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.