Light at the end of the tunnel

Argentina’s wine sector has experienced crisis after crisis, being hit by the country’s macro-economic conditions. As inflation is slowly brought under control, the most recent crisis is receding. Daniel López Roca explains.

Buenos Aires
Buenos Aires

After three decades in the international world market, Argentina's wine industry is stronger than ever. Exports rose to 25% while the rest of the wine production feeds a huge internal market. Nevertheless, even if it now is less dependent on the domestic market than before, it is experiencing a moment of risk. Bad public policies, coupled with a historical situation of an asymmetrical wine sector dominated by a handful of huge wineries, with thousands of small grape producers, lead to disequilibrium in the supply and demand balance. Argentina’s 223,034 ha of vines are distributed among 30,000 smallholders, and over 60% of them have less than 10 ha of land. This situation has transferred regulatory control from the state to the oligopolies, a fact that’s evident today more strongly than ever. Macroeconomic conditions, taxes, inflation, and exchange rate conspire against the wineries, preventing them from exporting in many cases. 

Background to the crisis 

Several crises have affected the wine industry in Argentina in its history. The traditional wine model started by the European immigrants suffered moments of anxiety from the beginning, for various internal causes, such as inadequate use of grape varieties, technological backwardness, shoddy wines, fraud and stretching wines with water, etc. External factors added to the difficulties, including climatic problems, national and international economic crises, and falls in consumption and prices. The first such crisis took place between 1901 and 1904, and the second between 1914 and 1916. Although in some ways they appeared to be linked to external factors such as a domestic economic crisis affecting consumption, or foreign conflicts such as World War I, wine overproduction and adulteration were generally thought to be the main causes.

These crises led to the unification of industries through various organisations, under the control of large, integrated winemakers who were able to become an economic and political power in the ­
Mendoza province: the so-called modern agro-industrial bourgeoisie. 

The ultimate goal of those crisis solutions implemented by both governments and producers was always to decrease the grape and wine surplus, to balance supply with declining demand. Compulsory vineyard eradication and the removal of surplus by pouring wines into the irrigation ditches, or even intervening directly in the market by buying grapes and wines for disposal were some of the drastic methods implemented by the state.

In the 1970s, there was a third great crisis that lead to the failure of renowned wineries in Mendoza, and marked a clear break with the existing model. True emporiums of wine like Arizu, Gargantini and Tomba were ruined, broken and abandoned, with the image of wines running down the irrigation channels still affecting older producers today. Consumers were redirected to other products such as beer and sodas and consumer demand plummeted from 93 L per capita in 1970 to 25  L in 2010. 

It was not until the 1990s  that a significant conversion of the industry came about, at the same time that a marked economic deregulation proposed by the government cleared the way to a systematic influx of foreign investors. The investments greatly improved the technology of wineries. Between 1982 and 1992, production was reduced by 36% as many low-quality vineyards were eradicated. Since 1992, the production structure became oriented towards quality production. In 1994, a big crop caused a saturation of the domestic market, and the consequent fall in wine prices lead the governments of Mendoza and San Juan provinces to sign an agreement on must. Law 6.216 established that a minimum  percentage of grapes (~20% to 30%) is to be set aside for must-making every year, taking those grapes out of the wine production.

The must arrangement worked well until 2014.

After an inaccurate crop forecast from the Instituto Nacional de Vitivinicultura, only 18% of the harvest grapes were diverted to must and the agreement failed to reach its objective. The most serious consequence was a fall in the price of wine, critically damaging small- and medium-sized wine producers, who were not able to afford the harvest costs.

The national macroeconomic situation of the last three years has increased input prices (particularly on imported goods), as well as labour and logistics. This increase exceeded the price growth of basic wines. This caused a loss of profitability for small producers and producer associations, which were unable to export their surplus to the international market. The wines that were exported at less than $18.00 (per 9-L case) are no longer profitable for producers, which is why big wineries are not buying either basic varietal grapes or basic finished wines.

Argentina has no export incentives. Producers often say the situation is, in fact, the opposite: they pay export duties that are supposedly refunded later, but which the state fails to refund in time. Despite this, producers say that when the overvalued exchange rate is not taken into account,  the vineyards planted in Argentina would not be able to supply 80% of global demand for Argentine wines.

Eduardo Garces, president of the Vintners Federation of San Juan said: “It is known that the wine surplus that’s pulling down prices is in Mendoza. But this is not the fault of Mendoza winemakers, but of the large wineries with pricing power. For winemakers, the wine price is going down, while in the market the prices always go up.”

According to the Observatorio Vitivinícola de Argentina, inventories gained about 13% in 2014, leading to an increase in stocks, while exports went down.  Mendoza province had 2,776m L of wine and 128m L of sulphited must in stock, while San Juan province had 181m L of wine and 77m L of sulphited must in stock by December 31, 2014.

