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!).

The economics of the 2009 harvest and its implications

wine barrelsThe Rioja Regulatory Council recently announced that the harvest subject to protection in 2009 was 397,42 million kilograms of grapes and 5,15 million kilos for the quality reserve.  This is less than the 410 million kilos that I mentioned in my post of October 27.

What do these numbers mean? I think it’s interesting to see how the Council calculates them as grapes become wine and are aged in barrel and bottle before release from Rioja wineries.

Every fall, just before the harvest begins, vineyard owners receive a card with a microchip.  The chip contains data about each owner’s  holdings of red and white grapes. It works like a credit card.  During the harvest, each time the grower delivers a load of grapes to a winery, an inspector subtracts the amount of red and white grapes from the total in the chip.  Once the balance  reaches zero, the grower is not allowed to deliver any more grapes.  A little wheeling and dealing takes place, however, as some growers, due to drought, hail or other reasons produce a little less than their cards indicate, so a grower with a little more than allowed often ‘borrows’  a card with a balance to be able to deliver more grapes.

At wineries, a sample of each load of grapes is analyzed and the potential alcohol, color, tannins, amount of botrytized grapes, age of the vineyard and other parameters determine the price the winery is willing to pay.

Once the harvest ends, each winery sends a harvest report to the Council, and the Council in turn informs the winery how much wine can be vinified and subject to protection as Rioja wine.  Ususlly the conversion factor is 72 liters of wine for every 100 kilos of grapes, but it can be as low as 70 or as high as 74 depending on the harvest and the state of the Rioja business.

After alcoholic and malolactic fermentation take place, the wineries prepare samples for blind tasting by the Council’s tasting committees, made up of winemakers from Rioja wineries.  It’s like a peer review. At the same time, each batch of wine is chemically analyzed. Wines that pass the tasting and chemical analysis are then certified as Rioja.

At this stage, some wines are bottled and sold as ‘sin crianza’ or young Rioja.  The Council issues back labels and subtracts the corresponding amount of wine in their books from that winery’s total for that year.  In the same way, when wine is put into barrels for ageing, the Council records the amount of wine being aged.  At the ‘crianza’, ‘reserva’ and ‘gran reserva’ stages, the same procedure is followed, with the Council issuing only as many back labels as the balance of wine from that vintage in the winery, according to the Council’s accounting.  Note that the correct figure is the Council’s, not the winery’s.

Once the winery has asked for all the back labels it’s entitled to from a given vintage, it can’t sell any more wine from that year.  This system has been in place for all vintages since 1980.

Another interesting feature is the quality reserve as mentioned above.  Wineries are allowed to petition the Council to vinify up to 5% more than the maximum allowed to compensate for potential shortfalls in small harvests.  There’s a catch, though.  If there’s no shortfall, the winery has to send the wine to the distillery.

For the last week or so, the Council has been debating what should be done in 2010 if sales remain stagnant.  Traditionally, a reliable measurement of the ‘health’ of the Rioja business is the inventory to sales ratio.  If the ratio is about 3 (years of sales as inventory of wine), both wineries and growers are comfortable with the state of affairs.  If, however, the ratio dips below 3, it indicates a shortage of wine and the quality reserve program kicks in to alleviate it.  If, on the other hand, the ratio is over 3,5 either sales are stagnant, too much wine has been made, or in this year’s case, both).  Under debate at present is the possibility of only allowing 90% of the maximum allowable yield (5.850 kgs/hectare for red grapes and 8.100 Kgs/ha. for white) in the 2010 harvest.  This will bring the ratio back to about 3.  This seems to satisfy the wineries but the counteroffer made by representatives of the growers remains to be seen!

This may sound complicated, but it shows how committed the wineries and growers are to stability.  As you can see, there’s a lot more to a Rioja harvest than meets the eye!


The 2009 harvest – promising quality, uncertainty about quantity

tempranillo_editLast week, the Rioja Regulatory Council officially declared the end of the 2009 harvest.  The Council wasn’t in a position to estimate the total size of the harvest yet, but has confidently stated that the maximum size of the harvest subject to protection as D.O. Ca. Rioja will be about 410 million kilograms of grapes.  This is easy to calculate:

56.825 hectares of red grapes x 6.500 kgs/hectare (maximum allowable yield) plus 4.057 hectares of white grapes x 9.000 kgs/hectare = 406 million kg. of grapes.

What will be even more difficult to predict is the actual number of liters allowed to be aged, bottled and sold as Rioja, because once malolactic fermentation has taken place, wineries have to submit samples to a tasting committee where they will likely, but not necessarily, be accepted.

This procedure illustrates a big difference in grape growing between Europe and the rest of the world.  Outside Europe, viticulture is a business where there’s no guarantee that your grapes will be bought.  In Europe, however, within the Appellation Contrôlée system (Denominación de Origen in Spain or in the case of Rioja, Denominación de Origen Calificada), owning a vineyard and growing grapes is a privilege granted by the AC and at least in Rioja, farmers know that someone will buy their grapes, although price is subject to supply and demand as well as quality.

Over the years, the Council has tried to encourage price stability by balancing the supply of grapes and wine with market demand with the help of European Union wine laws, that formally don’t allow total production of wine to increase but do permit the transfer of planting rights between regions.  In this way, the vineyard area has increased more or less in step with the increase in demand for our wines. Yields, however, have also increased and this is the source of the problem today.

It’s impossible for farmers to produce exactly 6.500 kg. of red grapes per hectare.  Older vines produce much lower yields while young vines planted with high-yielding clones produce a lot more.  As long as average grape prices were high (between 0,80 and 1 euro a kilo), farmers didn’t mind doing a green harvest (culling the vines to reduce production).  This year, however, because demand has weakened due to the economy, the prospect of a big harvest  has pushed grape prices down. Consequently, farmers are interested in selling everything they’ve produced.  Traditionally the Council let growers  deliver up to 25% more than  the maximum  allowed production to wineries and coops, so that these could choose the best wines for the tasting committee and sell the extra 25% outside Rioja as table wine. Unfortunately, this policy created a large inventory of bottled table wine that competed directly with the most inexpensive Riojas at a time when sales in Spain began to slide. Alarmed, in 2007 the wineries, coops and one of the farmer’s associations voted to gradually reduce the extra 25% in 2007 to zero in 2010.  Now, the individual members of the coops have pressured their boards into attempting to cancel the agreement in the Council to allow them to make some money from the surplus grapes and wine.  The issue will be discussed at the end of the week in the Council.

To satisfy your curiosity, I have to say that most winemakers are pleased with the quality of this year’s harvest.  Although Rioja was plagued by a drought all summer, the subsoil in the vineyards had accumulated enough water throughout the winter and no rain fell during picking.  In addition, throughout September and the first three weeks of October, warm days and cool nights allowed the grapes to ripen with no risk of rot.  However, as baseball great Yogi Berra once said, “It ain’t over till it’s over.”

More about the economics of the 2009 harvest in my next post.