The Economics of Wine – Introduction

To coincide with the 150th anniversary of the famous Bordeaux Wine Classification of 1855, the Centre for Policy Evaluation at the University of Nottingham sponsored a special session at the 2005 RES Annual Conference on the economics of wine. The 1855 classification was completed as part of the Paris Exhibition of the same year as a temporary means to determine which Bordeaux wines would be exhibited. The classification took hold, and is still in use today. In celebration, this Feature explores how economics can add to an understanding of wine production and wine markets.     

Heterogeneity and fine wine prices: application of the quantile regression approach

ABSTRACT

This study addresses the price heterogeneity of the five first growths of Bordeaux. We apply the quantile regression (QR) approach with market segmentation based on wine bottle price quantiles. We compute the hedonic price of wine attributes for various price segments in the market. This approach is applied to a major dataset comprising approximately 50,000 transactions over the 2003–2017 period. The findings indicate that the relative hedonic prices of several wine attributes differ significantly among deciles. The implications of our results are manifold. Vintage and Parker grades have a strong impact on the variation in wine prices, and there is a hierarchy among the five first growths of Bordeaux. There is also a premium commanded by the reputation and experience of an auction house. Since the financial crisis of 2012–2013, investors have considered that the five first growths are overrated, save for the most expensive wines; for those most expensive ones, investors prefer scarcity to liquidity. These results are of import to several actors in the fine wine market: investors, for example, could use the findings herein to better diversify their wine portfolio, while auction houses could better anticipate their future sales based on consumers’ expectation.     

Forecasting Bordeaux wine prices using state-space methods

Generic Bordeaux red wine (basic claret) can be regarded as being similar to an agricultural commodity. Production volumes are substantial, they are traded at high frequency and the quality of the product is relatively homogeneous. Unlike other commodities and the top-end wines (which represent only 3% of the traded volume), there is no futures market for generic Bordeaux wine. Reliable forecasts of prices can to large extent replace this information deficiency and improve the functioning of the market. We use state-space methods with monthly data to obtain a univariate forecasting model for the average price. The estimates highlight the stochastic trend and the seasonality present in the evolution of the price over the period 1999 to 2016. The model predicts the path of wine prices out of sample reasonably well, suggesting that this approach is useful for making reasonably accurate forecasts of future price movements.     

Predicting the Quality of an Unborn Grange*

In a recent paper Ashenfelter, Ashmore and Lalonde found they could explain the variation in the price (and quality) of Bordeaux vintages by a combination of age, temperature and rainfall. The same ideas are applied here to Grange Hermitage, Australia's premier wine. Weather variation is less important than in Bordeaux. However, some remarkably robust results are obtained: a ‘quality index’ for Grange is derived, predictions about still unreleased vintages are made, the Australian regression coefficients work well in the Bordeaux equation, and issues relating to market efficiency in the pricing of young wines are examined     

Dynamics of fine wine and asset prices: evidence from short- and long-run co-movements

This article examines short- and long-term price linkages among the majority of fine wine and equity markets over the period of 2003 to 2012. We do not consider the price index (LIV-EX 100 or 500), as is typically undertaken in previous studies, but rather examine the auction price series of the world’s most traded wine-vintage pairs (5 Bordeaux first growth, 8 Bordeaux second growth, 5 Burgundy, 3 Rhone, 4 Italian, 5 Californian, 1 Australian and 1 Portuguese). A global equity index is also included using the Morgan Stanley Capital International World. Cointegration procedures, the Granger non-causality test, and ECM are used to analyse short- and long-run relationships among these markets. The results indicate a strong effect of financial markets on wine prices and short-term causality for certain wines. Moreover, the findings indicate short-run causality between the wines themselves, revealing a leader (exogenous) or follower (endogenous) status of certain fine wines in price dynamics, and also long-run causality for endogenous wines. This approach is relevant to portfolio diversification strategies and allows price movements to be anticipated more accurately than using an index approach.     

Do denominations of origin provide useful quality signals? The case of Bordeaux wines

This paper investigates whether the existing Denominations of Origin (DOs) provide useful quality signals for wine consumers. To test our conjecture that the large number of existing DOs is too many for the typical consumer, we investigate the patterns of co-movement among average monthly wholesale prices for red wines from the 11 main DOs in Bordeaux over 16 years, 1999–2014. Our results indicate that consumers substitute among these wines according to the similarity of semantic elements in the names of DOs on the labels, and not according to prices or terroir that could reflect intrinsic quality where the names as such cannot. This finding suggests that the current DOs are too numerous and complex to provide helpful quality signals to consumers. A substantial reduction of the number of DOs might be warranted to better address the broader informational issue in wine markets.     

