All Working Papers

This study examines wine trade in the United States to assess the impact of higher energy costs on the average distance of world and U.S. regional wine shipments, or wine miles, to U.S. markets. To examine this issue we calibrate a spatial equilibrium model of the U.S. wine industry. The model accounts for (i) consumer preferences for variety, (ii) monopolistic- competition/increasing-returns in the production of differentiated wine products, and (iii) transportation costs. Wine production areas are grouped into nine U.S. and seven world producing regions. U.S. markets are grouped into the 50 States plus the District of Columbia. Results indicate that U.S. consumers are willing to pay substantial transportation costs in order to consume a wide variety of wines from premier U.S. and world wine growing regions. As increasing energy costs drive up the price of freight services, wine mile impacts are limited by the degree of regional product differentiation in U.S. and world producing regions.

We have a coherent and combative position...transform an activity dedicated to making massive and undifferentiated products, to products high in quality able to be differentiated by the market.
Centro de Bodegueros de Mendoza, “El valor de la coherencia,” Bodegas y terruños, # 1 (March 1999), 44.

The rise of exports starting in the second half of the 1990s was perhaps the most transcendental phenomenon of the local wine industry, not only because it reflected the enormous potential of a greater insertion of domestic production internationally, but also because of its repercussions for wine production as well as for the marketing of Argentine wine and consequently for wine business strategies.
Daniel Aspiazu and Eduardo Basualdo, Estudios sectorales. Componente: Industria vítivinícola. Buenos Aires: CEPAL-ONU, 2003, 15.

Argentina emerges. Argentina’s wine industry is experiencing astonishing growth, both in production and international acceptance....And if you taste a rich Argentinean Malbec, all this makes perfect sense.
Adam Strum, “Top 10 Wine Stories of 2006,” The Wine Enthusiast, XX:1 (January 31, 2006), 10.

I know that 50 percent of spending on marketing is wasted. The problem is, I don’t know which 50 percent. Old marketing dictum.

Since Chile’s adoption of outward orientation, the country has converted itself into the fourth largest producer in exports volume and fifth large producer in export value (ODEPA, 2005 & Olavarria et al, 2008). It has increased its share in the predominant markets, shown by its increase in shelf space in the U.K supermarket (Gwynne, 2008c). The study of how Chile changed around its wine sector in a short space of time (exports only really started in the 1990’s) is of highest importance, as it is evident this semi- peripheral country has fought its way into the competitive global value chain. I will study the changing periods of wine history in Chile along with firm creation and the strategic evolution of firms. This will examine in particular the record of process upgrading and upgrading in marketing and branding. An analysis of how these firms evolved will investigate how the Chilean wine sector has gained its success in the global market. Finally, a study of clusters in Chile shall be carried out to show the importance of the firms studied in creating economic growth not just for individual firms but also for the economy of an area.
In order to carry out this study two valleys shall be examined. The first is that of the highly successful Colchagua valley in Chile’s sixth region and Casablanca in the fifth region. It is the second most planted region in Chile (Olavarria et al, 2008) and arguably produces the highest quantities of quality wines in Chile. Casablanca, on the other hand it is a relatively young valley, with very little planting of grapes till the early 1990s. It is an example of the extension of traditional wine producing regions in Chile with land under grapes increasing 164% between 1998 and 2006 (Wines of Chile, 2008).
The new dimension of Chile is the east-west axis and there are four major areas in this regard (Richards, 2006: 13-14). The first covers the plateaus and slopes on the western side of the coastal range, where cloudy, humid mornings and stiff afternoon breezes are the norm; this is very much the landscape of Casablanca whose production really took off in the 1990s. The second is the eastern side of the coastal range, where temperatures tend to be very warm except in the sites that are exposed to some oceanic influence – this is where Colchagua at present starts off its new range of vineyards, The third is the central depression and the fourth is the contact zone between this flat land and the Andean foothills in the east, where conditions are warm though moderated by mountain downdraughts and southerly winds. Colchagua covers these latter two regions as well.

