Impact of Organic, Sustainable, and Biodynamic Wine Making Practices on Wine Prices

Transcription

1 Impact of Organic, Sustainable, and Biodynamic Wine Making Practices on Wine Prices Megan Waldrop and Jill McCluskey, Washington State University, Selected Paper prepared for presentation at the 2016 Agricultural & Applied Economics Association Annual Meeting, Boston, Massachusetts, July 31-August 2 Copyright 2016 by Megan Waldrop and Jill McCluskey. All rights reserved. Readers may make verbatim copies of this documentfor non-commercial purposes by any means, provided that this copyright notice appears on all such copies.

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3 Introduction Although the United States is the fourth largest producer of wine, the U.S. has been the largest wine consuming nation since Furthermore, California and Washington are the two largest producers of wine in the U.S., with California representing 60% of the U.S. wine market by volume. Total U.S. wine sales continue to rise and were $37.6 billion in 2014 (Geisler; Wine Institute). Consumers have also become more environmentally conscious and are purchasing a higher number of organic and sustainable food and beverage products. In 2011 organic beverages, including wine, contributed around 12% to the total organic market sales growth (McEvoy 2013). Other eco-labels that indicate sustainable practices for food and beverage have also increased (Loureiro et al. 2001; Durham et al.2012). Grape growing and wine making has an environmental impact similar to other agricultural products such as using high amounts of energy inputs, chemicals, and packaging materials. Organic, sustainable, and/or biodynamic practices can help reduce negative environmental impacts. Wine makers can also choose to selfclaim these practices or go through a certification process for their vineyards and/or the winery. Organic practices include not using synthetic fertilizers and pesticides, pest control through integrated pest management techniques, and conserving water and energy resources. The USDA oversees the organic certification through the National Organic Program (NOP). There are two categories of organic wine according to the NOP: made with organic grapes and organic. For wine represented as being made with organic grapes, 100% of the grapes must be certified organic and sulfites may be added up to 100 parts per million. For organic wine, all grapes and agricultural ingredients must be organic and no sulfites may be added. Sustainable wine making is more broadly interpreted than organic. Although there is no set definition of sustainability, in terms of agriculture it is generally meant that production minimizes negative

4 environmental impacts while being socially equitable and economically feasible in the long term. Examples of sustainable practices include ensuring resources are available for future generations, providing fair labor practices, and promoting economic opportunities and growth in the community. Sustainable food and beverages do not have formal federal standards and regulation, but many states have recently developed organizations that certify vineyards and wineries. Examples include Low Input Viticulture and Enology (LIVE) for the Northwest, Sustainability in Practice (SIP) in California, and Certified California Sustainable Winegrowing Participants (CCSW). These organizations have developed self-assessment tools and are third-party certifiers that require vineyards and/or wineries to adhere to strict guidelines regarding their sustainable practices. Depending on the size of the winery and vineyard fees and annual dues can range from a few hundred dollars to thousands. Another sustainable practice, specific to the west coast, is protecting the native salmon population. The Salmon-Safe organization currently certifies farms and vineyards in Oregon, Washington, California, and British Columbia. Vineyard certification requires practices such as reducing water runoff and using natural methods to control weeds and pests in order to promote native biodiversity. Specific to California is the Fish Friendly Farming organization and certification, which aims to protect the native steelhead trout population in addition to coho salmon. Although fish friendly practices may not affect the overall sensory quality of the wine, the environmentally conscious consumer may be willing to pay a price premium for wines that are made from Salmon-Safe or Fish Friendly Farming certified wineries. Biodynamics extends the principles of organic and sustainable agriculture and was developed in the early 1920s by the Austrian writer Dr. Rudolf Steiner. It is a more holistic

