Sunday, October 14, 2012

Argentina: Why Malbec doesn't Flood the US

There's no substitute for visiting a wine region to get a true sense for the business. Tasting doesn't tell you strategy. Reading won't describe scents in the air. A travelogue gives you no indication of the heart of the people or the quirks in customs. For that you have to visit the region.

A few months ago I was given the opportunity to speak at the VIII Foro Internacional Vitivinícola in Mendoza Argentina. It didn't take long for me to accept the invite. In the U.S. I've tried many of their wines but wasn't that impressed, probably because I've never focused on the region and generally was drinking wines in restaurants that were over priced. But the buzz over quality Argentinean wines has never waned. Some of my clients even have vineyards there. So I saw this as an opportunity to broaden my understanding of the Argentina and get first hand knowledge. What I came away with was inspiring and mind altering.

 Environment


One of the things that I never sorted out in my mind regarding Mendoza was the environmental aspects. The region is a desert. Santiago is an hour away on the Pacific side of the Andes and gets all the rain. On the other side of the range, just like the State of Nevada over the Sierra's, there is little rain. As it turns out, the indigenous peoples there channeled snow melt into ditches centuries ago and to this day most of the irrigation is done with those same systems the old fashioned way, by flooding the fields. So water is not a problem, unless there is rain and then there isn't good runoff. Flooding is a problem.

The other environmental piece that never made sense was the lack of Marine influence. All the major regions I'm familiar with have evening cooling off the water. I understood how long hot days could happen in a desert, but what about the cool nights? If the cold nights came from snow peaked mountains, then why wouldn't there be frost problems? The answer is the cold from the Andes can't run into the lower regions because there is another ridge of mountains running North-South that stop the cold from running down into the valleys. The high altitude allows the heat of the day to more easily escape as well making for optimal dry conditions for several varietals but clearly Malbec has taken a meaning of its own.

Our Mendoza cousins deal with hail which is a little different from most regions. Pretty much every year they deal with heavy hail that can easily damage cars and ruin the harvest in large or narrow swaths. Its a matter of luck if you get missed. Generally they estimate 10% is the normal loss from hail. The counter-measures in the higher profit vineyards is to place black netting over the trellising. That netting slopes off between the rows so hail is directed between the vines. You can see the netting in place on the vineyard picture above, and notice both the Andes and the sub-Andes in the background of the picture.

Again in the above picture, you might also notice the wire posts pounded into the ground are untreated wood branches. With a lack of water, there is a lack of termites and I'm told generally speaking, phyloxera has had a more difficult time in the region as well .... though I've heard that before and do note most of the current high-end planting does get done on resistant rootstock today.

Of course finding the right micro climates are critical just like everywhere, and the Argentinians have gradually evolved to believe the cooler varietals like chardonnay should be planted in higher elevations, and the Bordeaux varietals planted in the lower zones. The region that seems to have come of great import lately is the Uco Valley to the  side of the map on the left. The soils are alluvial in nature, there is a source of water, and the cold air that I talk about above flows down the mountains and out the cut in the range from the river, adding an additional source of evening cooling and moderating temperatures. I have to say, there wasn't a single malbec I tried from the Uco Valley that I didn't absolutely love. And ...... the price for most of those kinds of wines were a third to a fifth what I would expect to pay for such a wine.

Argentina's Future


Why should the US worry about Argentina? Because as I discovered first hand, the wines made there can be as good as the wines made anywhere in the world and those wines are a third or more cheaper than those made in the US. 

Why shouldn't we worry? Because the country has a dysfunctional government. Today you effectively can't import anything there. The idea is that the government wanted to encourage domestic manufacturing. The outflow of that is inflation is 25% as they can't import lower cost goods from elsewhere. Another odd use of their Government power is limiting smart phone sales. Argentina only allows sales of Samsung, Nokia, Motorola and L.G. since they each have manufacturing plants in the country. Apple i-Phones and Blackberry's aren't available. When you come into the country, you have to declare what kind of phone you are bringing in and the vintage. Mine is a 4 year old Blackberry so it didn't attract attention but I don't know what would happen if I had a new i-phone. Of course with this kind of restrictive law, there there emerges a black market for i-Phones, and there is a similar market for US currency.


Exchange Rates Between AR Peso and US$
 At one point, the country pegged their currency against the US Dollar. They carried one US$ in the Central Bank for every Peso in circulation. That worked until the crash in 2001. Since then, the currency has floated again with the Central Bank carrying an official exchange rate, but a higher exchange rate does exist in other gray markets. Argentinians crave US Dollars because they are familiar with the currency from the currency pegging days and are always worried not only about inflation that eats up the real value of their own currency, but also devaluation which they've experienced in the past. As a consequence, if you have US dollars for trade there, your business will be highly prized.