The international economy has, for several decades, undergone an intensive process of integration, which has offered developing countries opportunities to increase their exports and, consequently, stimulate their economic growth. Although since the middle of the twentieth century, the greatest opportunities have emerged in the export of manufactured goods, for some countries primary products still constitute a substantial part of their foreign trade and the currency gained through trade. It is well known, however, that the development of such exports faces very diverse difficulties, such as the inelastic income demand for agricultural products, the low participation of these goods in intra-industrial trade or the serious institutional obstacles which exist, derived from the existence of protectionist policies, especially in the more developed countries, which limit their the possibilities of in this direction (Serrano and Pinilla, forthcoming).
The first phase of globalisation, which occurred between the mid-nineteenth century and the First World War, allows us to analyse, albeit in a different historical context, the principal factors which determine the possibilities of trade growth in the long term.
The debate regarding the causes which determined the growth of trade in the first phase of globalisation has notable similarities to that which currently exists with regard to the second phase, although the historical circumstances are obviously different. There is widespread agreement that the increase in incomes has, obviously, been a fundamental cause of its growth (Irwin, 2002; Estevadeordal et al., 2003; Jacks and Pendakur, 2007). In addition, trade liberalization and exchange rate stability have been very important (Jacks, 2006; Estevadeordal et al., 2003; López-Cordova and Meissner, 2001). By contrast, the debate regarding the role of the reduction of transport costs is by no means closed; certain authors believe that this was essential to explain the growth of trade (O’Rourke and Williamson, 1999; Jacks et al., 2008), while others find no evidence on this point (Jacks and Pendakur, 2007). Similarly, different positions exist between those who consider that the stock of immigrants in a country stimulated its trade with their country of origin (Dunlevy and Hutchinson, 1999) and those who believe that the effects of this circumstance were neutral (Jacks, 2005). Belonging to an empire, and therefore lower transaction costs or more favourable trade policies, has also been considered to encourage trade growth in this period (Mitchener and Wedenmier, 2008).
Within this context, the present study concentrates on trade in agricultural products, a group of products which played a central role in this period, maintaining from 1870 onwards a fairly stable participation of approximately 50% of international exchanges (Aparicio et al., 2008). However, very few studies have focused specifically on the determinants which stimulated trade in this type of products, and even less so on those which played such a role in this historical context.
To this end, the present study concentrates on a specific case i.e. trade in Spanish table wine. Wine was one of the key exports produced by Spanish farmers in the mid- nineteenth century. Together with cereals (especially wheat) and oil, it was one of the three key products of Mediterranean agriculture, occupying a significant part of cultivated land and agricultural production.
In the analysis of this case, the literature initially analysed the success of exports and their subsequent collapse as the exclusive consequence of the exceptional demand which existed in France between 1875 and 1891, due to the harm caused by the phylloxera plague in its vineyards (Carnero, 1980). Subsequently, certain wider visions explained the success of exports to France in the general context of the unequal advances of Spain in other markets (Pan-Montojo, 1994), or in the consideration of table wine as a product with low barriers to entry and therefore highly vulnerable to the entry of new producers; moreover, it encountered difficulties in penetrating the markets of non-producing countries (Simpson, 1995).
In recent years, various studies have attempted to study in depth the above- mentioned research lines, broadening them or employing different approaches with the help of econometric models which made it possible to empirically verify the proposed hypotheses. Most notable is the consideration of the harm caused by the French tariff policy (Pinilla and Ayuda, 2002) and the difficulties in penetrating the markets of high- income countries (Ayuda, Aparicio and Pinilla, 1998; Pinilla and Ayuda, 2007 and 2008).
Given this background, the objective of the present study is to analyze the overall trajectory of table wine exports and provide convincing explanations of the pattern. Thus, we employ an approach that takes all of the possible explanatory factors into account, instead of adopting a narrower approach which focuses on a single principal factor. The methodology employed consists of using a gravity model to explain trade flows in Spanish table wine.
Our results highlight the key role of trade policies in the determination of export possibilities and the difficulties derived from the export of products which are characterised by the low or non-existent change in demand when income changes. These results may shed a little more light on the determinants of trade in the first phase of globalization.
Following this introduction, the next section briefly examines Spanish exports of table wine. Subsequently, the data used and the gravity model employed are explained. Next, an analysis is made of the results obtained from the econometric model. Finally, the article ends by providing some conclusions.

