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Adding value to spanish exports


22 DE febrero DE 2016

Wine re-evaluates its strategy

  • Planting areas, yields, designations of origin and quality—the main issues being debated
  • The sector recognizes that current success in production and exports also bear some serious black holes due to the massive supply of bulk wine, low prices and the slide in domestic demand

Vidal Maté. @trigolimpio_VM

With a vine-growing area of almost a million hectares nationwide, more than 4,000 wineries and 300,000 winemakers, Spain is a global leader in terms of the area dedicated to wine as well as exports, with more than 23 million hectoliters, and is one of the three main producers in the EU, together with Italy and France. Wine is a key sector in the agricultural and food industries. However, the big numbers, which on paper reflect success, actually hide some black holes and doubts which are currently fueling debate and controversy on different fronts vis-à-vis the sector's policy. These debates touch on issues including the ideal growing areas and yields required to operate profitably, the need for the policy on quality wines in designations of origin to be more far-reaching so as to strengthen the excellent diversity of wines available, and export strategies. In short, efforts to evaluate and provide internal self-criticism in search of a new model for the sector to address the future, focusing on competitiveness and quality in globalized markets and with the greatest returns.  

The discussion on the future of the wine industry included establishing a breakeven point in the vine-planting areas as a function of the forecast for demand.

Based on current EU provisions, at the end of January the Ministry of Agriculture established the volume of new authorizations for vine planting in 2016 which replaced growing rights that had been in force for those purposes in previous years, giving rise to notable buying and selling activity. According to these guidelines, growth in each country's total planted area will be limited each year to 1% of the existing areas at July 2015. Other rival countries in the EU wine market, such as Italy and France, established an increase of 1%.

Initially, the Ministry of Agriculture established an increase of 0.6%, but eventually reduced it to 0.43%, equivalent to 4,173 hectares, responding to the demands of agricultural organizations and cooperatives which lobbied for an increase of close to 0%. However, this volume was in addition to the more than 68,000 hectares held by the sector which already has planting rights that may be exercised in the next three years, with the result that vine-planting areas could in fact be much larger.

In the agriculture sector, organizations such as the UPA rejected the increase in authorizations, considering the low prices received for grapes by farmers in the leading production areas due to low sales prices outside Spain which aim to offload surplus wine and to the gradual decline in domestic demand for wine. Among cooperatives, industry leader Ángel Villafranca defended an increase of just 0.25% so as not to expand potential production. However, in his opinion, the sector's main problem wasn't the risk of more planting areas or increased production due to high yields but, rather, the search for markets and payment for quality grapes.

In response to demands by some designations of origin, Navarre will only authorize planting on 56 hectares, Ribera del Duero 314 and Rioja 387. Moreover, these DOs' regulatory councils may also place restrictions on replanting authorizations and on the conversion of planting rights.

In contrast, parts of the sector defended freedom in planting from the perspective of competitiveness and with a view to maintaining the possibility that wines in a specific area be able to increase production if they have the capacity and if there's demand in the market.

In short, in the same market there are two different ways of looking at the future of the sector—a space shared by quality wines with small production and others with large yields which lead to surplus and low prices and where the debate will focus on whether or not to control planting areas, yields, or both at the same time.

One of the EU's main objectives in recent years has been to maintain wine's production potential. To that end, several grubbing-up and restructuring schemes have been rolled out since 2008 with considerable EU aid, of which Spain was one of the main recipients. Brussels subsidized a grubbing-up scheme for 175,000 hectares to reduce production potential, of which 95,000 corresponded to requests from Spanish winemakers. In accordance with the restructuring and reconversion programs, Spain has taken action on around 300,000 hectares since 2008 with 1.700 billion euros in aid. These policies reduced the planting area, from 1,150,000 to 958,000 hectares currently.  However, the European Commission's plan backfired because instead of reducing production, it increased in Spain, from an average of 37 to 43 million hectoliters, improving structures, with new trellis growing systems and high-yield varieties, intensifying the existence of both "worlds" in the same sector.

A second debate revolves around yields. Currently, while several regulatory councils maintain their policies of limiting production per hectare to protect their markets and quality, in most areas there's a policy of freedom, or high yields, such as in free areas in all types of DOs, where the wineries (most of which are cooperatives) do not require price policies linked to quality.

Against this backdrop, it's somewhat surprising that the discussion has focused on a fear of overproduction and low prices in new vine-planting authorizations, and yet there have been no recent efforts to implement mechanisms to limit the yields that gave rise to the price crisis in which a large number of winemakers have been immersed for the last few seasons in the leading production areas.

In contrast with the sector's image as having successful production and its leading export position with 23 million hectoliters, domestic demand for wine has been sliding every day, to just 10 million hectoliters, and year after year it only surpasses sales internationally by lowering the price of bulk wines, which account for more than 50% of all sales.

According to sector analysts, such as Rafael del Rey, who heads the Spanish Observatory of Wine Markets, in terms of production, and debates about vine-planting areas and yields aside, every winemaker should have a clear idea of his or her objective when growing grapes, he or she should know if the goal is to produce high or low quality wines, for the product to be used to make must or simply to make alcohol. The gradual change in the current model dominated by cheap bulk wines is a pressing objective, although it's a change in strategy that can't be achieved from one day to the next.

Together with growing areas and yields, there has also been a debate in recent weeks on the policy and functioning of regulatory councils, which have been accused of having simply implemented origin control policies but not promoting other aspects to distinguish quality.

This issue is nothing new, although it materialized in Rioja following the decision by Artadi bodega, in Alava, to withdraw from the regulatory council as it felt that the strategy implemented by the large wineries in the DO diverged from the policy on quality followed by smaller wineries in the area and that there should be a policy focused on greater differentiation. That was a method initially promoted by a winery and which later received political support in the Basque Country. It's a bad strategy when the only talking point is quality.

It's likely that some regulatory councils haven't or aren't operating with a clear focus on greater differentiation of quality. But the truth of the matter is that if a winery believes it can market its product as having greater quality regardless of the image of these large groups, the current regulation allows it to aspire to different classifications as estate wines without having to point the finger at others as producers of poor quality wine.

All of this confirms that the wine industry—with all of its debates—is very much alive.

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