The economics of the 2009 harvest and its implications (2)

After almost one month of celebrating Christmas, New Year’s and Epiphany, January is usually a pretty dead month in Rioja.  Except in the Rioja wine business.

 As I mentioned in my post on November 16, sales of Rioja have dropped dramatically due to the economic crisis, which has hit Spain especially hard.  Shipments from January through November are down almost 6% in Spain and over 11% internationally, prompting the president of the Rioja Regulatory Council to predict that shipments in 2009 will decrease by 8% (the numbers won’t be published until the middle of February).  This means that Rioja wineries have shipped 30 million fewer bottles than in 2008.

Ex-cellars prices have decreased, too, with the average price of a young Rioja dropping 4%, crianza 2.8%, reserva 7.7% and gran reserva 9.2%.  This follows a trend going back to 2000, mainly the consequence of a crowded marketplace and pressure from big retailers to meet price points.

These numbers have had a huge impact on grape prices, as wineries, faced with razor thin profits, are pressuring their grape suppliers, who have found that they have produced more grapes than the wineries are willing to buy.  The result:  grape prices have plunged and the growers are complaining that current prices don’t cover their production costs and some wineries haven’t paid for grapes from the 2008 harvest.  The wineries counter that grape prices were high for ten years and if wineries have had to tighten their belts, the growers have to, as well.

Back in November, I explained that an inventory-to-sales ratio of 3 is ideal in Rioja.  Now, a large harvest in 2009 as well as decreased sales has pushed the ratio well over 3. At that time, the largest winery association, the Grupo Rioja,  proposed that maximum yields be reduced by 10% for 2010, 2011 and 2012 to bring supply of grapes back into line with demand until sales of wine pick up again.

 This situation came to a head at last Friday’s meeting of the Rioja Regulatory Council when the growers’ representatives refused to support the Council management’s request to approve the 2010 advertising and promotion budget.  The growers have convened meetings this week to decide a course of action.

 From the growers’ point of view:

  • Grape prices are at their lowest since 2001 – an 8% drop in sales doesn’t justify a 50% reduction of grape prices
  • Some haven’t been paid for their grapes from 2008, let alone 2009
  • Reducing production takes money from their pockets, as they could sell excess grapes to make table wine.

However, the European Union doesn’t allow minimum price fixing, so the matter of renegotiating prices is strictly between wineries and growers, outside the scope of the Council.

 The president of the Council has stated that the growers’ refusal is temporary and the problem will be solved.

The Council has proposed a 10 million euro (14.3 million USD) advertising and promotional budget for 2010 that is on hold until financing is secured.

As Spaniards like to say, ‘las espadas están en alto’ (the swords have been drawn!).

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