Walla Walla enjoys the fastest growing wine industry in the State of Washington, if not in the whole U.S. This paper examines the impact of this extraordinary growth on the revenue of regional hotels and restaurants. Employing a dynamic quarterly panel model at the county level we show that the regional reputation as high quality wine county, as expressed by critical wine points in the national wine press, has a significant effect on the tourism industry. Less than 17% of all restaurant and approximately 40% of all hotel revenue is tied to the wine cluster (2007). However, regional reputation is short-living and needs to be constantly re-earned.

The present study is framed within recent works addressing the process of product portfolio renewal as a mechanism for organizational renewal, in that firms may use it to meet the challenge of a changing environment. Based on this theory, we build an analysis model linking product portfolio renewal to changes in external factors and apply it to D.O. wine companies in Castilla y León. We found that both the environment as well as firms themselves had been highly dynamic during the period analyzed vis-à-vis their product portfolios. The importance of issues related to organizational adaptation and adjustment, such as those tackled in our research, lies in their link to organizational survival, making them a focal point of managerial concern. The findings to emerge from our work throw up certain implications which may prove useful to managers. In dynamic environments, such as those in which many firms find themselves immersed, it is likely that a change in the initial external circumstances may lead to a certain lack of organizational adjustment. In this situation, managers should consider the need to implement adjustment mechanisms. One such mechanism, product portfolio renewal, has proven to be a valid alternative to help them find their way in a changing environment.
Keywords: product portfolio renewal, dynamic capabilities, wine industry

Individuals who are unaware of the price do not derive more enjoyment from more expensive wine. In a sample of more than 6,000 blind tastings, we find that the correlation between price and overall rating is small and negative, suggesting that individuals on average enjoy more expensive wines slightly less. For individuals with wine training, however, we find indications of a positive relationship between price and enjoyment. Our results are robust to the inclusion of individual fixed effects, and are not driven by outliers: when omitting the top and bottom deciles of the price distribution, our qualitative results are strengthened, and the statistical significance is improved further. Our results indicate that both the prices of wines and wine recommendations by experts may be poor guides for non-expert wine consumers.

A hedonic price function for Argentinean wines in the U.S market is estimated in order to evaluate the effect of the most important attributes of wine on price. Results show that labeling practices and the choice of the right wine quality attributes are far more influential on price than expert panel opinions or oenological wine improvements such as aging.

As the sun began to set over the water, Jim Fetzer sipped a glass of his Kathleen’s Vineyards Sauvignon Blanc 2005. The wine was one the first vintages of his newly established Ceago winery, located on the shores of Clear Lake in Lake County, California. While drinking in the breathtaking view, Jim was also enjoying the wine. The wines rich aromas of juicy apricot and peach were coupled with wonderfully light undertones of vanilla oak spice. He was very proud of the wine’s recent recognition in the winemaking world. However, Jim’s appreciation for the wine went beyond the taste. Wine production at Ceago was executed with great care and respect for the environment. Ceago Vinegarden was a certified biodynamic agricultural enterprise. Farms and vineyards that are certified biodynamic follow strict guidelines to ensure the sustainability of their growing and production practices.
Jim was a passionate advocate for the environment. He spent all his life making wine and promoting sustainable wine practices. Though he was convinced that sustainable practices produce better quality wine, he was not sure how to communicate his passion to his customers. Jim recently reviewed the results of a survey on wine customers’ perceptions of organic and biodynamic wines. Unfortunately, the survey revealed that few customers understood the true meaning behind organic and biodynamic eco-labels. Was communication through eco-labeling the best strategy? Also, in an increasingly competitive industry, was there any room for a differentiation strategy based on sustainable wine practices? Jim was also contemplating expansion of his Vinegarden into an agri-tourism venture, where he could invite people to his vineyard and communicate the magic and the benefits of sustainable farming. Would expanding the business to include agri-tourism help Jim to promote biodynamic wine making and Ceago’s mission?

