of nationaliza-
tion of the common wine policy.There is also a large historical effecton reform, in the sense that formerbudget amounts that were devotedto wine remain in place. The newCMO for wine did not achieve budget
savings for the European Union.The CMO reform also includes new
regulatory measures. Among thesemeasures, the planting-rights regime isone of the most controversial. There is
currently a prohibition of new plant-ings of vines until December 31, 2015.The new planting rights will allow wineproducers to plant vines after the mora-torium expires, but this decision waspostponed until 2016. Growers who
produce wines in delimited areas withprotected designation of origin believethat uncontrolled and unlimited wine-grape plantings will result in overpro-duction and a fall in perceived quality.
Conclusions
The new wine CMO represents a set ofcompromises between the 27 memberstates. The CMO is not really a uni-fied policy, and every member stateis attempting to obtain as much as it
can from the new policy and budget.The CMO is a step towards a commonagricultural policy for wine in Europethat is WTO compatible. None-
theless, the CMO allows a degree ofnationalization, and member states
can influence policy by demonstrat-ing the relevance to their own situa-tion. At the same time, many of themost controversial aspects of the CMOhave been delayed for the transition.
The new CMO has succeeded in
encouraging the removal of many vine-yards from production, allowing other
crops to be grown on this acreage.
Moreover, the politics and some of theeconomics of the new CMO are nowmore agricultural than specific towine.
Since the 1980s, the European wineindustry has faced increased produc-
tion against a declining demand inEuropean countries. Exports fromEuropean wine producers increased
during this period, but increasedcompetition from producers outsideof Europe limit this expansion.
The CMO is intended to achievea better balance between supply anddemand on the European market. How-ever, it is difficult to estimate the over-all effects of these policies on Europeanwine exports and production. Some
measures of the CMO will likely reducewine production. Removal of vineyards
from production and the reduced roleof some support programs decrease theincentive for growers to overproduce.
However, other measures of the
CMO stimulate production. Theseinclude domestic and export promo-tion, and changes to the planting-rights-regime. In addition, phas-ing out (or down) the distillationprogram allows more wine to enter
the market. Uncertainty regardingthe impacts of these counteractingmeasures means it is impossible to
know whether European wine pro-duction and exports will increase ordecrease as a result of the new CMO
tienne Montaigne is a Professor of F
Economics and currently scientific administr
in the Agricultural Mediterranean Inst
of Montpellier (IAMM) in France. He cancontacted by e-mail at montaigne@iamm.fr.
For further information, theauthor recommends the followin
U.S. Department of Agriculture,Foreign Agricultural Service2009. EU-27 Wine Annual Repor2009. GAIN Report Number:E49021. www.fas.usda.gov/gain-
files/200903/146327359.pdf.Brunke, H., R. Mueller and D.A.
Sumner. 2008. CaliforniaWine and the EU Wine PolicyReform. AIC Issues Brief no. 34Available at: http://aic.ucdavis.edu/pub/briefs/brief34.pdf.
Figure 3. EU Budget for Removal of Land Under Wine Grape Cultivation, 200820
Source: European Commission 2008.
Spain236
Greece7
Hungary10
Portugal14
France71
Others10
Italy116
Total464 m Euro
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In 2010, the United States was the
largest wine market by value and setto overtake France in volume. Of the
wine consumed by U.S. consumers, 30%came from outside the United States.
In 2009, according to Wine Institute
figures, California supplied 61% of allwine sold in the United States and theU.S. market accounted for approxi-mately 83% of Californias total salesthat year. Wines retailing for less than$9.25 per liter (about $7 per bottle)
constituted 72% of the total market,with over 30% of the market retailing atunder $3.96 per liter. California exportswere also relatively low value: of theapproximately 378.5 million liters ofCalifornia wine exported, roughly half
was shipped in bulk with a value of justover $1 a liter, while exported bottledwine averaged just over $3 a liter. Muchof this article, therefore, focuses onthe large volume market for relatively
low-priced wine. What might demandand supply be like in twenty years?
