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Argentina's Wine Exports Squeezed by Inflation

Argentina's Wine Exports Squeezed by Inflation

Posted by Juan Gavasa on August 11, 2014

For years, Jose Manuel Ortega exported a type of Malbec wine from his vineyard beneath the snowy Andes that U.S. reviewers called "broodingly inky," with a "monumental flavor."

But he recently halted production of the fruity, garnet-colored Massimo line. Amid Argentina's escalating inflation, labor costs were soaring, and he could no longer make a profit on the lowest-priced bottles selling at retail for $9 to $12. A national economic downturn that is battering everything from auto makers to the real-estate market hasn't spared the niche industry in western Argentina.

Mr. Ortega, who founded the O .Fournier vineyard here 14 years ago, still sells his higher-end Alfa Crux, named for the stars of the Southern Cross that twinkle overhead. But "we were forced to stop supplying" wines in the lower price range, Mr. Ortega says. "When the situation clears up, we can go back to these projects."

The 46-year-old former investment banker came to Argentina from Spain after seeing the potential for great wines in the fine-grained soil and clear skies of the Uco Valley. But he is now among the successful growers stung by an inflation rate that some economists say is close to 40%, affecting everything from milk to movie-ticket prices.

The emergence of Argentina's wine sector counted as a success story. Demand abroad for its good-quality but inexpensive Malbecs drove robust growth for nearly a decade, making Argentina the fifth-largest producer in 2011, according to the International Organization of Vine and Wine. But sales from exports fell to $877 million last year, down 5% from 2012, according to the trade group Bodegas de Argentina. In that same period, the quantity of exported wine fell 14% as Argentine suppliers found it harder to compete and still make a profit.

This year has also been grim. According to Bodegas, exports of bottled, boxed and other individually packaged wine fell 5.5%, to 77 million liters, in the first five months of 2014. The trade group says the value of wine exports fell 3.6% in the period, to $301 million, and export volume to the U.S., Argentina's biggest market, slipped nearly 8%, Bodegas says.

"It's not because of the wine or how they managed their brands," says Stephen Rannekleiv, a wine and spirit analyst at Rabobank Group. "The inflation issue is really out of their hands." Wine has been hit harder than agricultural products like soy because picking the grapes is so labor intensive. Analysts say producers' costs have risen at least 100% in the past four years.

That means fewer bottles of cheap Argentine wine are making it to the shelves of restaurants and liquor stores in the U.S. and Europe. "People want something for the evening that is affordable," says Victor Marquez, a manager at Beverage Depot in Dallas. He adds that $8.99 bottles of Malbec were a popular choice for years, "but right now, we don't have any on the shelf."

One of the earliest vineyards in Argentina was established by Jesuit priests in the 1500s to make wine for Mass, according to Ian Mount, the author of a book about the Argentine wine sector, "The Vineyard at the End of the World." Later, an agronomist introduced the Malbec vines, and producers soon discovered grapes grown in dry western Argentina had less risk of fungal diseases, permitting production to flourish.

"It's one of those countries where [wine is] practically considered a food group," Mr. Mount says of Argentina.

In the years following Argentina's 2001 default and the devaluation of its currency, bold investors flocked into the wine region. Many growers saw an advantage in exporting wine to the U.S. and being paid in dollars while covering their costs with weak Argentine pesos. While there are many higher-priced, higher-quality Argentine wines available, exporters edged their way into the U.S. market by promoting Malbecs and blends as superior products at low prices.

But now that strategy makes it tricky to charge consumers more. "They've painted themselves into a corner because people expect most Malbecs to be under $20," says Kathleen Smith, a buyer for Castle Wine & Spirits in Westport, Conn. Mendoza, a city of 1.8 million people, thrives on the viniculture industry. Scores of hotels and restaurants cater to vineyard tourists. Twenty-foot-high wine bottles encircle a park on the outskirts of town in an ode to the region's lifeblood.

"People here made a lot of investments and worked hard, and they are frustrated with the situation," Juan Carlos Pina, executive director of the Bodegas trade group, says at the group's headquarters, a small house lined with shelves crowded with bottles of wine. Michael Evans, co-founder of Vines of Mendoza, a vineyard that sells parcels to people who want to give wine production a try, says he recently cut back wine exports, including his $18-a-bottle Malbecs, because of rising labor costs.

"We just gave a 15% salary raise to our workers, and it only helps them break even after the inflation this year," says Mr. Evans, who will hang on to the bottles and await a more profitable moment to export.

Finding an outlet in Argentina's domestic market is difficult. While Argentines are accustomed to swallowing price increase, they are attached to their brands and it is hard for newcomers to gain traction. In one move to alleviate the pressure from inflation, some vineyards are exporting more wine in bulk, to have it bottled by distributors abroad, where costs are lower. But smaller producers generally don't have infrastructure and contacts for such a move, say wine experts here.

Some have been investing more in the tourism side of the business. O. Fournier has an upscale restaurant on the vineyard. Mr. Ortega also sells parcels of the vineyard for up to $170,000 a hectare, or 2 ½ acres, giving buyers the chance to produce their own wine or build a vacation home.

But as he gave a tour of his wine storage area that contains 120-year-old oak barrels, Mr. Ortega stressed that his passion is wine. He says that he, like other wine producers here, is hopeful that once President Cristina Kirchner's term ends next year there will be new economic policies to ease inflation and attract foreign investment.

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