Eco-labeling signals that a product has been eco-certified. While there is increasing use of ecolabeling practices, there is still little understanding of the conditions under which eco-labels can command price premiums. In this paper, we argue that the certification of environmental practices by a third party should be analyzed as a strategy distinct from although related to the advertisement of the eco-certification through a label posted on the product. By assessing ecolabeling and eco-certification strategies separately, we are able to identify benefits associated with the certification process independently from those associated with the actual label. More specifically, we argue in the context of the wine industry that eco-certification can provide benefits, such as improved reputation in the industry or increased product quality, which can lead to a price premium without the need to use the eco-label. We estimate this price premium of wine due to the eco-certification of grapes using 13,400 observations of wine price, quality rating, varietals, vintage, and number of bottles produced, for the period 1998-2005. Overall, certifying wine increases the price by 13%, yet including an eco-label reduces the price by 20%. This result
confirms the negative connotation associated by consumers with organic wine. The price premium of this luxury good due to certification acts independently from its label, a confounding result not previously demonstrated by related literature.

Econometric demand and supply models of agricultural commodities and crops have been around for a long time with extensive research and adaptations being made in the grain and livestock sectors. This much attention has, however, not been afforded to long term commodities. This paper presents a partial equilibrium framework for modelling long term commodities using the South African wine industry as an example. The model structure and important assumptions are presented, after which the usefulness of the model is tested in the form of baseline projections and the analysis of a typical “what if” question. The wine model presented in this paper is housed and maintained in the Bureau for Food and Agricultural Policy (BFAP) at the Department of Agriculture, Western Cape and the Universities of Pretoria and Stellenbosch.

For repeat transactions data from monthly auction hammer prices, we analyze the level and quality of Bordeaux wine returns using the Fama-French Three-Factor Model and the Capital Asset Pricing Model. Returns average up to 0.75% per month above those predicted by these models. Further, investment grade wines benefit from low exposure to market risk factors, thus offering a valuable dimension of portfolio diversification. These findings are consistent with simple theoretical considerations and support a documented growing interest in wine investments.

We propose a structural empirical approach a la Levinsohn and Petrin (2003) to disentangle the effect of experts' grades from the effect of unobserved quality on the pricing of experience goods. Using a panel data set of 108 châteaux selling wine on the Bordeaux "en primeur" market, we provide some empirical validation for the theoretical result that the price set by wine producers is used as a signal for wine quality. We confirm that experts' grades affect producers' choice of "en primeur" price above the effect of unobserved wine quality. Our empirical results also show that failing to control for endogeneity caused by the omission of unobserved quality leads to over-estimate the influence of experts' grades on the "primeur" price.

Climate change is altering a wide range of human activities, including wine making. While wine may appear to be one of the most natural alcoholic beverages, it is not without carbon inputs and emissions, which contribute to the very change in climate that is altering both wine and wine making. In this paper, we use a carbon life cycle analysis to develop a model for quantifying carbon inputs in a bottle of wine. Current regulatory arrangements do not capture the carbon costs of wine effectively since most costs are externalized. We conclude with estimates of the cost of carbon under various regulatory regimes, which suggest how wine producers and consumers can reduce the carbon footprint of wine.

Globalization and the expansion of world wine trade have caused a wine boom that together with agricultural subsidies have made fluctuations in wine inventories a more critical issue. In the case of domestic and international wine markets, little is known about intertemporal inventory adjustments and how they relate to prices. We investigate possible dynamic relations between these variables in a time series context, so as to better understand how wine producers and traders can face growing price and financial volatility. Countries for whom meaningful data series could be constructed include: Argentina, Australia, France, Germany, Italy, Spain and the United States. The study begins by examining the empirical evidence on inventories in these markets and their relation to prices. Stationarity tests are first performed to assess likely trends in the wine inventory and price variables. Cointegration analysis follows to analyze the stationary relationships between these variables. To explain the dynamics of this relationship, vector autoregressions have been estimated and impulse functions are computed to measure possible delays between variable reactions.

