AMERICAN ASSOCIATION OF WINE ECONOMISTS

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1 AMERICAN ASSOCIATION OF WINE ECONOMISTS AAWE WORKING PAPER No 18 Business OVER-PRODUCTION OR RECESSION? CAUSES OF THE LOW PRICES OF TABLE WINE IN ARGENTINA Jorge A Day Oct 1 wwwwine-economicsorg

3 Over%ProductionorRecession? CausesoftheLowPricesofTableWineinArgentina JorgeADay FacultaddeCienciasEconómicas UniversidadNacionaldeCuyo Mendoza Argentina Table wines do not shine like Malbec doesin Argentina's wine industry; nonetheless they represent two thirds of the wine produced in this country A key economic indicator of this product is the price of the "vino de traslado (bulk wine) A grape% grower has two options with his grape: he can sell it or he can elaborate wine (the bulkwine )andsellitlatertoalargewinerythus,thepriceofthe bulkwine isa referenceoftheincomesofgrape%growersandsmallwineries Inthelastfiveyears,thispricehasbeenverylow,andconsequentlygovernmentsof wineprovincesareundersocialpressuretoimplementpoliciestoraiseitbyrestricting wine supply and/or by buying wine Why is this price so low? From a sectorial perspective,thereisoverproduction,withtheconsequentincreaseinwinestocksthis hypothesis is strengthened by the declining domestic consumption of this wine in Argentinaforseveraldecades,aswellasinothermajorwineproducingcountries However, there is another view, a crisis one Over a period of more than three decades, this reference price reaches the minimum levels in each recession in Argentina After a while, in every economic recovery, this price has increased very stronglymacroeconomicimpactsseemstrong Thisstudywillshowinnumbersbothimpacts(ofoverproductionandrecession)onthe price of bulk wine in the Argentine case Given the relevance of this price for the grape%grower, the study will analyze the evolution of the producer share in the final price of wine (paid by consumers) In these years of low prices, producers have

4 complained of lower share and there is a question whether this phenomenon is a trendobservedovertime 1! The&Facts:&Lower&Prices&in&Generic&Wines& ThewinebusinesshasdifferentbranchesOneofthemisthebusinessoftablewines In Argentina, they were earlier as "table wines" and now as "generic wines In principle,thesewinesareofadifferentqualitytovarietalwines(malbec,chardonnay, etc),buthavehighervolumesofsalesthesegenericwinesareconsideredalmostasa commodity,withlittlepricedifferentiationinthispaper,wewillfocusonthe bulk stageoftheproductionofgenericwines During the last five years (11 %1), prices of grapes and red bulk wine have remainedstable,despitetheinflationaryeconomyinotherwords,thesepriceshave beenlosingpurchasingpowerthekeytothisisthepriceofthe wineinbox paidby theconsumerthepriceoftherawmaterial( bulk wine)dependsonthepriceofthe final good ( wine in box ) If the wine in box becomes cheaper, the same also happenstograpesandbulkwine(graph1) Graph&1& 1 1 Red)table)wine)prices $)1,)per)liter Consumer)price) (dotted line) "Bulk wine) price")(solid+line) Sources:)Bolsa)Comercio)Mendoza)and)DEIE

5 ! Overproduction&or&Recession?& Whydoconsumerspaysuchlowpricesforwine?ThereareseveralreasonsOneofthe causesisoverproduction,duetolowerdemandand/orhighersupply(harvest),which leads to an accumulation of stocks, and therefore to a downward pressure on price Thishypothesisisstrengthenedbythedecliningdomesticconsumptionofthiswinein Argentina as well as in other major wine producing countries for the past several decades We do not unfortunately have stock data disaggregated by types of wines Knowing thattwo%thirdsofargentinewinesaretablewines,wecancomparetheevolutionof thetotalstocksandthereferenceprice(ofred bulkwines )Duetotheinflationary environmentprevalentinargentina,priceswillbeexpressedinrealtermswithfew exceptions,thedatashowthattheruleismet:higherstocksarecorrelatedwithlower prices(graph) Graph&& Wines&in&Argentina& Higher&stock,&lower&price STOCKS at&may&each&year& (months&of&consumption) 1:&estimation&based&on&data&of&1 &quarter Price:&of&red&"bulk&wine" Sources:&INV&and&Bolsa&de&Comercio&de&Mendoza PRICE May&of&each&year (in&$&apr&1) To obtain a different perspective, we examine the recent history of Argentine wine Thegraphbelowshowstheevolutionofthepriceof bulkwine inrealtermsthekey