When you talk to the people in the streets, you discover a short term perspective because every 7 years there is some major catastrophe that kills investments and savings. Most recently the Government decided to nationalize the Spanish/Argentinean gas company YPF. They just decided that they needed it more than Spain. Well .... if you are considering investing money or developing a partnership in Argentina, how does that make you feel? Its much deeper than that though. One of the stories I heard was from a producer who contracted with a grower. A week before harvest, their grapes were sold to a higher bidder. The grower had no long-term view of their decision, just like the government. There is a live for today attitude there.

Argentina makes wines that should roll over the US in comparable price points for wine quality. They are making great strides in their exports but their government itself shoots their businesses and investment in the foot with the populist laws that pass which in the end kill off the source of employment. Today most of the exported wine to the US is in bulk and goes into inexpensive bottles with US domestic labels.

Malbec doesn't flood the US simply because their Government is making it hard to do international business. And that is why its particularly difficult to predict anything about the Argentine peso or their imports: At any given time, that Government can reverse course and do something completely different. But that is also why investment will always be stifled in the country.

 SVB On Wine Vacation

At this point in the year I am going to go on hiatus with the SVB on Wine Blog, because I am moving into the period when we produce the State of the Industry Report. So this is the last of the Blog for a spell.

Look for the Annual Wine Conditions Survey in your email box soon and please participate. If you want to make sure you are included and then have the opportunity to get the output which only participants get, please email me your address and we'll get you in there.

Thanks for all the participation this year and look for the blog resuming in January of next year.


18 comments:

  1. I now have a saying: "Jake, it's Argentina (from the movie, Chinatown)!
    The government is challenging, the work ethic and ethics and mystifying and yet it is so beautiful and the wine so good, i can't help it but make wine there. It will never be boring and the wines will get better and better!

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  2. Jon - I totally agree. If their government would stay out of the way of commerce, their exports would soar. So many of our clients have wineries and vineyards down there. Cheap land and world-quality wine is a hard combination to pass on ... unless the government decides to outlaw foreign winery ownership .... one never knows.

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  3. Hey Rob I'm glad to see the geopolitical views talked about. When I went on a Sommelier Camp trip a friend was asked to bring (sneak) a cachet of wines with him so the Catena team could have some greats from Bordeaux, Napa and other places for comparison tastings.

    Hope you also got to experience some of the great Cabernet's available from some of the higher vineyards ~ they are expensive, yet still less than similar quality wines from Napa or Bordeaux.

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    1. I did get to try their cabernets and agree they are good, but a step down from the best. The cab has a unique greenish note that I detected in all the cabs I tried and could be detected in the blends as well. I probably only tried about a dozen so it could have been a vintage issue, but that was my take-away.

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  4. Interesting report, and pretty much spot on. Argentina is not for the faint of heart!

    As far as I know, I was the first US producer (as opposed to consultant) of malbec in Argentina - I have been making wine there since 1998. When I got there the currency was stable; three years later, folks were banging on the doors of the banks trying to get their money out and weeping in the streets since their pesos that the day before purchased a dollar had been devalued overnight to a third of that amount. Of course, all the rich Argentines had by that time taken their pesos out of the country. I never purchased any land there and have never regretted the decision. In spite, however, of all the difficulties doing business in Argentina, the land and people are so seductive, not to mention the wines!! What a country!!

    More details at http://www.tierradivinavineyards.com/mendoza/

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    1. Thanks for joining in Patrick and nice to hear from you.

      I absolutely loved all that you note ... people and pace, the land .... 2:00-4:00 lunch and 11:00 pm dinners ... great wines for $25US. I hope I can go back again soon. Highly recommend the trip.

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  5. Dont's see how they would flood the market.. I think people would just drink more!

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    1. People might drink more, but when wine quality is that good and its that much cheaper, one would think they would have pressured domestic prices but that hasn't seemed to have been the case.

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  6. Rob - Excellent perspective! The "There is a live for today attitude there" is a such a majority mindset in business down there that long-term relationships are hard to find. Being an Argentine Wine importer the last 5 yrs I've come across lots of producers with that narrow perspective. Even me being Argentine-American you would think I can convince them of the American business way, but you can't blame them for that because of all the experiences they've gone through; as you point out. In addition to Gov't getting in the way of exporting to the US market, another reason flooding hasn't occurred here can be due to the "turnover" of brands; meaning see them today but not tomorrow (which goes back to that mindset you pointed out). Searching for a great wine to import is half the battle, because there has to be the right people behind the to give it a stable footprint here in the US. Hope to see you again soon down in Argentina where I call it my 2nd home from L.A.

    Pablo Lastorta
    ARGCA Imports

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    1. Thanks for weighing in Pablo. Now that I have discovered Malbec, I'm definitely on the lookout for some of the wines I tried there, and more open to paying more to try others that come with high regard.

