How two regions maintain their prices

Roger Morris looks at how two wine regions seek to self-regulate production to prevent wine gluts and deflationary prices. 

Verzy, looking out to the Montagne de Reims, Champagne
Verzy, looking out to the Montagne de Reims, Champagne

Long before there was OPEC, there was Champagne. When the oil producers from Iran, Iraq, Kuwait, Saudi Arabia and Venezuela gathered in Baghdad in 1960 to form OPEC, the organization that controls the production and price of oil, it’s not known whether anyone was thinking about the French region that produces sparkling wine, a different kind of liquid gold. Whether they did or not, OPEC could not have chosen a better model for the word “cartel”. 

This past year, Champagne and Barolo—another famous wine region—each announced or threatened actions to stop the growth of production of their individual wines, as a means to keep prices steady as well as ensure quality. It was an illustration that, while Champagne and Barolo are each highly respected for their quality, both regions are on constant alert to prevent a glut of wine on the market that would cheapen their reputation and lower the prices of their wines.

Restricting production

Barolo announced as of 1 January 2020, no additional Barolo vineyards could be planted within its region over the next three years, thus heading off any significant future production increases for the Nebbiolo wine. Ilaria Bertini, speaking for the consortium that controls production in Barolo and neighboring Barbaresco, said its moratorium “is a sensible and cautious action aiming at protecting the appellation and allowing the market to adjust to an increasing production of Piemonte’s top red.”

Meanwhile, Maxime Toubart, who leads the Champagne winegrowers association (SGV), said a planned geographic expansion of the Champagne region, which has been in the works for almost two decades, would not take place unless the European Union agrees that Champagne can maintain its “planting rights” past a planned 2030 cutoff date. Planting rights allow a region to control the amount of grapes harvested per hectare. “Champagne’s success has always been based on regulating supply,” Toubart argues. “We will block the process of extending the Champagne production area if there is no clarity on the long-term future of a planting rights system.”

For centuries, European wine regions have sought ways to limit the geographic areas of a particular region or “brand” as well as the amount of wine produced per hectare. Chianti, for example, has been known as a wine since the 1300s – one of the first regional wine brands – yet it is a poster child for what can go wrong if a production area is not tightly controlled. In spite of repeated attempts to do so, the region was allowed to over-expand through the centuries, thus cheapening its image. As a result, Chianti has struggled for the past 100 years to find ways to regain its cachet.

France was the first country to systemize the geographies of its wine regions, dictating what kind of grapes a region could grow, the type of wine it could produce, and how much of it. In 1905, it created the first formal wine regions, or appellations, including Champagne. 

In a 2002 research paper, a Harvard University law student, Jeffrey A. Munsie, gave a simple summation of how a French wine industry slump in the early 1930s “prompted the government to pass another series of bills to address all aspects of the industry, collectively known as the Statut du Vin (Wine Statute). The Wine Statute had three main objectives: 1) to avoid surpluses by cutting back the size of vineyards producing vin de consommation courante (ordinary table wine), 2) to stabilize the market by controlling supply and 3) to provide growers with a price that would bring in enough profit to allow families to remain on the land. These measures eventually came to form the backbone of the modern regulatory scheme, and, surprisingly, are mostly still in effect today.”

Hence, groups of regional wine cartels sprouted up with the stakeholders controlling production and quality to maintain prices. By contrast, American wine regions such as Napa Valley cannot form their own cartels because cartels violate US antitrust laws. US wine regions may jointly promote their wines, but they cannot legally join together to control production or price.

Champagne control

In France, no one has a stronger, more-complex cartel than Champagne. Léa Holmes, communications director for SGV, the Champagne growers’ organization, points out that the region has controlled production for decades, gradually planting new vineyards to meet increasing demand. Thus, Champagne grew from 17,000 hectares planted in 1970 to 34,324 hectares today.
Champagne production is complex because most wines are blends of more than one vintage, with most wine from the current vintage being set aside for eventual blending with past and future vintages. As a result, each year a harvest allocation is set well in advance by agreement of both the growers and the Champagne houses, represented by the CIVC (Comité Interprofessionnel du vin de Champagne). According to Thibaut Le Mailloux, CIVC’s director of communications, the allocation is made early in the season, taking into account early analyses of potential quality and yield. Then, he says, consideration is given to the “economic situation – level of stock, dynamism of shipments and the three-year volume forecast.”

