Are Wine Boom Bust Cycles Inevitable?
International speakers at UC Davis talk research, markets and water
Davis, Calif.-- A mini-symposium presented by the Robert Mondavi Institute's Center for Wine Economics at the University of California, Davis on Oct. 12 examined boom and bust cycles in the world wine industry and addressed emerging opportunities and challenges. Themes from the event, which featured three speakers and audience participation, included the need for longer-term planning and research for better decision-making by industry executives, and larger, industry-wide concerns such as supply and demand, climate change and resource and water issues.
Peter Hayes provided global perspective from his position as vice president and past president of the International Organisation of Vine and Wine (OIV), and perspective as a native Australian who has been a viticulturist for both Rosemount Estates and Southcorp, involved with Australian wine industry research. UC Davis agricultural economists Daniel Sumner and Richard Howitt focused more locally on California resource issues.
Hayes has witnessed first-hand extremes of the Australian wine industry that have included a 12-year boom of constant growth and more recently, a bust since 2007 with a decline in the value of exports that is approaching US $1 billion over the past three years. Hayes said, "Some of our boom and bust cycles very much arise from the failure of people to account for unintended consequences."
Speaking to an audience that included researchers, economists and wine industry business managers, he discussed the need for better cooperation between the research community and industry executive management, to look at larger and long-term issues and trends affecting the wine industry. He observed, "Research and development is generally not called upon until it's too late, and it's used more as a corrective response, rather than as part of a strategic plan."
This situation presents both a challenge and an opportunity for R&D. "One of our biggest issues is enlightened industry leadership, and one of our biggest challenges is business engagement with R&D," Hayes said. "I don't see R&D and innovation put into the business strategy of most executives," he added.
Some of the larger issues Hayes listed as threats and opportunities included:
• Social and regulatory issues that include favorable and unfavorable perceptions of wine/alcohol, and potential tax increases. "Treasuries around the world like to use wine as an excuse to raise money," Hayes said.
• The embedded surplus in wine production and supply worldwide.
• Market consolidation, including at the retail level, with trends toward larger retail chains offering a more limited number of SKUs on their wine shelves.
• Resource allocation, resource competition and climate change, and their effects on favorable land and growing areas and water.
After citing data comparing wine production and wine consumption, Hayes said, "As I see it, almost every wine-producing country has a surplus above the actual need in terms of consumption." He suggested that more research was needed to evaluate consumer demand for wine in all countries.
Will “BRIC” nations consume?
He cautioned that the industry should not expect the emerging "BRIC" nations (Brazil, India, and China) to save the industry as export markets, simply because they have large populations of possible consumers. He noted that little research has been done on whether or not Indian and Chinese consumers really like wine, or the types of wine and wine styles they would drink. These countries are also producing their own wines, and their wine industries are growing.
Although there is some growth in higher-end wine sales in China from U.S. and European exports, this could be related more to rising incomes and the perception of wine as a status symbol. A much higher volume of domestically produced low-end wine is consumed in China. Hayes said, "Development of the Indian and Chinese markets probably won't be as simple or as profitable as we believe, and I think we need to analyze those markets a little more."
He noted that the European Union is making an effort to address wine surplus issues collectively, one reason being that wine consumption continues to decline in France, Italy and Spain. "The Europeans are trying to get some of their collective act together, funded by market adjustment programs that include removing vineyards, changing their varietal production, and new marketing programs to increase export sales," Hayes said.
He listed several emerging issues with potential opportunities and challenges: sustainability, health/nutrition/lifestyle-related concerns, product safety and traceability, and authorized and accepted production methods and technologies. In the latter category, he noted that genetically modified organisms (GMOs) will continue to be a production and marketing issue. This category also includes opportunities for new products and methods. He noted that OIV is actively discussing issues related to de-alcoholized wines in producing reduced- and non-alcohol wine products.
On the home front
Sumner, a professor in the UC Davis Department of Agricultural and Resource Economics and director of the UC Agricultural Issues Center, also served as assistant secretary for economics at the U.S. Department of Agriculture in the early 1990s. Looking at the agriculture industry as a whole, he showed that grapes and wine are still doing well compared with other ag crops and commodities in California and throughout the U.S.
Variation in winegrape prices are sometimes cited as indicators of boom and bust cycles. Sumner provided data comparing annual price volatility of several ag crops in California from 1995-2009 that showed winegrapes had significantly less price variation (an average annual price change of 11.2%) compared with milk (18.7%), cotton (23.6%), and rice (27.2%). Sumner observed, "If you're worried about price volatility, join the club. It's not unique to the wine business, it's a fact of life for agricultural commodities."
He cited the gradual increase in total wine consumption in the U.S. as a positive trend. He noted that the U.S. is the second largest wine consuming country (in total volume) and is expected soon to pass France to be No. 1. However, graphs of consumption trends show this rise in position is not due to a rapid increase in U.S. consumption, but due more to a faster decline in consumption in France and Italy since 1960. Sumner cautioned, "Everyone better hope that the consumption trend lines for France and Italy start to flatten out, because those countries won't be going out of the wine business anytime soon."
Water issues loom
All three speakers discussed water as a resource issue, and as a current and future challenge. "We will find increasing pressure to justify why we're using water for producing wine," Hayes said, alluding to the fact that most people do not consider wine a necessity. Hayes has been involved in irrigation issues in Australia. He mentioned Australia's current drought, and said a current proposal for the country would result in agriculture losing from 25% to 40% of its water allocation permanently. Spain and Germany are also having drought issues.
Howitt, professor and chair of the UC Davis Department of Agricultural and Resource Economics, specializes in ag water issues and is a member of the Watershed Center's Delta Solutions Group. He discussed resource constraints on wine production in California related to future water supplies and climate change. He said California growers will face increased water scarcity costs from urban and environmental competition and due to climate change.
"Those of you in the Russian River watershed realize that environmental competition for water is real, as you're competing with fish for water when it comes to vineyard frost protection," Howitt said. He cited climate change predictions for California that will result in a 3% increase in temperature and a 6% reduction in yields by the year 2100. Overall, climate change is expected to result in warmer weather and less water, which could influence where grapes are grown in the future and change the type of varieties produced
Based on trends in water runoff, storage and delivery in California, Howitt predicted, "Agriculture will have to get by on 20% less water in the future." He concluded, "The scarcity-value of water will increase rapidly over the next 20 to 30 years."
However, overall ag economics and market conditions will still affect what crops are grown, and the dollar value of winegrapes compared with other crops could work in the industry's favor. Howitt and Sumner presented data from an analysis comparing revenues per acre-foot of water use for four different crops in one region in Fresno County.
The study calculated the evapotranspiration of applied water (ETAW) and its cost. The crops compared and the approximate revenue in dollars per acre-foot of water: almonds ($1,300), winegrapes ($1,900), cotton ($350), and alfalfa ($250). Sumner observed: "It's possible we may end up with more winegrapes being grown. With climate change, as with other factors, it's not whether it's favorable or unfavorable to your crop, it's whether it's favorable or unfavorable to your crop in relation to other crops and their prices, and in relation to the prices of the same crops in other regions."