      While down there, one of the topics taken up was the brand of Argentina itself. I pointed out the mistake being made by the community by exporting such massive quantities of bulk but not bottled wines. That bulk is put into other labels, used for blending and will over time define the Argentina brand much like Yellow Tail defines Australia for many consumers, and a repeat of Mondavi when they imported Chilean wines in bulk to the US defining for many consumers Chilean wine quality as being average. The business leaders are beginning to question the strategy, but I didn't sense an overwhelming commitment to a plan to reinforce bottled exports and build up the Argentine wine brand.

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  7. It seems to me that all of the comments and indeed,the article itself, repeat the common theme that a populist government is a bad thing because they limit imports, control exports, and otherwise stifle business, like, say, by levying taxes. Argentina is still a developing country, and controls on imports, currency, investment, are necessary. Even though they may seem burdensome, remember that the purpose of government is not to enrich the few, but to ensure that the greater needs of the populace take precedence. (Remember, too, that tax avoidance--or evasion--is considered a national sport there as in all of Latin America.) For example, coffee exports in Colombia are controlled so as to make only "export grade" available externally. This is to protect the brand, quality, and reputation, and ultimately the revenues of a national resource.
    Granted, there are inefficiencies in the market, sometimes from needless regulation, corruption, and, well, inefficiency, but to remove these impediments is to challenge a system whose existence depends upon their presence. Without offering a better system that more equitably distributes the fruits of the land, that, after all, belongs to all Argentines as their birthright, there is little hope for understanding, justice, or change. Recognize that: no peace without justice, and a better system may evolve. Otherwise, you may expect more of the same: an oligarchy serving its own needs. Although this may seem an overtly political view interjected into a conversation about wine, the tenor of the article and its comments are clearly have a subtext subsuming political and social issues, and thus, my reply brings these to the fore.
    That said, the Argentinian Malbecs are wondrous things, approaching a par with the best vintages of Europe and California, and they are rightly exalted and promoted. May they flood the market at affordable prices (under $10).

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    1. Daminan - Your comments are welcome and appreciated. The government is positioned as part of the problem if not the main problem in the piece and so is open to discussion here.

      Writing about what I saw when I was there doesn't mean I have a solution to Argentina's political and economic problems. But I can observe first-hand the consequences of some of the laws on the wine business.

      First let me say I agree with your broad perspective on the role of Government; to ensure the greater needs of the populace take precedence. Some even here in the U.S. interpret that to mean the wealthy have to pay more in taxes to provide for revenue to hand out through programs to those lower on the economic spectrum. But at a point, when you have a live for the day law making approach - you destroy investment which destroys job creation.

      The way that takes place is through taxation and law. Its a balance though because radical changes almost always have radical unintended consequences. For instance, creating an agricultural tax on exports will slow down soy bean exports which was the idea, but it also reduced the export of bottled wine, slows the development of the industry and reduces job creation. Restricting imports to put a premium on domestic manufacture did help employment, but the inability to import lower cost goods also has created 25% inflation meaning the employed worker is making 25% less in real spendable pesos every year. The unintended consequence is a scramble for non-inflated US Dollars .... so laws are passed about that. Its not the best approach to the problems from my seat.

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  8. To buy an i-phone or apple computer in Agentina is not only possible but legal. The rest is pretty much on the money, but overgeneralizing a little, like the previous comment on work ethics...like if the US has god work ethics (how much holidays per year do you have? Oh! not free parenting time for fathers? Ups! I forgot about the outsourcing of cheap manufacturing in Asian countries for US brands such as Nike or apple)...
    But yes, the actual government is lame, as much of the ones in the last 15 years, and they do live for today.

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    1. http://www.hitechreview.com/phones/smartphones/argentina-bans-sales-of-certain-smartphone-models/35089/

      Thanks for your perspective Anonymous. I belive my facts on restricted Smartphone sales are accurate and have attached an article above as support. Perhaps there has been a recent change in the law? In my time down there 3 weeks ago, I was told the same thing several times by people on the street so I'm not sure about that disconnect in views there. Reading between the lines of your response, it seems you have first-hand knowledge of the people and politics as well.

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  9. I'm about as populist as it comes, but even I have to take a deep breath at the excesses of the Peronist Kirchner regime - she has mortgaged the future of the country by purchasing the votes of la gente through soy bean taxation and the ever-popular printing of money; no wonder inflation is rampant. My last trip I got 6.5 pesos for a dollar on the streets of BA, despite the fact that the official rate is, or was then, 4.34. This is disastrous for the poor folk; the rich folks don't care, as their money is out of the country. What makes this particularly sad is that Argentina was the fourth largest economy in the world before the Peronists took over in the 1940s and wrecked the middle class.

    If there is a bright spot in all of this, it is delicious malbec!!