The Market for U.S. Wine in 2030
In 2030 the last of the Baby Boomers, a77 million-strong cohort that has drivenAmerican marketing trends for the past
50 years, will turn 65. Their children,the so-called Millennials, a cohort ofapproximately 70 million that turned
21 after the start of the 21st century,will be well along in their careers andraising families. According to projec-tions from the U.S. Census Bureau, the
United States population will growby 20%, from approximately 310 mil-lion in 2010 to 373 million in 2030.The country will be more ethnicallydiverse and older. Almost 20% of thepopulation will be over 65, as com-pared to 13% in 2010. The proportion
of the population considered whitewill have shrunk from 66% to 57%and increased in actual number by 7million, contributing just over 11% of
the population increase. By contrast,other ethnic groups will increase theirshare: Asian-Americans will constitute7% of the population compared to 5%in 2010; African-Americans will havegrown slightly from 12% to 13%; andHispanics are projected to grow to 23%
of the population, an increase to 86million from their current 50 million.
Wine consumed is a product ofper capita consumption multiplied by
population of drinking age. In 2010there are approximately 220 million
Americans of legal drinking age, andthat number is expected to increaseby almost 22% to 268 million, whichwould imply a market of about 2.97billion liters of table wineup fromthe current total of 2.45 billion liters
in 2008. To refine this projectionrequires reviewing some history andsome recent consumption patterns.
According to studies contractedby the Wine Market Council, in 2009approximately 43% of adult Ameri-
cans claim not to consume alcohol inany form. This level of abstinence hasremained fairly constant at around 40%since 1994, when the Wine MarketCouncil commissioned its first study.Compared with other developed coun-
tries, Americas level of abstinence is
extraordinarily high. The World HealthOrganizations Global Status Reporton Alcohol 2004 shows Germany with5.1% abstinence, followed by France
at 6.3%, the UK at 12%, and Japan at13.5%. Canada, which is perhaps mostsimilar to the United States, has one ofthe highest rates of abstinence at 22%,but that is still about half the rate of thof the United States. If, during the nextwo decades, abstinence dropped from
43% to even 30% of the adult popula-tion, an additional 27 million drink-ers would be added to the market.
Of those Americans who say they
consume some alcohol, slightly overhalf (30% of all adult Americans) con-
sume wine. Americans who drink winesplit roughly 50/50 between so-calledcore consumersthose Americanswho consume at least one glass ofwine per weekand the marginalconsumers who consume less than
one glass a wine of per week. Accord-ing to the 2009 Wine Market Councilsurvey, the core consumers are the
key market for wine, responsible for91% of all wine consumed. As in anypopulation, core consumers are not a
homogeneous group. Some drink onlyone glass of wine a week, while othersconsume wine daily. Collectively, coreconsumers are about 34 million innumber and average 70 liters of wine
per person per year (roughly one glassof wine per day). Clearly, core consumers are key to the U.S. wine market.
The ethnicity of current core con-sumers differs from that of the generalpopulation. Currently, Caucasians,
which represent 66% of the generalpopulation (assuming that Hispanicsare considered separate from Cauca-sians), account for 84% of core con-sumers. African-Americans account forapproximately 5% of core consump-
tion, but represent just over 12% of the
Looking Forward: Imagining the Market For California Wine in 2030
James T. Lapsely
Per capita consumption is increasing inthe United States as the demographicmake-up of wine drinkers is changing.Sales will be higher in 2030, but costsin California and increased brandingof bulk imports mean a higher shareof wine may come from imports.
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general population. Asian-Americansare 7% of core consumers while only
5% of the general population. Hispan-ics, at 59 million people, represent16% of the United States population,but are only 4% of core consumers.
Considering that the Hispanic popu-lation in the United States is expected
to increase by over 70% in the next 20years to 86 million, and is predicted toaccount for over 50% of the total popula-tion increase, it is clear that straight-lineprojections of total wine volume aresuspect, and the nature of wine drinking
among the Hispanic population must betaken into account. In 2006, the WineMarket Council contracted with Epe-rian-Simmons, a market research com-pany, to study Hispanic consumers. Not
surprisingly, they found that Hispanicwine consumers tended to have achievedhigher levels of education and be profes-sionally employed than were Hispanicnon-wine consumers. About 23% of His-panics in this 2005 survey drank wine as
opposed to 34% of the general market;however, younger Hispanics, thoseunder 40 years old, were a significantlylarger portion of the Hispanic marketfor wine than were their age counter-
parts in the general market. In addi-tion, they consumed about one moreglass of wine a month than did theirage counterparts in the general market.Hispanic wine drinkers also seem to bemore acculturated than Hispanics thatdo not drink wine: 56% of Hispanic wine
drinkers preferred to speak English asopposed to 41% of Hispanics who arenot wine drinkers. Note, however, thatapproximately half of the increase in the
number of Hispanics will come fromimmigration, and wine consumption
among this group will continue to lag.Millennials in all ethnic groups are
adopting wine at a higher rate thandid their parents, and ethnic composi-tion is changing, so it seems likely thatthe share of abstainers will decline. If
half the new consumers buy wine andthat new group is split roughly in half
between core and marginal consumers,then core consumers would grow tobetween 1819% of the adult population
and marginal consumers would accountfor 16%. If core consumers continue toaccount for 90% of total wine consump-
tion and they remain at their currentaverage of 70 liters, the total table winemarket in 2030 would be 3.67 bil-
lion liters, or 0.54 to 0.63 billion litershigher than a straight-line projectionbased solely on population growth.
