The long, hot summer

September is just around the corner. In Rioja, that means the grape harvest, wine festivals and the beginning of the annual joust between wineries and grape farmers over prices.

The Rioja Regulatory Council is predicting a smaller harvest than in 2011, when 387 million kilos of grapes were vinified. The theoretical production ceiling in Rioja is 413,77 million kilos (58.442 hectares of red grapes x 6.500 kg/ha. + 3.767 kgs of white grapes x 9.000 kg/ha). The smaller than normal harvest is a consequence of a severe drought that has lasted two years and several hailstorms in June and July that hammered Rioja Alavesa. In Álava agriculture experts have predicted a 35% reduction in yields, suggesting a harvest of 77 million kgs, 41 million less than normal.

The Council is strangely upbeat about the situation. The technical services director, Domingo Rodrigo recently went on record to praise the excellent state of the vineyards while minimizing the effects of the drought and the hailstorms. I’m surprised that the Council isn’t concerned about a 41 million kilo drop in production in the smallest sub-region of Rioja. I’m certainly worried about it.

Sales (from January through June, the latest figures available) are flat – 0,51% lower than in the same period in 2011. While export sales are up 5,3%, this doesn’t compensate for the 3,1% drop in sales in Spain. Hopefully sales in the Spanish market will pick up as soon as cooler weather invites Spaniards to drink red Rioja after a long, hot summer of cold beer.

What does this mean for grape and wine prices? In a supply and demand economy, the current situation in Rioja, with lower supply and flat demand usually means higher prices, but Rioja beats to a different drum. Prices will ultimately depend on how much wine is needed by wineries (a smaller harvest could be interpreted as a good thing) and on whether profits will be impacted by higher grape prices, which they probably will because wineries won’t dare raise prices. In addition, VAT (value added tax) will increase from 18% to 21% from September 1 and I seriously doubt that wineries will pass it on to their customers. Financial constraints will probably prevent bigger wineries from buying up more grapes than they require, as has been done in the past.

All the above suggests to me that red grape prices will remain low in 2012 and early 2013. Growers will complain and probably boycott the approval of the 2013 advertising and marketing budget, but that’s nothing new.

In short, we’ve had a long, hot summer and all things point to a wild, crazy ride for the rest of the year.

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.

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!).