Whiskey producers in the  US and the UK have to make similar projections of how much spirit to store to meet ageing requirements, but, as cartels are not legal in either country, they must do this on a solo basis and bear the consequences – good or bad.

To make things more complex, Champagne is redrawing its boundaries, a process that has been in the works since 2003. SVG’s Holmes insists that the process is “not about an extension, but rather a revision of the appellation area.” But expansion will in fact occur. The body which controls French appellations, the INAO (Institut national de l’origine et de la qualité), is expected to finally approve Champagne’s new boundaries by 2024, although a first public look at the plans is expected this year. 

What the SVG is demanding is the legal authority to continue to control the amount of grapes per hectare that can be harvested, which the EU plans to do away with in all countries after 2030. If the EU does not agree in advance to make a change, the SVG has threatened to totally scuttle the 2024 adjustments. “The Champagne region runs the major risk that the additional areas will be brutally planted from 2030,” Holmes argues, “and that the markets will become unbalanced – overproduction, fall in income, loss of quality.”

Rémi Vervier, managing director of Champagne Palmer & Co, agrees. “To expand the area of Champagne production with no control will have an impact on everyone,” he says. “Extension of an appellation must be done in a special way.” In other words, EU would take away the cartel’s chief weapon.

Restricting yields

Barolo is much simpler. Like many European appellations, Barolo restricts yields, primarily to ensure quality, by limiting the maximum amount of grapes to be harvested per hectare. Planting moratoriums are rarer. In announcing the three-year ban on plantings, consortium president Matteo Ascheri, said that while the marketing outlook is not grim, “we have to [consider] in light of the dropping exports toward Germany and the UK and an increased production. The easiest way to tackle the issue is to limit the planted hectares.” Ascheri says that Barbaresco, Piedmont’s other premium Nebbiolo region, will not be subject to the same moratorium as Barolo, but it will be limited to only an additional seven new hectares planted annually for the next three years. 

When, then, does it make sense for a region to slow or stop production growth? Controlling production “is beneficial if demand is inelastic,” says Professor James L. Butkiewicz, a macroeconomist at the University of Delaware.

“Inelastic demand exists when the quantity demanded does not fall much when prices increase. This is likely due to a lack of substitutes. When there are good substitutes, the quantity demanded will decrease by a large amount in response to even a small price increase.” Champagne is particularly concerned that its lowest-priced bubblies will come into competition with top wines from other sparkling wine regions, thus threatening that elasticity.
In recent history, Burgundy and Bordeaux have taken different approaches to controlling supply. Burgundy decided to increase entry-level production by promoting its previously obscure regions and by embracing Beaujolais, both measures intended to channel drinkers into the brand, hoping some will eventually drink their way to the top – the Côte d’Or wines. 

Conversely, Bordeaux has tried to reduce production because there was too much generic wine. In 2005, Plan Bordeaux sought to uproot 17,000 of its 124,000 hectares of vines, a reduction of almost 14%, although some production was being channeled into spirits distillation. After two years, Christian Delpeuch, the person in charge of the Plan, threw up his hands and resigned. 

“I refuse to countenance this continual putting off of decisions which can only end in failure,” he protested. The scheme withered on the vine, a victim of diversified decision-making in the absence of a centralized cartel system. 

As Butkiewicz points out, cartels fail when there is group disagreement or members cheat. Neither Champagne nor Barolo seems to have either worry. 

Roger Morris

This article first appeared in Issue 1, 2020 of Meininger's Wine Business International magazine, available by subscription in print or digital.

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