Wine production in Germany has a tradition of more than 200 years in each of the 13 German quality wine-growing regions. Even today small grape growers dominate the industry. As a result, most of the viticulturists are members of cooperatives. Our observation that grape growers still turn to wine co-ops, and hence, the increase in co-op members and vineyards, might indicate that the wine co-ops are successful. Thus, the aim of our paper is two-fold. First, we analyze the structure of this complex sector and the managerial construct strategic member groups. Second, we empirically test whether the formation of strategic groups is a driver of cooperative success.

This article presents three arguments as to why the value of wine as an investment good has typically been understated and argues that wine investment in the UK and Australia represents a value proposition. It is argued that general all vintage wine indexes understate the return the typical investor receives; that comparisons using pre-tax returns overstate the value of standard financial assets relative to wine; and that wine investment provides value in terms of allowing portfolio risk to be reduced.

Weather derivatives represent a relatively new form of financial security with payoffs contingent on weather indices based on climatic factors. These contracts provide firms with the ability to manage unforeseen climatic changes that create risk in terms of the variability of earnings and costs. The potential for their use in a wide variety of industries is great as it has been estimated that approximately one-seventh of the industrialized economy is weather sensitive (Hanley, 1999). A recent survey for example, conducted by the U.S. Department of Commerce in 2004 estimates that approximately 30% of the total GDP of the United States is exposed to some type and degree of weather risk (Finnegan, 2005). A brief listing of affected industries includes not only agriculture and utilities but also the entertainment industry, beverage, construction and apparel industries.

Weather derivatives include various instruments such as swaps, options and option collars with payoffs dependent upon a wide variety of underlying weather –related variables such as average temperature, heating and cooling degree days, maximum or minimum temperatures, precipitation, humidity, sunshine and even temperature forecasts. Temperature related contracts are however the most prevalent, accounting for 80% of all transactions (Cao and Wei, 2004) with standardized contracts trading on the Chicago Mercantile Exchange for major U.S. cities.

As a result the interest in and use of weather derivatives is growing at a phenomenal rate from an estimated $500 million in notional value in 1998 (Finnegan 2005) to $45.2 billion in March 2006 based upon a recent survey of the Weather Risk Management Association. Much of this growth has occurred in the last few years and recent statistics indicate that the notional value of trading in standardized contracts on the Chicago Mercantile Exchange rose from 2.2 billion in 2004 to 22 billion in 2005. The recent growth in weather derivative arrangements is also being fueled by hedge funds which are beginning to add weather contracts in order to further diversify their investments. (Ceniceros, 2006)

Although the use of weather derivatives is potentially widespread it would appear that firms in many sectors of the economy have not yet established a hedging policy or even ascertained their full exposure to weather risk. Their potential use in the viticulture industry for example has seen limited applications, mainly involving the mitigation of risk in retail sales, due to climate conditions. The use of these instruments in hedging quality and quantity in grape growing has yet to be seen on a widespread basis. Although the lack of liquidity for specialized weather derivative contracts appears to be the main reason for their lack of use, other issues include uncertainties as to the pricing of these securities. In addition, the availability of useful historical weather data and the definition of an appropriate underlying variable that is the source of uncertainty, also adds to their complexity.

The Niagara region of Ontario, Canada represents the largest producer of icewine in the world with icewine significantly contributing to the revenues of many of the over 85 wineries in the region. Its production however is quite sensitive to the occurrence of relatively low temperatures during the winter months, when the grapes employed for icewine are harvested in a frozen state. Cyr and Kusy (2005) explored the potential use of weather derivatives for hedging the risks inherent in icewine production in the Niagara region of Ontario, Canada due to temperature fluctuations. In particular their study attempted to model a temperature variable based on daily observations and subsequent prices of options that could be employed for hedging icewine production. Data limitations and the development of an optimal forecasting model however, mitigated these efforts. Their findings are not unlike previous studies in the application of weather derivatives where the lack of appropriate weather data specific to a region often limits their use.

