1/25/2011 1 The Central Valley Winegrape Industry The Central Valley Winegrape Industry and the World Market for Wine Daniel A. Sumner Ui it f C lif i A i lt lI C t University of California Agricultural Issues Center January 5, 2011 The Central Valley is a Central Part of the Competitive World of Wine • What is happening in the world of wine? – Where in the world is the competition and what are they doing? • What are the drivers of changes in global demand and costs of What are the drivers of changes in global demand and costs of competitors? – Where and why is demand growing or not growing and who benefits? – What are the cost conditions elsewhere? • What are the current policy developments? – Especially what is the EU doing and what in the world does it mean for the competitive position of Europe? • What is the competitive position of the Central Valley?
Transcript
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The Central Valley Winegrape IndustryThe Central Valley Winegrape Industry and the World Market for Wine
Daniel A. SumnerU i it f C lif i A i lt l I C tUniversity of California Agricultural Issues Center
January 5, 2011
The Central Valley is a Central Part of the Competitive World of Wine
• What is happening in the world of wine?– Where in the world is the competition and what are they doing?
• What are the drivers of changes in global demand and costs ofWhat are the drivers of changes in global demand and costs of competitors?– Where and why is demand growing or not growing and who benefits?– What are the cost conditions elsewhere?
• What are the current policy developments?– Especially what is the EU doing and what in the world does it mean for
the competitive position of Europe?
• What is the competitive position of the Central Valley?
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International Wine Markets:
Imports and Exports
50
60
Monthly volume of imports of all wine into the U.S. by origin
EU Chile
Australia Argentina
20
30
40
million liters
0
10
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3
25.0
30.0
Monthly volume of imports of all wine into the U.S. from France, Italy and Spain
France Italy Spain
10.0
15.0
20.0
million liters
0.0
5.0
12
14
16
Monthly volume of imports of bulk wine (containers holding over 4 liters) into the U.S. by origin
EU
Chile
Australia
6
8
10
12
million liters
Argentina
0
2
4
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4
10
12
Monthly value of imports bulk wine (containers holding over 4 liters) into the U.S. by origin
EU
Chile
Australia
4
6
8
$ millions
Argentina
0
2
Annual value of U.S. exports of all wine by destination
18Monthly volume of exports of U.S. bulk wine (in containers holding over
2 liters) by destination
4
6
8
10
12
million liters
JapanCanadaHong KongChinaEU 27
0
2
4 EU 27
14
16
18
20Monthly value of exports of U.S. bulk wine (in containers holding over 2
liters) by destinationJapanCanadaHong KongChinaEU 27
6
8
10
12
$ millions
0
2
4
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The wine world is continuing to expand outside Europe
• Production has stopped falling in Europe and is growing in the rest of the world
• Consumption continues to fall in traditional big wine producing European countries
• Much of world trade is within the EU South to North
• These patterns continue to change as the rest of the world grows in importance on both sides of theworld grows in importance on both sides of the supply and demand balance
• Consumption growth in Northern Europe and the world outside Europe is accompanied by production growth outside Europe 13
U.S. adult population and per capita consumption of wine, 1970‐2008
194
211 217
9.7 9.310.6 11.1
134147
154164
173184
194
Adult population (millions)
3.9
6.7
8.67.4 8
9.3
1970 1975 1980 1985 1990 1995 2000 2005 2008
Liters per adult
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Consider simple statistical projections from the historical data
• We use past 50 years of consumption data in each place to project forward 20 years using recent patterns to forecast subsequent years, smoothing out big movements.subsequent years, smoothing out big movements.
• This time series forecast approach is more sensible than just a linear or other trend line because it puts more weight on recent years, but it does not really do any economic or industry analysis.
• Consider this a straw man We use no real information other• Consider this a straw man. We use no real information other than that the future will be like the past in relatively simple ways.
• But, if we think the future will be different we need some good reasons.
15
Annual per capita consumption of wine
100
120
140FranceItalySpainGermany
40
60
80
100
liter
s pe
r cap
ita
yUSA
Projected
0
20
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
Note: projections estimated using exponential smoothing with a damped trend 16
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Annual total consumption of wine in some significant consuming countries 1960‐2006 and projections until 2030
60,000
70,000FranceItalyGermanyUK
20 000
30,000
40,000
50,000
1000
hectoliters
SpainArgentinaUSA
Projected
17
0
10,000
20,000
25%2% 11%
3%3%
1%
Consumption shares of the top 10 wine‐consuming countries
21%
7%
7%
4% 3% 3%France Italy
USA Germany
Spain UK
A ti R i
26%9%
8%
12%
16%
13%13%
6%3% 3% 3%
1980 2005
18%
16%12%
9%Argentina Romania
Portugal Australia
13%
19%15%
9%
13%
2030 (projected) 18
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What does population and income growth mean for the wine markets of the future?