Daniel Gil, a grape grower from East Mendoza said: “It is clearly demonstrated in the figures of the last four years that primary producers are transferring their profit to the rest of the market chain (bottling wineries, distributors, supermarkets).” He says that in 2014, the government purchased grapes at $0.24 per kilo, but in 2015 offered $0.18. “The wineries offer between $0.09 and $0.11 a kilo of common grapes. For varietal grapes they are offering $0.22 for Bonarda, and $0.28 for Cabernet Sauvignon.” Gil says that it’s impossible to sell wines at the 2010 and 2011 prices, given the increase in input, labour, oil and irrigation costs.

The most significant profit margins are to be found on the retail and distribution end of the chain. At the other end, where the producers sit, profits have almost disappeared.

Last year, inflation of about 40% caused significant distortion in the wine market. Not all the components of a bottle of wine are similarly affected; while wine prices have remained at the same level for the past four years, other inputs have shown above inflation indexes.  According to an Acovi Observatory (Winemaking Cooperatives Association) study, in January 2015 a grape producer needed 2,790 L of red wine to pay the salary of a field worker for a month, compared to 2,595 L in January 2014. Also in January 2015, he would need (the value of) 2.35 L of red wine to buy 1kg of fertiliser (urea), while in January 2014, he needed 1.49 L. In 2015, a producer needed 14.9 L of red wine to buy one litre of herbicide, while in January 2014 he required 11.42 L. Logistics costs are also part of the problem: from January 2002 to date, the peso fell 855% against the dollar, yet logistics costs climbed 3085% during the same period.

Gabriela Lizana, president of the Asociación de Productores del Oasis Este de Mendoza (APROEM), a producer organisation, said: “the production cost exceeds the value that buyers are willing to pay to producers. Now medium wineries may suffer the same situation as small ones.” She says that rising costs have made the break-even point rise, and wineries producing less than 5m L may face severe losses. “In many cases, this can be fatal to their business.” 

Proposed Solutions 

After many twists and turns, the governors of Mendoza and San Juan set the percentage of grapes sent for must production at 35%, a figure that does not satisfy the sector. The agreement was signed with the main must processing firms, under which they agreed to pay producers $0.18 per kilo of grapes; $0.095 will be paid by the wineries, while the state will subsidise the remaining $0.085. The signatories were FecCoVitA Coop Limitada, Allub Hnos SRL, Cepas Argentinas, Grupo Peñaflor, Viñas Argentinas SA, Gancia y Bodegas & Viñedos Benedetti SRL. These seven wineries produce 70% of the Mendoza province must, which is ultimately sold for fruit juice, making sweeteners, and for winemaking.

Gabriela Lizana, said: “We disagree with the $0.18 to be paid by the kilo of wine grapes. It is too low compared to market prices. However, we believe that the government should concentrate on studying the value chain as promised and so finding a way to really help growers,” she said.

Despite this background, Argentine wine exports to the UK nevertheless grew 5.5% in volume in November, with a rise of 9.3% in value over the same period. Some wineries have managed to grow steadily, such as Cavas Rosell Boher, a winery focused on the domestic market, that exports only 10% of its wines. It’s their 15th anniversary and they are celebrating that thier turnover grew 50% last year.

Explaining their success, general manager Matías Torres García said: “I call it coherence, and it is one of the key factors that has allowed us to increase revenues 120% in some products.” 

This also is the case of Viña las Perdices winery. Juan Carlos Muñoz, chief winemaker, said: “We are lucky and privileged to continue growing (mainly in Argentina) despite everything. We try to differentiate ourselves, creating a broad portfolio that strengthens the entire brand.” He says the winery offers, for example, an Albariño and a late harvest Malbec vinified with frozen grapes. While other Argentine wineries entered the US selling Malbec, they entered with white wines such as Pinot Grigio and Viognier. “When they came to notice our quality, we could also sell Malbec to them. In 2014 we reached one million bottles in Argentina, and this happened in eight years since the brand was launched to market.” 

Axel Kicillof, the Economy Minister, has managed to stabilise the dollar/peso exchange rate for more than a year now, allowing citizens to exchange pesos into dollars “for personal savings” at a special, favourable rate. This has moderated the black market demand for dollars and stabilised the peso. 

As 2015 is an election year, no dramatic changes are expected from the government. Argentina’s reserves of US dollars have stopped falling and inflation is slowing (at 1.1% as of February2015), while the president of the Central Bank of Argentina has pledged that the peso will not suffer any sharp devaluations. According to market analysts, this means the exchange rate will be used to keep up cash reserves in the Central Bank, even though it will dampen economic activity. 

In conclusion, it’s almost certain that wine exports – especially at the lower end – will continue to be affected, as will all regional economics relying on the export market. However, the policy of making small adjustments to the peso-to-dollar exchange rate may bring down inflation and ease the situation.



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