Cyr and Kusy (2006) later identified a model for estimating optimal icewine hours based upon daily observed temperature variables with fairly high explanatory power. The use of daily temperature variables that are easily measured and observed by both parties to a weather derivatives contract is a critical element to their successful use and aid in the contract’s liquidity. Their model was based upon a three year period for which hourly temperature data was available at a critical weather station.

In the current study we employ the model identified in Cyr and Kusy (2006) in order to estimate optimal icewine production hours for the period of 1966 through 2006. Given the time series of estimated icewine hours we then explore its behavior in order to identify a stochastic process. Using Monte Carlo simulation we then estimate the price of put options based on cumulative optimal icewine hours under varying assumptions with regards to the stochastic process.

Section II provides a brief overview of the history and use of weather derivatives and their basic structure. Section III describes the process of icewine production in Canada, the risks inherent in the endeavor and the potential use of weather derivatives to mitigate those risks. In section IV we attempt to define and identify a stochastic process for estimated icewine production hours based upon daily observed temperature variables and in section V we estimate put option values based upon varying assumptions for the stochastic process.
Finally section VI summarizes the paper.

Bordeaux is a region of France and red Bordeaux wines have been produced in the same place, and in much the same way, for hundreds of years. Yet, there are differences in quality and price from year to year that can sometimes be quite large. Until very recently, these quality differences have been considered a great mystery. In this paper I show that the factors that affect fluctuations in wine vintage quality can be explained in a simple quantitative way. In short, I show that a simple statistical analysis predicts the quality of a vintage, and hence its price, from the weather during its growing season. Along the way, I show how the aging of wine affects its price, and under what circumstances it pays to buy wines before they are at their best for drinking. Since this procedure for predicting wine quality has now been in use for over a decade, I also provide an appraisal of its successes (and failures), and a discussion of the role this information has played in the evolution of the wine trade. When a red Bordeaux wine is young it is astringent and most people will find it unpleasant to drink. As a wine ages it loses its astringency. Because Bordeaux wines taste better when they are older, there is an obvious incentive to store them until they have come of age. As a result, there is an active market for both younger and older wines. Traditionally, what has not been so obvious is exactly how good a wine will be when it matures. This ambiguity leaves room for speculation, and as a result, the price of the wine when it is first offered in its youth will often not match the price of the wine when it matures. The goal in this paper is to study how the price of mature wines may be predicted from data available when the grapes are picked, and then to explore the effect that this has on the initial and final prices of the wines.

This article analyses the way some 6,000 European wine consumers, both connoisseurs and non-connoisseurs, use a set of available signals (price, umbrella branding, goodwill, past consumption) to assess the quality of Bordeaux wines where price is the main source of information on quality. Connoisseurs use this signal less intensively than nonconnoisseurs. Price represents a substitute for umbrella branding where consumers are not aware of who is beneath this umbrella, and where this signal is thus of no help to them. This could explain why such wines tend nowadays to lose market share in favor of branded wines that are easier to evaluate.

We study whether quality assessments made by wine experts and by consumers (based on prices obtained at auction between 1980 and 1992), can be explained by variables describing endowments (land characteristics, exposures of vineyards) and technologies (from grape varieties and picking, to bottled wines). However, since technological choices are likely to depend on endowments, the effects can only be identified using an instrumental variables approach. We show that technological choices affect quality much more than natural endowments, the effect of which is negligible.

The purpose of this paper is to measure the impact of Robert Parker’s oenological grades on Bordeaux wine prices. We study their impact on the so-called en primeur wine prices, i.e., the prices determined by the chaˆteau owners when the wines are still extremely young. The Parker grades are usually published in the spring of each year, before the wine prices are established. However, the wine grades attributed in 2003 have been published much later, in the autumn, after the determination of the prices. This unusual reversal is exploited to estimate a Parker effect. We find that, on average, the effect is equal to 2.80 euros per bottle of wine. We also estimate grade-specific effects, and use these estimates to predict what the prices would have been had Parker attended the spring tasting in 2003.