Of course, wine consumption hasgone in and out of fashion in the UnitedStates. During the 1980s, per capita
consumption of wine declined, butincreased again in the 1990s. Lack of
industry advertising, tougher laws des-ignating lower blood alcohol levels fordriving under the influence, governmentwarning labels on alcoholic beverages,
and a government-sponsored war ondrugs have often been suggested as con-tributing to the decline in per capita con-sumption in the 1980s. But the 1980swas also the time when Baby Boomerswere home with childrenand stud-
ies have repeatedly shown that house-
holds with children have lower ratesof wine consumption than do similarhouseholds with no children. In 2030,the older Millennials will be in theirchild-rearing years and it is possible
that per capita consumption will againdecline. That said, it seems more likelythat wine consumption in the UnitedStates will converge gradually towardthe norm in other developed nations.
SupplyLow-cost wines must come from inex
pensive grapes, and most of Califor-nias production comes from the San
Joaquin Valley. Crush districts 12, 13and 14, which constitute the Central
Valley south of the Delta to Bakersfielproduced 52% of all grapes crushed in
2009. District 13, which is composedof Fresno, Madera and Tulare countiealone accounted for almost one-third all of Californias winegrape productio
A 2030 market of 3.67 billion literof table wine means that the U.S. mar
would expand by 1.13 billion liters,requiring approximately 1.75 milliontons of grapes. Assuming that Californ
supplied 60% of that increase and thahalf of the volume retailed for under $then the southern San Joaquin Valley
would need to expand its productionby about 500,000 tons, which wouldrequire an additional 42,000 acres at ayield of 12 tons per acre. Hence, usingthese estimates, unless yield were furtincreased, acreage in the San Joaquin
Valley would need to expand by abou30% to satisfy this additional demand
The recent trend in winegrape acreage in the region is actually down notup. After reaching a peak of 182,000acres in 2001, acreage fell to 150,000
2005 and further to 140,000 in 2009 the San Joaquin Valley crush districts 13 and 14. Table 2 shows some of whwas behind the decline in winegrapeacreage. For the seven valley countiesthat comprise the bulk of the acres for
Group
Share inCore, 2010
Share inCore, 2030
Population,2030
Core Consume2030
(Percent) (Millions)
Caucasian 13.9 16 212 33.9
African-American 4.3 4.5 48 2.2
Asian-American 14.8 16 27 4.3
Hispanic 3.2 8 86 6.8Total 47.2
Table 1. Core Wine Consumers in 2030
Source: Based on projections from U.S. Census and wine consumption survey data as described in the teNote: The percent of core consumers are shares of the total population (including those under 21 yearage) since Bureau of Census projections broken out by both age group and ethnicity were not available
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lower-priced grapes, acreage of wine-grapes fell by about 11,000 acres from
2005 to 2009 while acreage of tree nuts,especially almonds and pistachios, rose.
Table 3 indicates some of the eco-nomics behind these acreage shifts. Thedata presented are derived from coststudies prepared under the direction
of Karen Klonsky by the CooperativeExtension staff at UC Davis and in theregion. Each column shows informa-tion for the most recent cost study foreach crop in the region. Comparingacross the crops, we find that wine-
grapes had total revenue per acre for thetypical case that was well below totalcosts. Table grapes also showed nega-tive net revenue, while returns werestrongly positive for the tree nuts.