5 approach and includes spiritual elements in its guidelines. The methods also include caring for the entire eco-system; therefore, the entire property must be biodynamic, not just a particular vineyard. The Demeter Association, Inc. oversees the certification process for biodynamic farming and wine making worldwide. The baseline for certification is meeting the NOP requirements in addition to using the Demeter Farm Standard guidelines for at least three years if switching from conventional farming techniques. In 2006 it was estimated that 22 vineyards were certified biodynamic and currently at least 82 winegrowers were certified in the U.S (Delmas et al. 2008; These estimates do not include winemakers who use biodynamic practices, but forgo certification. While no official statistics exist through the Demeter Association, it has been estimated that there is currently at least 6,000 acres of biodynamic vineyards in the U.S, half of which are certified ( Switching from conventional wine making to environmentally conscious methods can be costly and time consuming. Choosing to become certified by at least one organization also increases the costs. Therefore, it is important for producers to understand the effect of switching on wine prices. Traditionally organic wines have had negative connotations and consumers were unwilling to pay price premiums. However, with the shift to more environmentally conscious consumers it is important to see if this still holds, in addition to examining the effects of more recent sustainable procedures. Thus, the purpose of the study is to determine how organic, sustainable, and biodynamic wine making claims affect wine prices. The effects of self-claiming these practices versus being certified will be explored, in addition to interactions of having multiple certifications. Previous Work

6 There have been numerous studies analyzing factors that affect the price of wine. Many studies have found that vintage year, age, region, and expert rating scores are significant in determining wine pricing (Oczkowski 1994; Angulo 2000; Noev 2005; Roma 2012). These studies used the hedonic pricing model, which is commonly used to analyze wine prices (Landon 1997;Combris 1997, 2000; Costanigro et al. 2007). Hedonic price models have been also used in other fields such as housing and automobiles (Griliches 1961; Goodman 1978) in addition to other food products (Waugh 1928; Stanley and Tshirhart 1991; Ward et al. 2008). While there is an abundance of research pertaining to organic food quality, consumer preferences, and pricing, there has been few studies on how organic wine making practices affect wine pricing. Many papers have found that consumers who purchase organic foods are generally more environmentally conscious, value their personal health, and are wealthier (Pino et al. 2012; Nasir 2014). Due to these factors, research has shown that organic foods can carry substantial price premiums. Furthermore, there has not been any studies conducted that distinguish between the effects of self-claiming organic practices and being certified organic. Much of the research pertaining to sustainability is in the context of adoption and consumer attitudes (Desta 2008; Little 2010; Pullman 2010; Santini 2013). To our knowledge, no previous research has been conducted on implicit price estimation of sustainability claims of wine. The limited previous research that has been conducted on the effect of sustainable viticulture has been defined in the context of organic and biodynamic (Delmas and Grant 2008; Kwong 2011). However, these papers did not separate the effects of organic and biodynamic. There is also no previous literature analyzing the effects of Salmon-Safe/ Fish Friendly Farming certification on food and beverage products. In addition, previous research has not analyzed all of these certifications separately and for interaction effects for wine.

7 Theoretical Context The hedonic price model described by Rosen (1974) is utilized to determine wine price. The model is based on assuming that total utility is gained by individual characteristics of the product, rather than the product as a whole. When product differentiation exists the marginal price benefit of a particular attribute can be determined because market equilibrium price, which is also a function of the attributes, differ. Other assumptions include consumers having full information of product options and having no search costs. Since wine is a highly differentiated product, price premiums can be determined based on its attributes: P = P(z 1.z n ). Consumer utility, with vector z and composite good x, is maximized subject to a budget constraint and the resulting first-order condition implies p z k = p zk = U z k U x. Thus, the marginal willingness to pay for wine attribute z n is the partial derivative of the price function with respect to z n for continuous variables and P/ zn for indicator variables. Since producers are aware of their cost function, implicit price estimation through the hedonic model can help determine an optimal marketing strategy and attribute combination for a product (Costanigro and McCluskey 2011). Data The data set is comprised of 45,352 observations of California and Washington red wines published in Wine Spectator magazine (online edition) from There are 2,958 California wineries and 463 Washington wineries in the dataset, representing approximately twothirds of wineries in California and half of the wineries in Washington. White, sparkling, rosé, and dessert wines were excluded from the dataset due to having different quality characteristics from red wine such as aging effects. Wine making practices for each wine were categorized

