Britain’s move to exit the European Union, talk in Washington about revisiting trade deals and a stronger U.S. dollar have been making it more challenging for U.S. vintners to sell wine to or buy supplies from markets abroad.
North Coast and other U.S. producers are more uncertain about having free access to the key U.K. consumption market, while vintners in the EU are finding the economics of the U.S. market more appealing, according to Stephen Rannekleiv, executive director of food and agribusiness research for Rabobank.
The strength of the U.S. dollar relative to other currencies has been developing since June 2014, but is becoming more acute, creating a combination of issues, Rannakleiv said.
“The flip side is weakness in the U.K. market and challenges producers are starting to face and nervousness the European suppliers are facing,” he said.
See it from the perspective of an EU supplier making 50 euros per case of wine sold to the U.S. and U.K., Rannakleiv said.
“The supplier is now getting 60 euros per case in the U.S., but only 45 euros a case in the U.K.,” he said. “Suddenly, it is a huge difference.”
Exchange rates have more leverage on high-end wines, according to Michael Swanson, Ph.D., a Minnesota-based agricultural economist for Wells Fargo Bank. For example, a 10 percent shift in the rate for a $10 bottle of wine changes the price up or down by $1.
“For most Americans, that’s not a difference-maker, if the quality is truly different,” Swanson said. But for a $100 wine, the move is by $10. “At a $100 a bottle, you have to demonstrate a lot more value or differentiation.”
The U.S. wine producers need to acknowledge that if wines from the European Union are discounted 25 percent relative to domestic wines, they will lose market share, regardless of differences in the wines, Swanson said.
“The important thing to remember is that exchanges always cycle. They never go to an exchange and stay there,” he said.
FLUCTUATIONS VS. CYCLES
It’s important to distinguish between fluctuations in exchange rates and cycles, according to Swanson. Month-to-month changes come from nonfundamental issues, as opposed to fundamental factors such as interest rates, employment statistics and the latest economic indicators. Nonfundamental events create “noise” in exchange rates, Swanson said. Over a number of years, currencies move relative to long-term economic opportunity for investor returns.
Wine businesses can use foreign-exchange, or forex, markets to smooth out the “noise” by averaging exchange rates, Swanson said.
“They can’t fight the long-term changes in currency-exchange rates,” he said. “They shouldn’t make their future success hostage to their ability to forecast the future.”
TAKING THE LONG VIEW
But U.S. winemakers need to be prepared to average out the currency markets over a 10-year period, Swanson said.
“Better product and better value will ultimately have their success, so they can’t expect exchange rates to be the cause of their business success,” he said.
International companies often represent financial results in a “constant currency” such as the U.S. dollar, because currency fluctuations between the home country and target markets can obscure the operations’ true performance.
HEDGING GLOBAL BETS
Computer and internet technology has made foreign-exchange risk management via hedging or other methods at financial institutions accessible to small as well as large vintners, Swanson said. He is set to speak at the Business Journal’s April 28 Wine Industry Conference on the implications of the strength of the dollar.
North Coast wineries that buy bulk wine, barrels, cork, glass or other materials from abroad monitor foreign exchange closely, according to Fred Vela, leader of Wells Fargo’s the region’s Middle Market Commercial Banking team. Hedging is a tool employed by frequent players in global markets, depending on the advice of forex advisers at vintner’s financial institution, he said.
“Typically, the overall competitive market, where foreign companies and imported wine products are competing directly against domestic products, is where we see concern about fluctuating foreign exchange,” Vela said. “But this is not necessarily a concern for the growers directly. Concern about foreign-exchange risks isn’t necessarily spread evenly across the industry.”
Jeff Quackenbush (email@example.com, 707-521-4256) covers construction, commercial real estate and wine.