Modelling prices and the reputation of individual named wines

This article develops empirical models to assess the relation between the reputation of an individual named wine and its price. Unrestricted and polynomial distributed lag models are used to assess the impact of past expert quality ratings on the prices of Australian premium wines. Results point to the practical unimportance of current wine quality scores impacting prices and suggest that quality score lag effects up to six years may be important. The largest individual lagged impact of quality on price is estimated to occur at approximately two years, and prices are estimated to increase by more than 10% over six years for a one-point quality score increase. A procedure for identifying potential wine price bargains based on a comparison of price predictions from estimated wine reputation and current quality measures is illustrated. The implications of the findings for wine producers are also discussed.     

An analysis of wine and food consumption dynamics in Japan using a vector error correction model

This article provides an analysis of long-term equilibrium relationships between wine and food-related consumptions in Japan through the vector error correction model. Utilizing longitudinal data from 1970 to 2009, the analysis suggests that wine consumptions and food-related consumptions are co-integrated. The investigation of orthogonal impulse response functions suggests that food-related items, such as bread, vegetables and eating out are positive factors for wine consumptions. With the expansion of wine consumption and diversification of food consumption patterns, wine is deemed to have gained its place in Japanese ordinary life, regardless of the general state of economy. The estimated results also provide a supporting evidence for previous cross-sectional study findings by others that wine consumers tend to have healthier diet. Despite the downward forecasts for economic performance and some food items, wine consumption is predicted to grow continuously.     

THE 2012 LAWRENCE R. KLEIN LECTURE: BUBBLES IN PRICES OF EXHAUSTIBLE RESOURCES*

This article proposes a test for the presence of a bubble in the price of an exhaustible resource. A bubble is accompanied by a rise in the storage‐to‐consumption ratio: Consumption peters out, and a fraction of the original stock is held forever. The test suggests there is a bubble in the price of oil and in the market for high‐end Bordeaux wines, but other explanations are also possible. A bubble reduces welfare regardless of whether there are other stores of value, particularly fiat money.     

RETURN TO WINE: A COMPARISON OF THE HEDONIC,REPEAT SALES AND HYBRID APPROACHES

Comparisons between the return to wine and standard financial assets are complicated in that the return to wine must be estimated from infrequent sales of heterogeneous wine brands. Wine returns can be estimated using several different methods, and here the performance of the hedonic model, repeat sales model, and hybrid model are compared using 14,102 auction sale observations for Australian wine over the period 1988 to 2000. The results show that the hybrid model provides the most efficient estimates, and that the repeat sales model provides significantly higher total return estimates than the other two models.     

Economic determinants of the consumption of alcoholic beverages in Canada: a panel data analysis

In this article, the economic determinants of the demand for three alcoholic beverages (wine, spirits, and beer) are investigated with a focus on the price, income and unemployment effects. The investigation is conducted within the fixed effects panel regression framework using a balanced panel for ten Canadian provinces spanning the years 1981–2004. The estimated own price elasticities indicate that increased government taxation is an effective tool for curtailing the consumption of spirits (at the expense of lower government tax revenue), but it is less effective for curtailing the consumption of wine or beer. The cross-price elasticity estimates reveal that taxing beer or spirits may not be an effective tool for encouraging consumption switch from these alcoholic beverages to wine in light of wine’s greater health benefits. Income emerges as an important determinant of the consumption of both wine and spirits but not of beer, whereas unemployment emerges as an important determinant of the consumption of beer but not of wine or spirits. With respect to unemployment, we find no support for the addiction hypothesis in the case of wine and spirits and strong support for the severe budget constraint hypothesis in the case of beer.     

Trade liberalization in the presence of domestic regulations: public policies applied to EU and U.S. wine markets

Wine is the highest valued product in the agricultural, food, and beverage sector traded between the United States and the European Union (EU) and wine faces a range of tariffs that are differentiated by country and product category. In addition, the production of wine grapes is heavily regulated within the EU and there are complicated state-level policies in the United States designed to limit the retail availability of wine. There continues to be economic and political pressure for reform to the tariffs between the United States and the EU, and to the domestic regulations in each region. We carefully develop parameters to characterize the effects of tariffs and domestic regulations that affect production and consumption of wine in the two regions. Simulation results show that reductions in tariffs would have relatively small effects in EU and U.S. wine markets, whereas reductions in EU domestic policies that affect wine grape production would have much larger trade and welfare implications.     

An analysis of EU wine trade: A gravity model approach

In this research study, a gravity model approach was used in order to analyze the main factors affecting the trade flows of wine in the EU. The empirical model was applied using data for the first twelve EU countries for the period 1989–97. It has been clearly shown in the empirical literature that gravity models can be successfully applied to a single commodity market. The present study utilized pooled cross-sectional and time series data in a one-way fixed effects model that accounted for country-pair heterogeneity. The results revealed that wine trade was positively influenced by an increase in GDP per capita, since greater income promotes trade. The remoteness of one country from another influenced exports positively and imports negatively, and the quantities traded did not prove to be very sensitive to wine prices. The depreciation of EU currencies and the high production of wine in the EU increased exports and reduced imports, while EU integration enhanced trade among members.     