• The wine consuming markets are NOT in the fastest growing parts of the globe.g g p g
• The Middle East, south Asia and Africa are growing and none have much of a history of wine or, probably, much future.
• The rich world is a shrinking share of the global consumption of most food and consumer products.
• These demographics mean that the overall wine market is not like food and agricultural markets generally. 19
Plant or Pull?One simple equation
Compare across potential crops:
Profit = Price X Quantity – Costs• But, we must look far into the future and
consider the interest rates and expectations• So the equation is really a little less simple• Variability causes complications too• Adds to risk
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Expected prices• Expected prices hinge on the interaction of expected
long run crop supply conditions in competitive regions and long run demand conditions in relevant markets.g
• Expected future demand includes the US market and potential export markets.
• In all markets, expected future demand depends on expectations about prices of substitutesfoods, new product developments, nutritional benefits, income growth, demographic trends such as age distributions,growth, demographic trends such as age distributions, ethnicity and etc.
• In export markets, tariffs and other barriers to access also determine relevant demands.
Indexed prices for milk, cotton, rice and winegrapes, 1995‐2009
300
350
All milk
Upland cotton
All rice
100
150
200
250
1995=100
All rice
All wine (District 13)
Source: NASS. Agricultural Prices and Grape Crush Reports. All Milk and all rice prices are for California. Upland Cotton price is national.
0
50
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Measures of volatility in average annual price changes, 1995‐2009
All Milk Upland Cotton
All Rice WinegrapesCotton
(percent)
Averaged absolute values of annual percent price changes
18.66 23.56 27.21 11.22
Averaged absolute values of annual percent deviation from trendline(linear)
12.01 16.52 35.70 14.13
Source: NASS. Agricultural Prices and Grape Crush Reports. All Milk and all rice prices are for California. Upland Cotton price is national.
Korean Free Trade Agreement:Competition with other exporters in crucial
• The best opportunities are to expand in the K k t f d t h KKorean market for products where Korean production is small or potential for Korean supply expansion is limited
• One emphasis to use lower barriers to compete• One emphasis to use lower barriers to compete with other who already have trade deals (Chile) or may develop deals (Australia and the EU)
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Wine and tree nuts have significant potential
• Wine must build stronger Korean demand to compete with Chile, EU and
• Korean consumption of tree nuts is low and has a huge upsides for taste and
Australia health reasons
150
170
Index of monthly trade‐weighted exchange rate for U.S. imports of all wine
90
110
130
Jan19
97=1
00
50
70
Jan‐97
Jul‐9
7
Jan‐98
Jul‐9
8
Jan‐99
Jul‐9
9
Jan‐00
Jul‐0
0
Jan‐01
Jul‐0
1
Jan‐02
Jul‐0
2
Jan‐03
Jul‐0
3
Jan‐04
Jul‐0
4
Jan‐05
Jul‐0
5
Jan‐06
Jul‐0
6
Jan‐07
Jul‐0
7
Jan‐08
Jul‐0
8
Jan‐09
Jul‐0
9
Jan‐10
Jul‐1
0
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EU Wine Policy has changed• Policy to remove bulk wine from the market is being
phased out• Some relaxation of intrusive regulationsSome relaxation of intrusive regulations• Paying growers to remove vineyards• Paying growers for “environmental” services even if
they do not grow winegrapes
• Some of these shift out the supply of bulk wine from Europe some of them shift back the supplyEurope some of them shift back the supply.
• The next result is not yet clear.
The effect of EU subsidy changes on EU wine supply is not yet clear
P, wine in Europe
Demand Supply
?
?
Demand
Q, bulk wine in Europe
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Other issues for changes within the industry
• Bulk commodity wine vs. expensive packaged wine
• Branded commodities– Easy to reproduce product hard to reproduce the brand– high profit margin – Colas, shampoos, beers
• Branded wine– different model than wines with unique terroir or practices
i i fi– produced by distributors who capture benefits– Australian wine in the US has partially achieved this and
others are attempting to use commodity grapes
• Traceability, location and labeling what is the role for policy and industry practice 29
Country of origin other labeling issues as the industry evolves to global sourcing without
appellations of importance
• Traceability for products of mixed origin– Potential for blending wines from different regions of the
world
• To what extent does terroir matter for bulk wine?– Issue that wine industry doesn’t necessarily face but the
food industry does
• Effects of regulation and policy: will governments mandate added labeling for wines with multiple international sources
