wine outlook aug 2010

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.


2/16Giannini Foundation of Agricultural Economics University of California2

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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Giannini Foundation of Agricultural Economics University of California

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.



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 [email protected].

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.



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



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 [email protected].

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



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


11/16


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 [email protected].

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



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



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


15/16


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 [email protected].

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.


16/16

The University of California is an Equal Opportunity/Affirmative Action employer.

http://giannini.ucop.edu

Agricultural andResource Economics

UPDATE

Co-Editors

Steve BlankDavid Roland-Holst

Richard SextonDavid Zilberman

Managing Editorand Desktop Publisher

Julie McNamara

Published by theGiannini Foundation ofAgricultural Economics

ARE Update is published six times per year by theGiannini Foundation of Agricultural Economics, University of California.

Domestic subscriptions are available free of charge to interested parties.

To subscribe toARE Update by mail contact:

Julie McNamara, Outreach CoordinatorDepartment of Agricultural and Resource EconomicsUniversity of CaliforniaOne Shields Avenue, Davis, CA 95616E-mail: [email protected]: 530-752-5346

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[email protected].

Articles published herein may be reprinted in their entirety with the authoror editors permission. Please credit the Giannini Foundation of AgriculturEconomics, University of California.

ARE Update is available online atwww.agecon.ucdavis.edu/extension/update/

Department of Agricultural and Resource EconomicsUC DavisOne Shields AvenueDavis CA 95616

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wine outlook aug 2010

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