The Economics of Wine – Introduction

THE ECONOMICS OF WINE – INTRODUCTION

Alan Duncan and David Greenaway

To coincide with the 150th anniversary of the famous Bordeaux Wine Classification of 1855, theCentre for Policy Evaluation at the University of Nottingham sponsored a special session at the 2005RES Annual Conference on the economics of wine. The 1855 classification was completed as part ofthe Paris Exhibition of the same year as a temporary means to determine which Bordeaux wineswould be exhibited. The classification took hold, and is still in use today. In celebration, this Featureexplores how economics can add to an understanding of wine production and wine markets.

The wine industry is important to the economies of many countries, both in terms ofproduction and for tourism. Some countries have a long tradition in wine produc-tion; others have seen substantial recent growth both in the level of production andvalue of exports. For example, French wine exports to the rest of the world in 2006were valued at around US$7.8 billion, representing just over 1.6% of its total com-modity exports.1 Australia has secured around 10% of the share of world wine ex-ports by value, from a 5% share of total world production volume. However, Australiaexports fully half of its wine produce, compared with France exporting a quarter.This suggests that a greater part of the expansion of New World wines in worldmarkets comes from increasing volumes, rather than by exporting higher pricedwines.2 In contrast, French wine exporters appear to trade more on quality than domost of their international competitors, with relatively high export unit values leadingto a sharp distinction between production volumes and export value shares(Figure 1).

The world wine industry is also remarkably dynamic, with real shifts in market shareacross countries over the last two decades in particular. Table 1 shows clearly how thedominance of the traditional wine producers (principally France, Spain and Italy) isbeing challenged by the New World. France has seen its value share of world wineexports fall from 58% in 1990 to 34% in 2005. Over the same period, the value share ofItalian and Spanish wines have remained relatively stable at between 18–20% and 8–9%respectively. In sharp contrast, Australia’s wine exports have grown from virtually nil inthe mid-1980s to just over US$2 billion in 2005 (over 10% of the total value of worldwine exports), with similar (albeit less extreme) patterns emerging among the otherNew World producers in Australasia, Africa and the Americas.

A range of factors explain the sharp rise in export market share among New Worldproducers. Through a combination of industry investment, an increase in grape-bearing land and improvements in wine production methods, the volume of wineproduction has trebled since the mid-1980s in Australia, and doubled in Chile and NewZealand. The same countries have exported a progressively greater proportion of their

1 Moreover, this proportion has remained relatively stable over an extended period. In 1986 and 1996, theequivalent figures were 2.2% and 1.7% respectively. Source: United Nations Commodity Trade StatisticsDatabase.

2 New Zealand is an exception to this rule; since 2000 the unit values for its wine exports often exceed eventhose of France.

The Economic Journal, 118 (June), F137–F141. � The Author(s). Journal compilation � Royal Economic Society 2008. Published by

Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

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domestic production (see Figure 2), to the point where Australia now exports fully ahalf of total wine production, New Zealand more than a half. Over the same period,production volumes in France and Italy have declined by a quarter, with exports risingmore modestly as a proportion of domestic production. France now exports a quarterof its wines, Italy 30%, and Spain just under 40%.

1. Wine Quality and International Competition

Against this background, how has the French wine industry responded to the pres-sure of international competition? France exports a larger share of its production in

Table 1

Country Shares of World Wine Exports, 1975–2005 (%)

�Old World� wine producers �New World� wine producers

Year France Italy Spain Germany Portugal Australia Chile USA South Africa New Zealand Argentina

(i) Country shares of total world wine exports (by value)1975 32.2 18.5 8.9 4.8 6.2 0.3 0.2 0.3 0.3 0.0 0.21980 39.1 18.4 8.6 7.8 5.4 0.2 0.4 0.7 0.3 0.0 0.21985 44.7 18.7 7.4 8.4 4.2 0.3 0.3 0.6 0.1 0.0 0.11990 57.7 19.3 7.8 5.9 5.7 1.6 0.7 1.7 0.1 0.2 0.31995 45.7 18.2 9.5 4.4 4.5 3.1 1.8 2.2 1.9 0.3 0.72000 39.7 17.5 8.9 2.8 3.7 7.1 4.5 4.2 1.9 0.7 1.22005 34.0 18.0 9.2 3.3 3.2 10.2 4.1 3.0 2.9 1.6 1.4

(ii) Exports as a proportion of total domestic production (by quantity)1975 8.9 18.5 14.9 8.9 23.1 1.8 1.0 0.4 2.0 1.1 0.51980 12.7 16.9 12.9 38.0 15.7 1.5 2.5 1.6 1.8 1.0 0.51985 16.5 26.8 20.0 47.5 14.5 1.9 2.5 1.3 1.1 1.4 1.31990 18.8 21.8 11.0 23.2 14.0 10.5 10.8 5.1 0.8 9.1 3.71995 20.5 28.2 29.8 27.5 22.0 36.7 40.7 7.1 14.6 15.3 13.12000 25.8 27.1 18.6 24.0 23.9 38.6 60.3 10.4 29.2 63.6 7.32005 25.6 30.7 37.5 22.1 35.7 48.5 45.2 14.0 38.6 56.4 14.3

Sources. Food and Agriculture Organisation of the United Nations, Statistical Division; Global Trade Atlas.