8 depending on information found on the winery or vineyard website and/or lists found on each certification organization s website. Wineries were considered self-claim (non-certified) sustainable, organic, or biodynamic if these practices were advertised as taking place in the vineyards used in the wine and/or at the winery. The main sustainable certification organization in Washington is LIVE. In California, the CCSW and SIP certifications are available statewide. There are also the regional certifications in Napa Valley called Napa Green and in the Lodi area called Lodi Rules. Wines were classified as certified sustainable if the winery or vineyard was found to have certification from at least one of these organizations. Certified organic wines must have been shown to be certified by the USDA either directly or through the state organic certification organization. Wines classified as certified biodynamic were shown to be certified by the Demeter Association. Salmon-Safe and Fish-Friendly vineyards were categorized as a separate category from certified sustainable to tease out the effect of this specialized certification. Lastly, wines were identified as have no sulfites added if they were organic (NOP definition) or advertised as being produced without additional sulfites. Variable frequencies interactions are found in Table 1. There are four continuous variables: price, score, cases produced, and the number of years of aging (Table 2). Price for each wine has been adjusted to 2014 values using an averaged annual seasonally adjusted consumer price index (CPI). Rating represents the score given by Wine Spectator s expert sensory panel. Scores are based on a 50-point scale ranging from : is not recommended, is mediocre/good, is very good/outstanding, and is a classic. Age was determined by subtracting the magazine issue date from the vintage year. Indicator variables were used to denote wine region, as defined by Wine Spectator, most common varietals, vintage year, other wine label information, wine making practices, and

9 certification interactions. One indicator variable was used for wines that are certified Salmon- Safe or Fish Friendly Farming due to the similar mission statements and certification requirements of the organizations. Note that Washington is not divided into regions. Also, Other for California regions, non-varietal (blends), and vintage year 2013 are being used as benchmarks and are therefore excluded from the model. Empirical Methodology The hedonic price model theory does not include functional form restrictions. Instead, the functional form is determined from the data. Although there are many functional forms, the most commonly tested for hedonic models are linear, log-linear, power transformations, and Box-Cox (Stanley and Tschirhart 1991; Costanigro et al. 2007; Benfratello 2009; Kwong 2011). Linear, log-linear, power transformations ranging from -0.5 to 0.5, and Box-Cox forms were examined. The linear model was quickly ruled out due to the skewness in prices in addition to exhibiting the lowest R 2 value. Results and marginal estimates for the log-linear, power transformations, and optimal box-cox form (λ=0.22) were similar. In addition, R 2 values did not significantly change, staying from , between the log-linear form and all power transformations tested. The log-linear functional form was ultimately chosen due to the more intuitive and straightforward interpretation of coefficient estimates. It should be noted that all the functional forms tested rejected the null hypothesis of the RESET test, which can indicate misspecification. However, this test is not the only method to determine the optimal functional form due to issues of its interpretation and lack of a specified alternative. Age and score are modeled to have a quadratic relationship with price. Age and score are standardized by subtracting their respective means to reduce multicollinearity issues that arise

10 when adding a quadratic term. Based on the data and functional form comparison, the model specified for this study is as follows: Ln( price) ( CS ) ( NCS ) ( OG ) ( NCOG ) ( D ) 0 1 i 2 i 3 i 4 i 5 i 4 3 ( NCB ) ( Nosulf ) ( ff _ ss ) (Interactions ) (Label ) 6 i 7 i 8 i 8 i i 12 i i i 1 i 1 8 (Region )+ ln(cases) (Score) (Score) (Age) i i i (Age) (Variety ) (Vintage ) 28 i i 33 i i i i 1 i 1 where Interactions certification interaction indicator variables. Descriptions of variable names are found in Table 3. The model was estimated using ordinary least squares (OLS). The null hypothesis of constant variance was rejected of the Breush-Pagan/ Cook-Weisberg heteroskedasticity test, indicating evidence of heteroskedastic errors. To correct the error terms, the covariance matrix was estimated using White s consistent heteroskedasticity-robust estimator. Results and Discussion Estimation results are presented in Table 4 and Table 5. All wine making practice variables are positive, except for no sulfite added wines, and statistically significant. The marginal effects of certified sustainable and non-certified sustainable wine are 8.21% and 6.55%, respectively. The minimal premium price difference of 1.66% may indicate that it is unnecessary to invest in certification as a similar price premium can still be achieved without going through the process. However, comparing certifications certified sustainable commands the largest premium. Since sustainable does not have a formal definition and can be interpreted more broadly than organic and biodynamic, certification may signal to consumers that guidelines

