The grapes of wrath



                                   The 2010 harvest in Rioja is set to begin. The latest buzz in the region is about the excellent condition of the grapes in the vineyards on the one hand and anticipation about the results of the Regulatory Council’s decision to reduce yields of red grapes by 10%, which, together with an increase in sales of 16% in the first six months of 2010 and an increase of 6,5% in the last 12 months could bring supply in line with demand.

As I’ve explained in the past, the best indicator of the general ‘health’ of Rioja wine is the inventory to sales ratio. The ideal ratio is a level of inventory equivalent to between 2,8 and 3,2 years of sales. If it’s lower than 2,8, there aren’t enough grapes and wine to go around and prices rise, while if it’s higher than 3,2 prices fall.

The ratio in 2009 was 3,54 and grape prices plummeted from an average of 80 euro cents to 55 euro cents (according to the Grupo Rioja) to 40-45 according to representatives of farmers’ unions. One big winery in Haro paid 38 cents a kilo which was undoubtedly good for its balance sheet but extremely bad for customer (that is, grape farmer) relations.

In 2010, an increase of 8% in sales and a decrease in production to 260 million liters could bring the ratio back to 2,76 which in theory would mean higher grape and wine prices. I’m sure this is the argument that prevailed in the Regulatory Council (the measure passed with 175 votes out of 200). Will grape and wine prices return to their previous level? The farmers doubt it – they’re planning a demonstration on September 11 – and so do I.

The plain and simple fact is that the average ex-cellars prices of Rioja have decreased steadily since 2000 and the wineries can’t afford to pay an average of 80 euro cents for a kilogram of grapes when their margins are being squeezed by customers in Spain and abroad. The reason sales are beginning to increase is lower winery prices with more comfortable margins along with the weak euro with respect to the dollar (1,27 now compared with over 1,40 throughout 2009) that is helping sales to the USA.

A lot could happen before the end of the year. First of all, September is traditionally the ‘make or break’ month for a Rioja harvest. Warm, sunny days and cool nights are important. Early rain could make for a major quality problem. Secondly, the timid economic recovery in most of Europe and the USA could sour.

I remain optimistic, however. We always learn from our mistakes and a major one last year was squeezing the farmers too hard on price. Since wineries have no choice but to buy grapes and wine from farmers and coops in Rioja, long-term relationships take precedence over short-term economic considerations. Grumbling is a highly developed political art form in Rioja but wineries and farmers have no other alternative than to get along. Wait and see.

2 thoughts on “The grapes of wrath

  1. Have been following your posts since we met at Barry’s Brilliant Birthday Bash in May and found today’s story particularly informative!
    Didn’t ever fully understand the way your market determines grape pricing… they have a council, which sets prices in a similar fashion in Ontario, Canada… but here, in the free-market zone of America (Napa Valley, where I live and make wine), prices are determined by the forces of the market place.

    When are you coming west to see how wine is really priced and made!!?? (PS: We envy your just-about-to-get-to-harvest posture… in Napa Valley harvest is three weeks late due to a particularly cool summer.)

    • Hi Jim, Good to hear from you! You have touched on an interesting point – in the Appellation of Origin system in Europe, wineries are 100% subject to the whims of the marketplace while grape growers are somewhat protected. European governments feel that farming deserves protection to maintain life in the countryside and in an AOC, farmers and wineries each have a 50% stake and voice in running it. Grape and wine prices aren’t allowed to be fixed (even the EU respects the market) but at least in the case of Rioja, the Council has succeeded in reducing the maximum yield for red grapes, even though the Ministry of Agriculture took months to approve the change, arguing that such a measure would restrict competition.

      The problem as I see it is that protection like this for farmers encourages inefficient production (straight from Econ 101). If farmers know that they will always have a market for their grapes, most of them have no incentive to produce a superior product to get the top euro. It’s interesting to note that the average vineyard in Rioja is about 0,5 hectare (75 x 75 yards). These properties could be marketed as microestates with singular characteristics but only a few producers have realized the merit of this. For the most part, once a big grape purchase has been made, usually by a big winery, that price sets the market price. Another factor that has to be taken into account is that winery ownership of vineyards is only about 10-15% of the total area under vine. Coops vinify another 30%, so the grape price debate is a hot topic.

      I don’t know when we will get out to Napa but we will let you know before we do! All the best, Tom

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