February 27, 2014 by Roger McCain
My colleagues Anne Duchene and Marco Airaudo were recently interviewed about the surging demand for wine on the part of the rising middle class in China and other emerging countries, and they predicted that demand growth will outstrip production. They reasoned that land suitable for wine grapes is limited in supply (drawing on economic ideas from the Classical Political economists Malthus and Ricardo), so the quantity supplied can only be increased at rising cost. The idea is that increasing production of wine would have to take place on land that is less suitable for wine production, with higher costs and perhaps decreasing quality as the result. But I think they may have underestimated the power of modern agriculture to increase supply, and overlooked some important facts about the market for wine.
Throughout the 20th century, in the relatively developed countries, agricultural productivity has commonly increased more rapidly than demand, depressing prices to such an extent that governments have intervened, limiting production or buying “surplus” production to support the prices. Wine is no exception. In 2005, the European Union estimated surplus wine production at 15 million hectoliters. (A hectoliter is approximately 26 gallons.) As I understand it, busses in Stockholm have been fueled with ethanol made from Spanish wine purchased by the Spanish government in order to support the price of wine, and France too has used ethanol made from “surplus” wine as automobile fuel.
France and Italy are countries in which wine has been made for thousands of years, as are Spain and several other European countries. However, in the last century and a half, very extensive new regions have begun to produce wine, including California, South Africa, Australia, New Zealand, Argentina, Chile, and the American states of Oregon, Washington, and New Jersey (more about New Jersey later). Some of these countries also have “surplus production.” In 2009, Australia had 100 million cases in “surplus.” Nor is production from these newer regions necessarily of lower quality. In 1976, a blind taste test was organized by a wine merchant who specialized in French wine and wanted to prove that it is of superior quality. This was the famous “Judgment of Paris.” The taste testers rated the California wines systematically better than the French wines. Further, still other new regions are being brought into wine production. In North Carolina and Kentucky, where tobacco growing is no longer profitable, authorities are encouraging a shift to wine grapes. Before Prohibition, Missouri was our second most important grape-growing state, after California.
It is likely that the early production in even newer regions like New Jersey will be of poor quality, but experience proves that quality, like quantity, can steadily be improved. In the Judgment of Princeton, 2012 (another blind taste test), New Jersey wines were rated almost as good as French wines, and at least one expert says that the New Jersey Outer Coastal Plain is comparable to Bordeaux as a potential wine region.
It is still true that wines from southern Europe, and especially from France, have a reputation as luxury products. The newly-wealthy buyers of wines and vineyards may choose them for that reason. All in all, if the new luxury seekers buy up all the French wine, the French may well shift from Cotes du Rhone to Goats Do Roam, a very nice South African label — or perhaps even to Colonel Sanders Pinot Noir.
Roger McCain is a professor of economics at Drexel University. He can be contacted at firstname.lastname@example.org.