6 years of different Argentine crises are marked by circles In most of these crises, the referencepricereachestheminimumlevel(graph3) Graph&3& 7 Price(E red("bulk(wine" in(different(argentine(crises $(apr(1(per(liter Some issues are worth noting First, there are exceptions to the crises explanation (graph): % Source:(Bolsa(de(Comercio(de(Mendoza,(Indec(and(private(inflation 8 1,7( Surprisingly, the crisis of 198 does not appear ingraph 3, when inflation reached high values, and an anti%inflation program, called"austral Plan", was implementedduringthatperiod,thegrapeharvestinargentinahaddeclined strongly during two consecutive years, 3% in total The lack of grapes overcompensatedrecession,withhigherpricesofgenericwines Duringthecrisisof1989,whentherewashyperinflation,theminimumpriceof wine was achieved two years earlier It was a period of several years of high inflationandlowgrowth During the international financial crisis, the minimum price was also achieved twoyearsearlier(in7)thecrisisbeganinlate8,andtheannualdata showsrecessionin9

7 1% 1% % % B% Graph&& Wine(price(and(Argentina(growth: $(Apr(1(per(liter(and(annual( variation GDP(Growth Wine(price B1% Source:(Bolsa(de(Comercio(de(Mendoza,(Indec(and(OJFerreres ThesecondissueofnoteisthatasthedatainGraphshows,generally,thepriceof wine reference reaches minimum values during the crises However, it providesno information about the non%crises periods In general, after a recession, the price of bulk wine strongly recovers within two to three years, reaching a maximum value Thenitfalls,evenduringperiodsofeconomicgrowthForexample,thepriceofwine peaked in and then began to lose purchasing power, even after three years of closeto9%annualeconomicgrowth Third, the overproduction hypothesis complements the macroeconomic explanation Inarecession,notonlydoesthedemandforwinedecline,butalsoitssupplyincreases becauseproducershavetoselltheir bulkwines duetothelackoffundsbothforces work to depress prices and stocks increase The reverse is true when the economy recovers However, there were periods with lower wine stocks but prices decreased concomitantly For example, after a poor harvest in 1, stocks fell, but prices of bulkwines continuedlosingpurchasingpower 3! White&Table&Wines&are&the&Exception?& Theprevioussectionshavediscussedthecaseofredtablewines,forwhichpriceshave been declining in real terms since 11 On the contrary, for wines of other colors,

8 priceshaveremarkablykeptpacewithinflation,untillastyearwhydoesthismarked differenceexist? Oneexplanationistheroleofthegrapejuice(must)whichisanexportableproduct Non%red grapes are mainly used for its elaboration As previously mentioned, the producer can sell the grape or he can elaborate bulk wine to further sell it to wineriesathirdoptionfortheproduceristosellthegrapestoafirmthatelaborates must For this reason, during the harvest period (February%May), prices of grapes, winesandsulphitedmustevolveinasimilarway(graph) Graph&& Untilmid%13,theexportpriceofgrapejuicewasincreasingItthenbegantodecline, but was offset by the Argentine devaluation of early 1 These facts explain why prices of white bulk wine have performed better until 1 The situation is more complex at present With lower grape juice prices and an appreciating peso, it is difficulttohavehigherpricesinwhite bulkwine Price(dynamics in(real(terms(c index(1:(year(7 Feb$Apr of*each*year 1 1 Source:(INV,(Bolsa(de(Com(Mza! Producer&Share&in&Consumer&Price& White(bulk(w Sulph(must White(grape Another important fact is that, during recessions, the raw material( bulk wine and grapes) loses share in the final price of the wine sold to consumers For example, in