Percentage share of world wine production2006

France, 18.9% Italy, 17.0%

Spain,13.1%

USA, 8.0%

Argentina, 5.5%

Australia, 5.1%

South Africa, 3.6%

Chile, 3.5%

Germany, 3.2%

Percentage share of world wine export market by value, 2006

France, 34.0%

Italy,18.0%

Spain, 9.2%USA, 3.0%Argentina, 1.4%

Australia, 10.2%

South Africa, 2.9%

Chile, 4.1%

Germany, 3.3%

Fig. 1. Wine Production and Market Shares

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� The Author(s). Journal compilation � Royal Economic Society 2008

volume than ever before (Figure 2), and exports wines of greater quality than itsmajor competitors. However, since production in the emerging wine producingcountries has grown more rapidly, so too has France’s value share of world wineexports declined (Table 1). The increasing volume of production has created prob-lems of over-supply in the wine industry, and led to some novel solutions. On the onehand, wine producing countries have sought to improve access to global wine marketsthrough both multilateral trade liberalisation negotiations and bilateral free tradeagreements.3 More destructively, producers from EU member states can take advan-tage of subsidies to uproot vines, or seek compensation from a �crisis distillation�where excess supply of lower quality wine is distilled into fuel additives or industrialalcohol.

A third solution, and one that the French wine industry appears committed to,recognises that in a saturated wine market, international competition is increasinglyquality-driven. Although global wine production volumes have increased and this hasled to the problem of over-supply, demand regularly outstrips supply in the market forpremium Bordeaux wine (grands crus). To adjust to international demand for quality,the French wine industry has sought to restructure its quality controls and indicators.A discriminating tier of intermediate quality Vins de Pays (country wines) and Vins deCepage (wines distinguished by variety) was introduced to sit between the premiumAppellation d’Origine Controlee (AOC) wines from Bordeaux and Burgundy, and the lowerquality Vins Ordinaires or table wines, the market for which is declining at some pace.Similarly, a more regulated classification was introduced in Bordeaux in 2003 forcru bourgeois wines that fall outside the original 1855 Grand Cru classification. The new

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Fig. 2. Wine Exports as a Share of Domestic Wine Production

3 For example, the major New World wine producers (Australia, Canada, Chile and New Zealand and theUnited States) signed up in 2001 to the Mutual Acceptance Agreement on Oenological Practices, whichmandates increased market access and harmonises conditions for production and export.

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system divides cru bourgeois into three tiers, from cru bourgeois exceptionnel (the best wines,comprising just nine chateaux), through cru bourgeois superieur (87 properties) to thestandard cru bourgeois estates, with plans to review the ranking every 12 years. Evidently,this emphasis on quality is having an effect; Figure 3 shows a consistent and substantialincrease in the unit value of exports of French wines to world markets, exceeded onlyby wines from New Zealand.

2. What Do We Learn?

Quality is the linking theme for the three articles in this Feature on wine: how mightone predict wine quality (Ashenfelter); how technology and physical endowmentsaffect the quality (Gergaud and Ginsburgh); and how might expert judgments on winequality affect prices (Ali, Lecocq and Visser).

Ashenfelter combines an enthusiasm for wine with tools of economics to create awine rating system using a formula based strictly on two variables: temperature andrainfall. Utilising years of weather data, he concludes that dry, warm weather producesthe best wines. According to Ashenfelter �predicting the quality and price of a winecould be like predicting any other market item�.

Gergaud and Ginsburgh study whether quality assessments made by wine experts andby consumers (based on prices obtained at auction between 1980 and 1992), can beexplained by variables describing endowments (land characteristics, exposures ofvineyards) and technologies (from grape varieties and picking, to bottled wines). Theyfind that, since technological choices typically depend on endowments, the effects canonly be identified using an instrumental variables approach. The controversial con-clusion from this article is that technological choices affect quality far more than naturalendowments, including terroir, the effects of which on wine quality is negligible.

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Fig. 3. Unit Value of Wine Exports by Country

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The final article by Ali, Lecocq and Visser, measures the impact of Robert Parker’soenological grades on en primeur Bordeaux wine prices (i.e. the prices established bythe chateau owners when the wines are still extremely young). By exploiting an unusualreversal in 2003 in the order of the establishment of en primeur wine prices and thepublication of the Parker wine grades, they have estimated an average Parker effect of2.80 euros per bottle of wine. They also estimate grade-specific effects, and use theseestimates to predict what the prices would have been had Parker attended the springtastings in 2003.

University of Nottingham

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The Economics of Wine – Introduction