11 are being followed to reduce negative environmental impact. Salmon-Safe and Fish Friendly Farming certification has a premium of 7.38%, which is similar to the certified sustainable premium. The decision to certify for a sustainable producer could depend on the regional competition and cost factors. Unlike for the sustainable case, non-certified organic and biodynamic practices have higher premiums than their certified counterparts, with a difference of 3.5% for organic and 10.5% for biodynamic. Although the effect of certified organic is 2.32%, consumers may have a stigma against the USDA organic certification due to pre-conceived quality ideas, making the premium reduced from when the winery just advertises practicing organic. For biodynamic, consumers may not be familiar with the Demeter certification compared to seeing biodynamic practices advertised. While the implicit price of non-certified sustainable and non-certified organic are both around 6%, non-certified biodynamic practices receive a premium of 15.3%. This could be due to the stricter guidelines of biodynamic and the underlining philosophy of the methodology. These results suggest that switching from conventional to one of the environmentally conscious practices is beneficial for wine producers even without seeking certification. No sulfites added wine has a negative effect on prices because the amount of sulfites does significantly contribute to the quality of wine. Sulfites are found naturally in wine, but additional sulfur dioxide must be added before anti-microbial and stabilization effects can be achieved. This is necessary so that wine can be aged, a required step for red wine. Flavor and aroma compounds continue to develop as wine ages, increasing the complexity and depth of the sensory characteristics. The length of aging depends on the quality of the wine, with only extremely high quality wines being able to age over 10 years (Belitz 2009). Therefore, wines

12 made with less sulfite may be perceived as an inferior good. This type of wine may, however, may still appeal to consumers who are allergic to sulfites or perceive sulfites as unhealthy and/or unnatural. Adding another certification either has a negative marginal effect on price or does not add value. All interactions between certifications were negative and significant except for the interaction between CCSW and SIP. Being certified sustainable and organic reduces price by 7.52% and being certified sustainable and biodynamic reduces price by 8.68%. Furthermore, having CCSW and Napa Green certifications creates a negative marginal effect of 3.49%. While some producers may believe that more is better, having more labels might confuse the consumer. This finding indicates that investing in multiple certifications is not worth the extra time and money for wine makers. All other variables, except for a few vintages, have a statistically significant effect on price. Wines that have reserve, estate produced, or a single vineyard on the label receive statistically significant positive premiums of 11.4%, 8.48%, and 6.07%, respectively. Higher amount of production, indicated by cases, has a negative effect on price, which is to be expected. Napa Valley has the highest premium because it is one of the more prestigious California wine making regions. However, Washington has a negative marginal effect of 5.97%, possibly due to not being as well-established. This magnitude suggests that being certified organic or certified biodynamic will have negative effects on price and all other wine making practice premiums are reduced for Washington made wines. Price also increases with age and rating because these variables capture quality. Conclusion

13 This study highlights the importance of understanding how environmentally conscious agricultural practices affect the prices received by wine producers. Knowing the magnitude of the effects can help determine if any type of wine certification is worth the cost to producers, in addition to deciding to switch wine making techniques. Due to the lack of research in this area, the results give insight to how consumers react to different types of environmentally related certifications and helps wine makers determine market potential for their products. It was found that wine produced with the environment in mind can command higher prices. However, more than one certification can cause a negative marginal effect on price. Further research could include the analysis of white wines for comparison. It would be interesting to determine the effect of no sulfites added because for white wines not adding sulfites has less detrimental effects compared to red wine. Estimating this model for other states throughout the U.S. that have sustainable certification organizations would help gain a better understanding of regional differences.

14 References Agricultural marketing resource center. Geisler, M. Wine industry profile. products/fruits/wine/wine_industry_profile.cfm. (Accessed December 10, 2014). Belitz, H., W. Grosch, P. Schieberle Food Chemistry. 4 th ed. Berlin: Springer. Benfratello L., M. Piacenza., S. Sacchetto Taste or reputation: what drives market prices in the wine industry? Estimation of a hedonic model for Italian premium wines. Applied Economics. 41: Costanigro, M., R. C. Mittelhammer, J. J. McCluskey Segmenting the Wine Market Based on Price: Hedonic Regression when Different Prices mean Different Products. Journal of Agricultural Economics. 58(3): Costanigro, M., R. C. Mittelhammer, J. J. McCluskey Under Class Uncertainty: Local Polynomial Regression Clustering in an Hedonic Analysis of Wine Markets. Journal of Applied Econometrics. 24: Desta, A Conventional versus Environmentally-Sensitive Wines: The Status of Wine Production Strategies in California North Coast Countries. Journal of Business and Public Affairs. 2(1). Goodman J.L Causes and indicators of housing quality. Social Indicators Research. 5: Kwong, L.M.K, D. Cyr, J. Kushner, T. Ogwang A Semiparametric Hedonic Pricing Model of Ontario Wines. Canadian Journal of Agricultural Economics. 59 (2011) Landon, S., C.E. Smith The Use of Quality and Reputation Indicators by Consumers: The Case of Bordeaux Wine. Journal of Consumer Policy. 20: Little, R., D. Maye, B. Ilbery Collective purchase: moving local and organic foods beyond the niche market. Environment and Planning A.42: Nasir, V.A Underlying Motivations of Organic Food Purchase Intentions. Agribusiness. 30(3): Oczkowski, E A Hedonic Price Function for Australian Premium Table Wine. Australian Journal of Agricultural Economics. 38(1): Pullman, M., M.J. Maloni, J. Dillard Sustainability Practices in Food Supply Chains: How is Wine Different? Journal of Wine Research. 21(1):

