Wineries Face New Fiscal Environment

U.S. dollar strong against euro in spite of coming interest rate hikes

by Peter Mitham
Source: 2016 Prof. Werner Antweiler, UBC
Salem, Ore.—With the Fed inching up interest rates 25 basis points last month, wineries are facing some scenarios unheard of in recent years.

On one hand, short-term loans and operating lines of credit are set to become more expensive; on another, the change delivered a boost to the currency that increased purchasing power overseas—especially against the euro—while making exports more expensive to foreign buyers.

But the overall effect could be a wash, according to Kurt Wittman, a vice president with Northwest Farm Credit Services in Salem.

“I don’t see it moving the meter all that much in terms of the overall profitability of a farm business,” Wittman said. “This little tepid quarter-percent increase is not going to have a huge impact.”

Government funds have been let at an overnight rate of 0% for the past seven years as part of post-recession stimulus efforts, and December’s increase is a signal that borrowers can stand to pay a little more in a stronger economy. Recent shocks to the stock market have businesses on edge, however, so increases aren’t likely to come fast and furious.

The economic turmoil, compounded by and further driving a drop in oil prices, has been so severe in Canada that there’s even been talk of lowering interest rates to facilitate investment.

Indeed, moderation is being seen in some long-term rates in the United States, helped by the advent of new players to the market that have helped boost competition for loan business.

“Long-term rates are still very attractive,” Wittman said. They “have actually flattened or dropped a little bit.…The 10-year Treasury rate is below, probably, where it’s been averaging the past two or three years.”

But if short-term debt is becoming more expensive at home, overseas goods are becoming more attractive as the dollar appreciates relative to currencies such as the euro.

A dollar buys 0.92 euros today, up from just 0.72 two years ago. It’s also stronger than before the recession, when it bought as little as 0.63 euros.

The swing in America’s favor makes barrels and other grapegrowing and winemaking equipment from Europe a bargain compared to two, five and especially seven years ago, when firms were urging hedging strategies to mitigate the euro’s strength (and the dollar’s relative weakness).

Today, with tables turned, wineries should be better able to invest in foreign supplies.

Wittman notes that the clients he deals with are paying less for barrels today, thanks to shifting exchange rates, even though the barrels themselves are more expensive when priced in euros. A barrel that cost $945 two years ago is now running about $880.

“Even net of inflation, that’s an improvement in our favor,” he said. “The exchange rate has more than made up for the increase in price, and so people are smiling as they’re sending those wires to Europe.”

Cash flow has also been helped by two good vintages in the Northwest, and Northwest Farm Credit expects a third to follow in 2016.

Speaking to Wines & Vines from his office in Oregon, Wittman said the producers he speaks with are bullish on the back of two solid—and abundant—Pinot Noir harvests.

“The Pinot Noir phenomenon has continued, and that’s really benefitted the producers here,” he said. “I think the industry is feeling fairly positive about their prospects as we sit here on two good vintages.”

Any surplus juice has gone out of state to producers in Washington and California.

If there are any concerns, it’s that sales in Canada—the country’s biggest export market—could take a knock from the shift in exchange rates.

Canada’s dollar—commonly known as the “loonie” because of the waterfowl it bears—has weakened during the past two years, plumbing 13-year lows this week of less than 70 U.S. cents. That’s down from being equal in value at the start of 2013.

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