Argentina’s wine industry takes a beating

Capital controls imposed by the government are putting winemakers into a vise, reports Daniel Lopez Roca. On the one hand, earnings are devalued as soon as they hit the bank. On the other, equipment, inputs and wages are spiraling out of control.

Martín Perez Cambet, general manager, Casarena Winery
Martín Perez Cambet, general manager, Casarena Winery

In the first three months of 2013, Argentine producers faced increasing difficulties in exporting bulk and entry-level wines. This situation was shaped both by inflation and currency controls which devalue profits as soon as they are turned into pesos. Other reasons include governmental restrictions on the import of raw materials and inputs – including winery equipment – along with wage pressures, as the unions demanded that salaries rise in line with inflation.

Although the higher-priced wine segments continued to grow in most markets, the loss of competitiveness in the lower-level segments reveal the increasing pressures that Argentine exporters are under.

It’s all about the money

When asked about the increasing difficulties in the export sector, most producers refer to government restrictions on imports and a delay in the present currency exchange rate of the peso to the US dollar.

Since 2008, Argentina has continued to expand the list of goods subject to import curbs, including laptops, tractors, machinery and tools, in an attempt to boost local production. Externally, a number of countries have complained about Argentina to the World Trade Organisation; internally, the country has suffered from inflation, rising salaries and the bad habits of input producers and importers raising their prices, taking advantage of the elasticity of the internal market. Faced with inflation that reached an estimated 24% in 2011, President Cristina Fernández de Kirchner imposed harsh currency control measures after her election that year to stem capital outflows. These controls include heavily taxing any credit card transactions that are made overseas or on the Internet, including taxing cash withdrawals, hotel bills and plane tickets, to try and prevent capital flight. The peso has slumped, creating a thriving black market in dollars. 

What this means in practice is that exporters have to exchange their US dollar earnings into pesos, using Argentina’s official currency market, which pays 40% less than those US dollars would earn on the black market. Unfortunately, the services and products that wineries use are priced at the black market rate, while the international travel that is crucial for making sales is now subject to punishing financial penalties.

Since last year, Argentina’s central bank allowed the official exchange rate to depreciate at faster rates. But President Fernández de Kirchner is not interested in worrying voters ahead of a mid-term election, scheduled for October this year. Devaluation acts as a tax on consumption rather than an income tax, causing salaried workers – the government’s electoral base – to lose spending power. So the government will try to avoid this at all costs, at least until October’s election.

Cheaper wine unprofitable

According to the DGA (Argentine General Customs), Argentine wine exports saw a slight increase of 2% in value in 2012 as compared to 2011, although volumes dropped. Increases in the average prices of Argentine wines to the major destinations were the main driving force throughout the year; sales of the lower- segment wines dropped both in value and volume, while the higher-price bands showed export growth. The most dynamic sector was in the over-$40.00 per 9-L case bracket, which increased almost 13% compared to 2011. The largest-volume band is now that between $27.00 and $40.00, where Argentina excels in offering an excellent price-to-quality ratio. This segment also showed growth, but not as great as in the over-$40.00 per case segment. In 2012, 1m additional cases from these two segments were exported.

Until the end of 2012, wine in bulk and containers greater than 2 L had been the engine of Argentina’s export growth. But during the first quarter of 2013, bulk wine exports fell by 45.3% in volume and 33% in value.

The weak situation of the European economies and the poor performance of Brazil strongly contributed to this fall in demand from major importers of bottled wines. While exports to Brazil failed to recover through 2012, the rest of the Latin American countries showed an excellent performance during the same period. Argentina’s primary destination for wine continued to be the US, representing 37% of the total turnover abroad; the US was also the market that saw the greatest increases in prices, of more than 8% on average. 

The Observatorio Vitivinícola Argentino is an information tool that’s managed and coordinated by the Argentina Wine Corporation (COVIAR), executed by the Mendoza Chamber of Commerce with the collaboration of the National Institute of Viticulture (INV) and the National University of Cuyo. A recent OVA paper reports that just six years ago, almost all the wine exported from Argentina was in the under-$2.00 segment. This trend was reversed with export growth, due to the great effort of private and public institutions to achieve greater recognition of Argentine wines around the world, and continuously improving their quality. Argentine producers began to see the results of this work in 2009 when the price segment mix began to change. First came an increased wine presence in the $2.00 to $4.00 segment, before moving into the $4.00 to $6.00 segment, and then to the $6.00 to $8.00- per-bottle bracket.