15 Roma, P What to show on the wine labels: a hedonic analysis of price drivers of Sicilian wines. Applied Economics. 45(19): Rosen, S Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition. Journal of Political Economy. 82: Salmon-Safe website. About: Salmon-Safe. (Accessed December 10, 2014). Santini, C., A. Cavicchi, L. Casini Sustainability in the wine industry: key questions and research trends. Agricultural and Food Economics. 1(9). Stanley L.R., J. Tschirhart Hedonic Prices for a Nondurable Good: The Case of Breakfast Cereals. The Review of Economics and Statistics U.S. Department of Agriculture. McEvoy, M Organic 101: Organic Wine. (Accessed December 10, 2014). Wine Institute website California Wine Sales Grow 4.4% by Volume and 6.7% by Value in the U.S. (Accessed March 1, 2015).

16 Table 1. Frequency of Wine Attributes Variable Wine Frequency % of Wines Certified Sustainable 8, Non-Certified Sustainable 7, Certified Organic 2, Non-Certified Organic 1, Demeter Certified Non-Certified Biodynamic No sulfite added wine Salmon-Safe or Fish Friendly Farming Certified 5, LIVE certified CCSW certified 3, SIP certified 1, Napa Green certified 4, Lodi Rules certifed CCSW and Napa Green certified CCSW and SIP certified CCSW and LR certified Certified sustainable and certified organic Certified sustainable and Demeter certified

17 Table 2. Descriptive statistics of continuous explanatory variables Price Cases Rating Age Mean Min th percentile Median th percentile Max

18 Table 3. Descriptions of the abbreviations used for the explanatory variables Variables dmrating dmratingsq dmage dmagesq lncase Napa Valley Bay Area/Central Sonoma Valley South Coast Carneros Sierra Foothills Mendocino Washington Zinfandel Pinot Noir Cabernet Sauvignon Merlot Syrah Reserve Vineyard Estate y84-y12 cs ncs og ncog ncb d nosulf ff_ss ccsw_ng ccsw_sip ccsw_lr cs_og d_cs Description Rating score from Wine Spectator centered by subtracting its mean Square of dmrating Years of aging centered by subtracting its mean Square of dmage Log of cases produced Region of grape production Varietal Reserve reported on bottle label Specific name of vineyard on label Estate reported on bottle label Vintage year Certified sustainable winery and/or vineyard Non-certified sustainable winery and/or vineyard Certified organic winery and/or vineyard Non-certified organic winery and/or vineyard Non-certified biodynamic Demeter certified biodynamic No sulfites added wine (organic certified and self-claim) Salmon Safe or Fish Friendly Farming certified CCSW and certified Napa Green vineyard and/or winery CCSW and certified SIP vineyard and/or winery CCSW and certified Lodi Rules vineyard and/or winery Certified sustainable and certified organic vineyard and/or winery Certified Demeter and certified sustainable vineyard and/or winery

19 Table 4. Ordinary least square estimates for hedonic price function Variable Coefficient Std. Err. t p-value cs ncs og ncog ncb d nosulf ff_ss ccsw_ng ccsw_sip ccsw_lr d_cs cs_og res vine est wash sonoma napa baycentral southcoast sierra carneros mendocino lncases dmrating dmratingsq E dmage dmagesq

20 Table 5. Ordinary least square estimates for hedonic price function (continued) Variable Coefficient Std. Err. t p-value cabsauv merlot pinot syrah zin y y y y y y y y y y y y y y y y y y y y y y y y y y y y y _cons