Of course, there is considerablevariation across specific locations andfarms, and winegrape prices have risenabove the $200 per ton used in the 2005study. Nonetheless, the basic messageof Tables 1 and 2 are clear and con-
sistent. In order to expand winegrapeproduction for lower-priced wines,innovations are needed to expandyields per acre or otherwise lower costsof production. One positive factor for
winegrapes is that average irrigationwater use per acre is about 2560%below that of other perennial crops.
Wine from grapes grown in the SanJoaquin Valley is essentially an undif-ferentiated commodity in competitionwith similar wine produced around the
world. California accounts for approxi-mately 80% of the worlds productionof almonds and 90% of almonds soldin the world export market. By con-
trast, California produces 7% of theworlds wine and only 4% of wine sold
in export. The supply of inexpensivewine from other countries acts as aceiling on prices for winegrape grow-ers. This reality was brought home in2009 when over 227 million liters offinished bulk wine, valued on aver-
age at $0.69 per liter, were importedto the United States and bottled here.
As we consider the market for winein 2030, it is useful to consider what
resources are available as inputs to theadditional production needed to supplythe expanding market in the UnitedStates. Many believe that irrigationwater will become scarcer and moreexpensive in California. Agricultural
water prices vary from under $10 peracre-foot in some locations to over$100 an acre-foot (when available) insome districts on the west side of theSan Joaquin Valley. Winegrapes requireless water per acre or per unit of value
than many other crops. This may sug-gest some advantage to a shift towardswinegrapes over the next two decades.
However, growers in crush districts13 and 14 do not yet seem to be plant-
ing new vineyards. Of the approximately105,000 acres of winegrapes in theregion, 93,000 acres were planted priorto 2001 and will have reached the endof their normal productive lifespan by2030. With grape prices for inexpen-
sive wines constrained by internationalcompetition and facing increased inputcosts, it seems likely that some wine-grape growers in the San Joaquin Valleywill turn to other crops when it comes
time to replant their vineyards. Unlessyields can expand substantially, thatmeans either higher prices or a highershare of supplies of low-cost wines sup-plied from other regions of the world.
The Market forMore Expensive Wines
This article has mainly focused on wine
retailing at below $7 a bottle, becausesuch wine constitutes the major share of
the U.S. market by volume. Because ofthe multiplicity of brands sales venues,it is difficult to track sales of expensivewines with precision and estimates of
volume differ. But, by any measure,higher-priced wine is important toCalifornia. In 2008, industry analyst,
Jon Fredrikson, estimated that the12% of California wine that retailed atabove $14 a bottle earned roughly one-
third of wine revenue, as did the winesretailing between $7$14 per bottleand wine retailing below $7 a bottle.
Most analysts agree that sales of expensive wines have expanded rapidly
over the past 20 years. This view is re-
flected in the increase in the number owineries in California. Only a few wineries are large enough to have sufficieeconomies of scale to produce wine fothe under $7 a bottle market. Most Ca
fornia wineries are small and focused producing expensive wines, and theirnumber has increased by about 260 pcent from 827 in 1991 to 2,972 in 200
Expensive wines require flavorfulgrapes, most of which are produced
in Californias coastal valleys that arecooled by their proximity to the PacificOcean. Grapes grown in cooler areastend to have higher levels of color, acidity, and flavor than do the same variet-ies grown in warmer areas, but they
also have lower yields per acre. Grapesgrown in areas such as Napa, Sonoma, San Luis Obispo are significantly moreexpensive than the same varieties growin Californias warm interior valley. In
2009 the average price of Cabernet Sauvignon from Napa County was $4,619per ton, compared to $2,194 per tonin Sonoma County, and $350 per tonin Fresno County (crush district 13).
The demand for expensive wines(and grapes) has fluctuated with
the U.S. economy, but has generallyincreased over the past twenty years. Inthe almost two decades between 1991
1 Central Valley south of San Joaquin County.2 Stanislaus does not report pistachios separateSources: CDFA. Grape Crush Report. 2010.California County Agricultural CommissionerData. 2009.
CropChange in Acreag
20052009
Winegrapes -10,752
Almonds 128,183
Pistachios2 28,852
Walnuts 1,838
Table 2. Acreage Change forWinegrapes and Alternative Crops1
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Table 3. Comparison of Per Acres Revenue and Costs for Wine Grapes andAlternative Crops in the Central Valley of California, Per Acre Basis
Crop Year of Study Revenue Total Cost Net Return
Winegrapes 2005 $2400 $2834 -$434
Table grapes 2007 $9600 $9652 -$52
Almonds* 2006 $4000 $3348 $652
Walnuts* 2007 $5100 $4027 $1073
Pistachios 2008 $4536 $3680 $856* Northern San Joaquin ValleySource: Cost and Return Studies. Agricultural and Resource Economics, UC Davis andUniversity of California Cooperative Extension. http://coststudies.ucdavis.edu/current.php
James T. Lapsely is an associate adjunct profein the Department of Viticulture and Eno
at UC Davis. He can be reached by e-majtlapsley@ucdavis.edu.
