News Analysis: Flowing over

Tired of pouring good wine down the drain, the European Commission has decided to cut subsidies for crisis distillation. Fionnuala Synnott asks whether this controversial move will help solve the surplus crisis

It was apparent to anyone with even a passing interest in wine that the situation could not go on. With no sign of the infamous European wine lakes drying up, and more and more money spent on crisis distillation, something had to be done. The European Commission, keen to resolve a crisis that cost it over E1.2 billion last year in subsidies, has finally taken the bull by the horns and has proposed a radical overhaul of the wine sector.

The Commission’s proposals are part of a strategy to make the European wine industry better able to compete with New World countries such as Australia. (In the past 15 years, wine exports from the EU have grown five times while Australian exports have increased nineteen-fold in the same period). The commissioner for agriculture and rural development, Mariann Fischer Boel, explains: “We must increase the competitiveness of the EU’s wine producers, strengthen the reputation of EU quality wine as the best in the world, recover old markets and win new ones. We must create a wine regime that ensures balance between supply and demand, and we must create a system that preserves the best traditions of EU wine production.”

One of the main targets for reform is crisis distillation – the controversial practice of distilling surplus wine into ethanol. The Commission, which is keen to use its budget more efficiently, plans to stop subsidising this practice and instead grant member states individual budgets or “envelopes” to allocate as they see fit. How much money these envelopes will contain is unclear, but the total amount is expected to be lower than the E180 million spent on distillation last year.

Crisis distillation, originally intended as an emergency measure, is now commonplace in Europe. In fact, one in six bottles of wine – both table and higher quality wine – is subject to crisis distillation. This year alone, The Wine Management Committee agreed that France could distil a maximum of 3m hectolitres of wine and gave Italy permission to do the same with 2.6m hl of wine, costing the EU E131m. Similar demands from Spain and Greece also led to EU expenditure of E22.2m earlier on this year.

Temporary relief
Fischer Boel says, “Once again we are spending large amounts of money on getting rid of surplus wine, when we should be spending it on improving our competitiveness. Crisis distillation is becoming a depressingly regular feature of
our common market organisation for wine. While it offers temporary assistance to producers, it does not deal with the core of the problem – that Europe is producing too much wine for which there is no market”.

Agricultural subsidies have always been controversial and are often criticised for being protectionist and warping global markets. They also inspire resentment among members of other industries, who think it’s unfair that farmers are allowed to run unprofitable businesses while they have to fight to stay afloat in a competitive global economy.

Subsidies granted under the Common Agricultural Policy (CAP) have also been blamed for encouraging overproduction and export dumping, driving down world prices. However, some farmers (not all are against subsidies) maintain that their industry needs subsidies to survive. The argument that the EU subsidises the production of agricultural foodstuffs because they are indispensable does not apply to wine, thus making the topic of wine industry subsidies even more controversial.

Some argue that severing the link between viticulture and subsidies is the only way to make the European wine industry compete against New World wine producers. This argument is based on the premise that once wine producers are no longer subsidised by European taxpayers, they will be forced to either produce quality, competitively priced wine or turn their hands to something else.

The end of subsidies is bound to have an impact on the dynamics of the wine industry and it seems reasonable to expect a certain amount of consolidation among wine producers. However, there is no indication that cutting subsidies alone will lead to the evaporation of the European wine lakes. The current oversupply cannot be blamed on EU subsidies alone. The global wine industry has to take responsibility for failing to understand the market for their products and not adapting to market changes quickly enough. Even Australia suffers from surplus problems (albeit smaller ones) and is also considering using crisis distillation to help combat the wine surplus and removing less popular varietals as part of a “vine retirement scheme”.

Additional measures
The wine trade, like all industries, is subject to supply and demand. Even if the Commission stops subsidising what it refers to as “non-effective intervention measures”, there is no reason to believe that this alone will reduce the wine surplus in Europe. This explains why the Commission has included other proposals such as grubbing-up incentives to encourage the more uncompetitive producers to leave the sector. If the proposals are accepted, member states could see their 3.4m hectares of vineyards cut by as much as 400,000ha over a five-year period.

The EU has also suggested implementing a ban on using sugar to boost the alcohol content of low-quality wine and has proposed using modern winemaking short cuts including the use of wood chips to flavour wine. Perhaps even  more radically, in an attempt to emulate the simple labels of the New World, it has also proposed reclassifying European wine into
two basic categories: those with a geographic indication and those without.

All of the proposals will be put before the European Parliament in January of next year and, if approved, will come into force within the next three years. © db August 2006

INSIDER OPINION

Roland Feredj, director general, CIVB, France
It is unfair to speak of an EU subsidy culture when criticising the CAP. If agriculture represents 40% of the European budget it is only because the EU budget, at around 1% of the GDP of each member state, is ridiculously small. One should be wary of oversimplified arguments, which maintain that stopping all subsidies will be good for the consumer.

When it comes to dealing with the wine industry in a global surplus market, it is obvious that the EU’s financing of crisis distillation may lead to quota politics in order to avoid market abuses. In this case the best regions of production across Europe, such as Bordeaux, Burgundy, Champagne, Rioja and Chianti, will be penalised. Personally, I find the EU’s proposals very interesting as they open up development possibilities for dynamic regions such as ours. However, we will have to wait for the French elections before these proposals can be analysed positively.

Ambrogio Folonari, president, Progetto Vino, Italy
The oversupply in the main European countries, particularly in Italy and France, existed before the constitution of the EEC when individual governments had already created some tools in order to help winemakers overcome difficulties linked to seasonality and an unsteady economic situation.

When the EEC was born, subsidies became homogeneous and well-coordinated. They helped producers face decreasing production, and falling consumption. These subsidies go some way to explaining why those who grow vines haven’t developed a new mentality vis-à-vis a changing market. In this way they didn’t realise the renewed potential for wine.

The vine-growers’ answer to the new OCM proposal can’t be a simple “no”. The industry needs a planning proposal so that the necessary subsidies remain alive, even if only to fund studies aimed at finding definitive solutions regarding wine oversupply and falling market consumption. On the other hand, it is the duty of the EU institutions to help producers build confidence and enthusiasm, which will allow them to innovate.

Jerry Lockspeiser, managing director, Bottle Green, UK
Subsidies definitely allow supply to be higher than it would be if the market determined it alone. However, subsidies referred to are principally those in EU countries – Spain, Italy and France – where the crisis distillation system allows producers to sell wine they would  otherwise have no market for, albeit at a low cost. But even if we remove the amount of wine currently covered by crisis distillation, there will still be a surplus of good quality wine. The excess of Australian Cabernet, for example, has nothing to do with EU subsidies. The general oversupply is due to a combination of factors including specific country incentives to increase plantings of vines such as the tax breaks given by the Australian Government in the 1990s.

The long lead time between planting new quality vineyards and the product being ready to market is also to blame for creating a gap between estimated sales and a changed market demand by the time the product is sold.

Better technology and winemaking methods around the globe also mean that there is less poor quality wine – the improved quality has increased the sellable/exportable proportion of the world’s supply.

The surplus is also due to very poor business planning by many wineries – there are thousands of examples of wineries that started with no understanding of who the wine would be sold to, and a reliance on assuming it would somehow come good. Government regulation has also led to a mindset that would never consider digging up uneconomic vines – as in French AOC areas for example.

© db August 2006