Volatility transmission to the fine wine market

The goal of this paper is to explore volatility transmission from various markets to the fine wine market. Knowledge of these channels for transmitting volatility to the wine market allows practitioners to anticipate the future volatility and the consequences of a shock on the wine market, to develop their investment strategy and diversify their risk. We especially analyse the impact of U.S. markets (i.e. art, commodities, credit, financial and real estate) during the 2007–2017 period. We shed additional light on how the volatility of the fine wine market varies during an extended period including a financial crisis. Our results indicate that, in the short-term, volatility is transmitted with a negative effect through the financial and commodity markets and with a positive effect through the art, residential real estate, and credit default markets. In the long-term, the wine market is impacted by all other markets. We show that correlations are time-varying.     

Analysing Firm‐level Price Effects for Differentiated Products: The Case of Australian Wine Producers

The paper discusses and illustrates estimation methods for identifying and modelling the influence of producers on the prices for a differentiated product. A two‐step fixed effects approach is contrasted to the random effects specification. The techniques are employed to analyse prices for over 260 Australian premium wine producers. The fixed effects specification is preferred given significant correlation between wine attributes and random producer effects. The estimation of fixed producer price effects identifies statistically significant price premiums and discounts, which average 15%. Fixed producer price effects are estimated to depend on the quality reputation of the producer, its level of experience, producer size and the use of multibrands by conglomerates. In part, results indicate that price discounts are associated with producers who have low‐quality reputations, are small and recently established.     

通货膨胀对我国酿酒行业盈利能力影响的实证研究

2010年以来通货膨胀压力逐渐显现，作为传统意义上的抗通胀行业，研究酿酒行业的盈利变化及影响因素的研究显得较为重要。本文使用2009年一2012年的样本数据，采用聚类分析研究行业总体情况并且给出了相关的评价，同时，文章使用因子分析和多元回归分析相结合的方法来研究酿酒行业在通货膨胀背景下的盈利能力情况并找出主要的影响因素。实证结果表明酿酒行业的利润与通货膨胀成正相关，与居民消费能力情况也有着正相关性，并且发现其盈利能力主要受到了居民消费能力的影响。     

Impact of the GST and Wine Tax Reform on Australia’s Wine Industry: A CGE Analysis

This study analyses the impacts of the Goods and Services Tax (GST) introduced on 1 July 2000, and the associated wine tax reform, on both the premium and non‐premium segments of the grape and wine industry using a computable general equilibrium (CGE) model of the Australian economy. Through input cost reductions, the grape and wine industry is projected to gain from the GST tax package. Thus the industry can still gain even though wine consumption is taxed a little more heavily after than before the introduction of the GST. This is particularly so for the export‐oriented premium wine segment. A switch from the current ad valorem to a revenue‐neutral volumetric tax on wine under the GST is shown also to favour the premium segment of the industry, but at the expense of the non‐premium segment.     

Behavioural heterogeneity in wine investments

We introduce a heterogeneous agent model to explain the dynamics of fine wine investments. Our results show evidence of the existence of both fundamentalists – those who trade on mean-reversion towards a fair value – and chartists – those who extrapolate recently observed price trends – in the wine market. Moreover, we document that market participants switch between the two trading strategies, allocating more weight to the strategy that has been the most accurate in forecasting wine index values in the recent past. This switching behaviour can explain the large variations in index values (bubbles and crashes) that are observed in the fine wine market.     

The Demand for Wine in Australia, 1955–1977*

The consumption of wine in Australia has risen markedly since the mid-1960s, from an apparent consumption per capita of 5·53 litres in 1965 to 13·04 litres in 1977. A number of factors (both social and economic) have contributed to this rapid growth in consumption which, despite the increases which have occurred, is still low by European standards. This paper presents the results of a study designed to quantify these factors and to establish their relative importance in explaining the demand for wine in Australia since 1955.     

以生物制药和制酒为主导产业的生态工业园建设模式——以吉林省通化市张家生态工业园为例

以吉林省通化张家生态工业园为例,探讨了在依托自然资源优势和自然环境优势的基础上,规划建设以医药和制酒为主导产业的生态工业园的关键技术,应该包括景观设计与工业组织形态设计两方面,才能使其成为生态环境优美和谐、经济模式循环高效的现代生态工业园。景观设计应充分尊重当地自然环境特点,建立景观安全格局,通过合理的功能分区及交通模式设计,使规划后的生态工业园能将工作和生活场所交融于自然之中,并能实现高效协调运作;工业组织形态设计主要是仿照自然界无废或少废的循环模式,根据制药业和制酒业的物质循环特点,引进养殖业和食品加工业,各产业间通过废物及副产品的交换,以及能量、水资源、信息的集成,组成高效的工业生态系统。