For further information, the authrecommends the following:
Sumner, D.A., H. Bombrun, J. M.Alston, and D. Heien, 2004. NorAmerica, Ch.10 in The WorldsWine Markets: Globalization atWork, edited by K.Anderson,
London: Edward Elgar.CDFA. Grape Crush Report. 2010.www.nass.usda.gov/Statistics_by_State/California/Publications/GraCrush/
California County Agricultural Commissioners Data. 2009. www.nassusda.gov/Statistics_by_State/Califnia/Publications/AgComm/Detailindex.asp
and 2009, north coast acreage grew by52% to 128,233 acres, Monterey acre-
age expanded by 58% to 44,894 acres,and the central coast area of San LuisObispo and Santa Barbara countiesincreased by 160% to 47,872 acres.Environmental regulations have lim-ited the amount of coastal land that
could potentially be converted to vine-yards, and areas such as Napa Countymay be essentially fully planted. Othercoastal areas, although expensive todevelop, remain available for vineyardexpansion if demand for expensive
California wine increases enough.The dramatic increase in the number
of small wineries has created bothopportunities and problems for indi-vidual firms. The proliferation of win-
eries has allowed effective collectivemarketing of regions, varieties and winetypes, resulting in greater consumerawareness of the fine wine category. TheNapa Valley Vintners is perhaps the bestexample of regional marketing and most
other grape-growing regions in Califor-nia have attempted to duplicate Napasefforts. While these activities haveserved to expand the market for expen-sive wine, the main problem for each
firm remains competition in what seemsto have become a saturated market.
There are few barriers to entry inthe California wine business. Today,all that a would-be wine-brand ownerneeds is money. Expensive grapes fromfamous areas can be purchased, exper-
tise hired, barrels leased, and winemak-ing outsourced through custom crush.Investments in vineyards, experience,and wineries are not necessary, although
some owners do choose to establishtheir own vineyards or build their own
processing facility. The result generallyis technically-sound, highly-extracted,richly-textured wine, which often tastesvery similar to other wines made in thesame region and from the same vari-ety. The proliferation of similar wines
has flooded the U.S. distribution andretail system, forcing brand-owners to
limit volumes produced and to pursuedirect sales whenever possible.
The supply of expensive wineshas increased, and can continue toincrease, but ultimately is constrained
by demand. Demand for expensive wineseems to expand when the economybooms and contract during recessions,
especially when asset prices, such asthe stock market or real estate decline.During both the economic contrac-
tion following the dot.com bust andthe most recent recession, quantitiesof every-day wine increased at roughlyconstant prices, while demand forupper-end wine faltered with pricesdiscounted as inventories rose.
The vast majority of expensive Cali-fornia wine is sold within the United
States, so this industry is tied to thefortunes of upper-income Americans. Ofcourse, the other crucial factor for salesof Californias fine wine is the percep-
tion of quality relative to imported winethat is also vying for the wine budget ofthe same small segment of high-incomecustomers. For this, the fine wine indus-try must vigilantly attend to the qual-ity of its wine and marketing efforts to
maintain and enhance its reputation.
Conclusion
The U.S. wine market will look differ-
ent in 2030. On the demand side, percapita consumption will increase asacculturated Hispanics adopt wine andas wine becomes a more integral partof the American culture. Increased percapita consumption combined with
population growth could quite possibly
increase total table wine sales to 3.60billion liters. California will remain thdominant producer within the United
States, but it is likely to lose market toinexpensive bulk-wine imports. Thesewines are likely to be marketed as globrands, with the location of grape supof little importance to consumers. Th
article has also discussed the supplyand demand picture for higher pricedwine for which location of produc-tion is a dominant marketing attributThese wines, which are largely produfrom coastal grapes, face quite differeeconomic drivers on both the supply
and demand sides of the market.
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8/8/2019 Wine Outlook Aug 2010
16/16
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