Feb 8, 2011

Wine, Quality and Trade Facts

I enjoyed the wine tasting at Roma VinoExcellence. I tried several wines, from sparkling, white and rosé, to white, red and sweet. I had a tasting of Austrian sweet wines, Eiswine etc. (try them with cheese!) Very hard job indeed...

I had the feeling that producers were actually doing their job with passion, but I am not writing to judge the quality or to tell you my impressions. You find that elsewhere, for instance here.

I want to take an economic perspective instead.
So here some data about the wine industry, with a focus on Italian wine.

Let's start from the production of grapes. Producing grapes is not that easy. And grapes quality largely affects wine quality. Grapes breeding has a long history and there are several grapes families out there. Or not? Actually, as reported by the NYT, a recent research found out that 75% of grapes are genetically closely related. And this evidence of lack of sexual reproduction might expose grapes to diseases, and we europeans already had the famous case of phylloxera, which destroyed most of the wineyards in the 19th century. Here the grapes family three from the NYT article.

Whatever the production issues, Italy is a top world producer (FAO). But its wineyard acreage lags behind those of Spain and France (table).
FAO Data

Let's focus on France, Italy and Spain. Italian and French production has diminished since 80's, while Spanish has slowly raised. Italy, again, is the first producer (FAO). In the period 2004-2008 Italy increased production by 17%, while France and Spain reduced it by 20% and 12% respectively (table).
FAO Data

France is by far the first wine exporter, followed by Italy and Spain (FAO and EUROSTAT). The value exported by France is almost double than that exported by Italy. That's a huge difference, despite the fact that Italy produces and exports more than France in quantity. What happens? Simple, French are able to charge a price (unit value) that is twice the price of Italian wine!
FAO Data
EUROSTAT Data (there must be some problem in the quantities)

Finally some technical thoughts.
I believe wine is a good case of monopolistic competition with price-quality differentiation. Higher quality implies higher costs and risks. The interesting point, which I don't know if is in the theoretical literature, is that information is a precondition to understand quality. Talking about models, I would say that the more people are informed about the product the lower is the elasticity of substitution and the more they are willing to pay for a high level product, ceteris paribus. So branding may raise information about the individual firm, but that has spillovers, which add to the general marketing of the industry, and eventually causes the producers to be perceived as less substitutable. That also makes consumers more willing to pay for a good product. Here you find a nice paper about wine.

This paper from IMF makes an interesting point: wine is not really a special good. If we compare wine and oil prices, we find a similar pattern which tells us that "macroeconomic factors are the main determinants of commodity prices. Although supply constraints have the expected effect, aggregate demand growth is the key factor. The empirical results show that while advanced economies account for more than half of global consumption, emerging economies make up the bulk of the incremental change in demand, thereby having a greater weight in commodity price formation."

Data Sources:
FAO - http://www.fao.org/
EUROSTAT - http://epp.eurostat.ec.europa.eu/
The Wine Institute - http://www.wineinstitute.org/
See also:
OIV - http://www.oiv.int/
I numeri del vino - http://inumeridelvino.it/


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