This wasn’t simply because the world was clamoring to drink better Argentine wines. According to the same report, by 2010 international agents were pushing Argentina’s wines into higher price segments, not only to remain competitive, but also to stay profitable. Production costs in US dollars were rising and with sales having to be made at a fixed priced, profits fell so sharply that cheap wine exports became unviable.

Nearly 200m L were exported in the under-$2.00 segment in 2008, but this had fallen to 33m L by 2012. Something similar began to appear in the $2.00 to $4.00 segment, which had reached nearly 100m L by 2012, but which fell to little more than 86m L last year. In the $4.00 to $6.00-plus segment, the situation is more stable, but involves considerably smaller volumes. Obviously these segments are less sensitive to external variables, but they also present greater difficulty when it comes to achieving a strong position with significant volumes.

Analysing the data in terms of FOB values shows a similar situation. Wines from the higher price segments have been a strong part of the total turnover of the wines exported by Argentina since 2008. Wine exports are beginning to be concentrated in the segment from $4.00 to $6.00 per litre and upwards, overtaking sales in the $0.00 to $2.00 segment, which is practically disappearing.

Impact on exporters

Gustavo Urbani, manager of Atilio Avena winery in Luján de Cuyo, Mendoza, said that “the exchange rate is a decisive factor for exports; the world is not interested in the problems of the rate between the Argentine peso against the US dollar.” And he added that even though 2012 was a good year for his winery, Atilio Avena has tried to preserve its export volumes, and doesn’t expect to lose markets. Urbani said they understand these years as a transition situation, in which the dollar-to-peso ratio and years of inflation have destroyed the profitability of the sector. He says he thinks  “the government needs to recognize the real value of the peso, or at least split its value to promote production and allow producers to be more competitive when it comes to exporting.”

Martín Perez Cambet, general manager at Casarena Winery said, “currently there are just a few factors that benefit the competitiveness of Argentine wines. Malbec ceased to be just a fashion and is now a full player in the world market; every wine bar or restaurant must have a Malbec on their list and that helps to create the category Argentine Wines.” He suggests that Argentine wines are still very competitive in the range of $7.00 to $15.00 per bottle retail, placing them above Chile and under New Zealand. As for the winery exports, 2012 was a positive year, but Perez Cambet warns that “if the peso value is not adjusted it will be increasingly difficult to achieve profitability. Being a new winery, to enter a new market is a triumph. But nothing has been easy...not even buying bottles.”

Ignacio Ciancio, export manager of Finca El Origen from Valle de Uco said: “We have accommodated prices and sale conditions in order to improve profitability and cut costs. We are now exporting to 36 countries, and our expansion project continues to grow. Asia is the market to develop. We have a commercial team living in that destination.” He added, “the quality of Argentine wines is still the main factor of competitiveness, and the thrust generated by Malbec stands as our flag.” Although Finca El Origen’s sales abroad have declined in volume, their average prices have risen. He fears that in the long run this action might harm sales, because the space lost in cases under $30.00 FOB may be replaced by wines from another country. Ciancio thinks that in 2013 the export volume will stay the same or grow slightly, dependent on macroeconomic factors such as the ongoing crisis in Brazil, the EU and the US. For the winery, not having entry-level wines puts the commercial chain, including logistics, at risk.

Mario Giordano, general manager of Wines of Argentina (WoA) acknowledged the difficulties in the lower price segments: “Today it is not possible to get foreign currency for producers travelling abroad and export sales are not developed by catalogue”.  He says that export levels of premium and ultra premium wines will continue to grow, even if market positions are lost in the medium- and lower-price segments – where the most turnover is to be made.

For Giordano, the situation of Argentine wine exports in general remains positive, though he says, “unfortunately Argentina has lost competitiveness because of domestic policy conditions that made it lose presence in volume in the best-selling price segments of the world, although exports have continued to grow significantly in over-$36.00 cases.” 

While they wait for the government to control liquidity and reduce inflation, ensuring real depreciation of the currency to support exports, Argentine wineries will have to keep moving their exports towards higher price segments in order to recover the profit lost by the exchange rate. This will mean turning to the markets of Latin America and Asia, as both regions have increased wine imports and are rapidly growing. Today, the US, Canada, Brazil and the UK account for 56 out of every 100 L of wine export by Argentina. In China, Argentina is already in sixth place in wine sales, although that doesn’t yet represent a significant amount of wine. But sales are growing.

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