    The following is from an economist friend of mine, who knows Argentina first hand:
    I went to talk today at Yale featuring Giorgos Papakonstantinou, Miranda Xafa, Domingo Cavallo and Ernesto Zedillo about Greece. The invited Domingo Cavallo because he was finance minister in Argentina during the late 80s. Naturally everything came to not because the Peronists torpedoed his efforts. I'm not saying that Domingo Cavallo was an angel in all of that. But it remains interesting to compare the financial history of Argentina with that of Greece. All agreed that Greece was better off now (sic) than Argentina, due to the sanity of her European neighbors, even Germany! When you put it in that context, Argentina is incredible: it has no friends! The only thing that it has in its favor, so far, is the price of soy. Since the debacle of 2001 the price of soy has gone up from $120 to $600, solely due to the world wide commodity market. Argentina had no effect on the price of soy; they just benefited from it. But in 11 years they haven't repaid their debt to the external bond holders and they can't even sell bonds internally because nobody trusts them not even the Argentines!
    Inflation goes on at 25% per annum. The black market in dollars is 40%. Since 2010 depositors have withdrawn 30% of all the money in Argentine banks. Only the price of soy and the lack of supply remain all that is separating Argentina from complete disaster. I went to talk today at Yale featuring Giorgos Papakonstantinou, Miranda Xafa, Domingo Cavallo and Ernesto Zedillo about Greece. The invited Domingo Cavallo because he was finance minister in Argentina during the late 80s. Naturally everything came to not because the Peronists torpedoed his efforts. I'm not saying that Domingo Cavallo was an angel in all of that. But it remains interesting to compare the financial history of Argentina with that of Greece. All agreed that Greece was better off now (sic) than Argentina, due to the sanity of her European neighbors, even Germany! When you put it in that context, Argentina is incredible: it has no friends! [actually Venezuela and Cuba approve]. The only thing that it has in its favor, so far, is the price of soy. Since the debacle of 2001 the price of soy has gone up from $120 to $600, solely due to the world wide commodity market. Argentina had no effect on the price of soy; they just benefited from it. But in 11 years they haven't repaid their debt to the external bond holders and they can't even sell bonds internally because nobody trusts them not even the Argentines!
    Inflation goes on at 25% per annum. The black market in dollars is 40%. Since 2010 depositors have withdrawn 30% of all the money in Argentine banks. Only the price of soy and the lack of supply remain all that is separating Argentina from complete disaster.

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    1. Patrick - Thanks for the enlightening additions to the politics in Argentina. The country has a long checkered past full of bloody military takeovers and corruption. But I don't want to be too hard on the present form of government as it’s as close to a democracy as it’s been for an extended period of time now, and that’s progress we should remember.

      What I don't understand is why the Government takes such a short view? For instance, most countries who want to trade on a World stage would try and work within their existing treaties, taxation, and duty systems. Instead, the government busts the trade agreements they have with Brazil that foster trade between neighboring countries, and then just take over the Joint Venture they had with Spain on the YPF Oil Company. Sure there is a populist benefit, in the first case by supporting domestic manufacturing and creating employment and in the second case by keeping more Oil Revenue thus reducing the need for collecting more taxes. But in the end, what you get is lower world exports which should be important to a country rich in land and oil, and the inability to borrow hard currencies which should be important to a developing country.

      Back to the first paragraph, the country has a long history of takeovers and dissent, and often times the dissent was created by the government with their short term economic actions. There are always consequences of choices and worse consequences when the choices go against accepted standards of international trade.

      In any case, I want to reaffirm that 1) Let’s not forget the progress that has been made in the creation of more of a constitutional democracy. 2) Lets not cloud the government’s questionable choices with the people of Argentina. My experience in country was they are people who appreciate the land, their families, faith, and while "live for today" has a negative spin in this Blogs context; there is another way that attitude is positive: The Argentinians seem to know things could be worse and as a consequence, appreciate what they do have today. Many seem disappointed with government, but they are pragmatic that it will change because it change is something they can count on. In the meantime, they are thankful for what is good. That’s a lesson for all of us.

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  10. Rob, Great insight,
    Argentina is the wine biz "sleeping giant" no doubt.
    Reminds me of a conversation I had in Mendoza,
    late...after a great meal of red meat, red wine and
    good company and conversation.
    A local told the story that God had blessed Argentina
    with: sunshine, snow peaked mountains and high
    altitude valleys perfect for vineyards.
    Then as a cruel trick, he gave them the Argentines.
    Salud!
    TD

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    1. Red meat - asado - great people, great wine, and sunshine. Those are the memories I take away. As one of the folks I met there said, "Argentina would be a great country if the Government didn't make it so hard to do business."

      I'm sure there is a counter to that comment by pro-government supporters. There is too wide of an opportunity gap between the wealthy and poor for instance. It really was an eye-opening visit to see the unique brand of Socialism in play there.

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