9 1,thepriceof wineinbox increased%(inpesos),while bulkwine increased byamoremodest1%andthepriceofredcommongrapesdecreasedby% An explanation is that other costs (elaboration, distribution and sale) increased at a higherrateastheinflationratewas39%thatyearthus,duetothesehighercosts,the winerieshadlessmoneytopaygrape%growersthisresultedinalowerproducershare in the price of the final good For example, in 1, the share of the bulk wine producer,was37%ofthepriceofthe wineinbox,whilefouryearslateritfellto lessthan% Graph& "Bulk&wine"&producer&share&and&Argentine&crises Recession(at(early(8s Tequila(crises((199) 3% 3% % % 1% 1% % Producershare+in# consumer#price#(bar) Consumer+ price+($#dic# 1#per#liter)# (line) 1 1 % % 3% 3% % % 1% 1% % 3% 18% 39% % % Convertibility(end(() International(crisis((8) % 3% 3% % % 1% 1% % % 3% 31% % % 3% 3% % % 1% 1% % % 37% 3% 7% Producer(share:("bulk(wine"(price(/(consumer(price Sources:(Bolsa(de(Comercio(de(Mendoza,(DEIE(e(Indec

10 Let sreturntotheargentinewinehistorywefoundatleastfoursimilarepisodes 1, wherethepriceofthefinalproduct(wineinbox)decreasedinrealterms,asdidthe producershareinthatprice(graph) An additional point is that the peso was overvalued in all these periods This means thatthecostsofwineriesincreasedindollars,andthentheyhadlessmoneytopayfor the raw material This fact strengthened the decline in the producer share in the recessionaryphases The reverse scenario plays out in the post%recessionary period After the crisis, the price of the final good improves, and in three of these crises, the peso devaluates, reducing the production costs of wineries in dollar terms Thus, the price of raw materials(grapesand bulkwine )increasesstrongly,furtherimprovingtheproducer share! Concluding&Remarks& Asmentionedintheintroduction,Argentinaispresentlyexperiencingaperiodoflow table wine prices for producers Clearly, overproduction is responsible for this phenomenon However, Argentine wine history is instructive, as it tells us that surprisingly these prices reach a minimum level in every crisis, as does the participationofproducersinthefinalpricethepositivenewsisthattheseindicators improved substantially in any ensuing economic recovery Both variables are highly pro%cyclicalthetakeawayfromthisstudyisthat,ifrecessionshaveastrongimpacton prices, local wine governments have a small political margin to prevent the loss of purchasingpowerinpricesduringthedifficultrecessionaryyears 1 Thefourepisodesare:(1)arecessionintheearly8s(whentherewasahugedevaluation),()the Tequilacrises(whenMexicodevaluateditscurrencyattheendof199,withanegativeinfluencein Argentinaeconomy),(3)theendofConvertibility,ananti%inflationaryplan,withasubsequent devaluation,and()theinternationalfinancialcrisis

11 ! Bibliography& Abihaggle, C, Pasteris, E, Rada, D y Fiocchetta, C (1), Impacto de la vitiviniculturaenlaeconomíaargentina1,faccseconómicas,uncuyo Day, Jorge A, reports in Informe de Coyuntura del IERAL, Región Cuyo, wwwieralorg o! (1), Preciosbajosdevinoscomunes,Nº9 March o! (1), Findelospreciosbajosenuvasyvinos? N 8,March o! (13), Panoramavitivinícola,N 8,November o! (11): Preciosbajosenvinosgenéricos,N 97,October o! (1): Vinoscomunes enbaja?,n,august Labys, Walter (), Macroeconomic cycles and the wine industry, _and_the_wine_industry

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