Wine Clusters

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Wine Clusters

• New Products, Marketing and Rural Development
• June 20, 2005, Sonoma California
• Daniel A. Sumner
• University of California Agricultural Issues
  Center and UC Davis Department of
• Agricultural and Resource Economics

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Analysis of the Price of Winegrapes Regression
Price of Grapes P (Year, Variety, District)
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What Determines the Price of Wine? Regression
Price of Wine P (Appellations, Variety, Score,
Age, Vintage, Vineyard, Reserve)
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Sample of Grape Growing Costs Definition /
Example

• Operating Cost all the expenses that are
  assigned to a particular operation during the
  year (planting, cultural, and harvest costs).
• Example Chardonnay in SonomaOperating Cost
  2,900 /acre.Source UC Cooperative
  Extension, Karen Klonsky

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Sample of Grape Growing Costs Definition /
Example

• Cash Overhead Cost various cash expenses paid
  out during the year that are assigned to the
  whole farm (property taxes, interest on operating
  capital, office expense, liability and property
  insurance, and equipment repairs).
• Example Chardonnay in Sonoma Cash Overhead Cost
  1,635 /acre.Source UC Cooperative Extension

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Sample of Grape Growing Costs Definition /
Example

• Non-Cash Overhead Cost capital recovery cost
  for land, equipment and other farm investments.
• Example Chardonnay in SonomaInterest rate
  assumed 7.40Non-Cash Overhead Cost 4,660
  /acre.Land Recovery 2,590 /acre.
• Important the land price is assumed as given in
  the Non-Cash Overhead Cost, thus in the Total
  Cost.Source UC Cooperative Extension

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Sample of Grape Growing Costs/Revenue
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Sample of Grape Growing Costs/Revenue

• The revenue for Chardonnay grapes in Sonoma
  covers largely the Total Cost of Production, and
  even more there is a rent of 3,000 /acre. Why
  isnt the price of land in Sonoma higher?
• The price of land in Lodi cannot support the
  costs of production of Cabernet grapes in the
  area. Either the price of land is too high, or
  the price of grapes is too low.

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Illustration of Value - Added Up Down the
Marketing ChainCompare 3 illustrative
examplesCabernet Napa, Chardonnay Sonoma,
Cabernet Lodi
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Illustration of Value-added Up Down the
Marketing Chain
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Illustration of Value-added Up Down the
Marketing Chain
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Effect on Wine Prices of a Land Price
IncreaseExample Chardonnay Sonoma, land price
increase of 10,000 /acre
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Another Way to Estimate theEffect on Wine Prices
of a Land Price IncreaseExample Chardonnay
Sonoma, land price increase of 10,000 /acre
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Price Endogeneity and Price Elasticity?
Price of wine
Supply of wine
P0
P1
Returns to Land
D0
D1
Quantity of wine
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Effect on Land Prices of a Wine Price
DecreaseExample Chardonnay Sonoma, wholesale
price decrease of 0.10/bottle
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Substitution Effects

• We did the calculations, assuming that there is
  no substitution effects between inputs.
• However, there may be some adjustments happening
  along the chain that would allow for less
  rigidity in the results.
• If for example we assume that a decrease in wine
  prices would affect not only land but also other
  inputs supply and demand (oak use, cork and glass
  prices, etc), the impact on land prices would be
  smaller.

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Agricultural location and agglomeration

• Agronomic basics determine location, terroir does
  matter for quality wine grapes.
• Transport costs matter for heavy and cheap
  agricultural raw materials.
• Processing depends on raw materials and vice
  versa so the location of processing is not a
  mystery either.
• So does the cluster idea make any contribution?
• Knowledge and information positive spillovers are
  easier within regions (space still matters, we
  are meeting here even though we are all on the
  web
• Local input supplies depend on some local scale
  economies

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Agricultural location and agglomeration

• Hypothesis
• Higher quality high prices raw material can be
  economically shipped farther for processing.
• High value per of transport cost.
• If transport costs of raw materials is the major
  issue clustering would matter more for cheap wine
  and less for fancy wine.
• Will this allow a test of the importance of
• local input suppliers
• Local knowledge networks?
• But terroir probably matters more for fancy wine.

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Networks in the wine industries of Italy Chile
Case study by Giuliani
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Network density actual no. links / max. possible
no. of links
Note The positioning of nodes does not refer to
geographical distances between firms. The
network draws on a directed 32x32 matrix.
Linkages represent the existence technical advice
knowledge flows between any two nodes considered.
The direction of arrows indicate the direction of
knowledge flows.
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Note The positioning of nodes does not refer to
geographical distances between firms. Linkages
represent the existence technical advice
knowledge flows valued 3 between any two nodes
considered. The direction of arrows indicate the
direction of knowledge flows.
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Wine clusters in Italy and Chile

• Most empirical evidence shows that only a small
  subset of the firms actively participate in the
  knowledge diffusion process at intra-cluster
  level and in the absorption of extra-cluster
  knowledge, while the bulk of firms are either
  peripheral or totally disconnected from the
  intra-cluster knowledge system.

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Sources

• Guiliani, E. 2004. Laggard clusters as slow
  learners, emerging clusters as locus of knowledge
  cohesion (and exclusion) A comparative study in
  the wine industry. LEM Working Paper No.
  2004/09, Laboratory of Economics and Management,
  Sant'Anna School of Advances Studies, Pisa,
  Italy.
• Giuliani, E. and Bell, M. 2005. The
  micro-determinants of meso-level learning and
  innovation evidence from a Chilean wine
  cluster. Research Policy 3447-68.
• Porter, M. 1990. The competitive advantage of
  nations. London Macmillan.
• von Hippel, E. 1987. Cooperation between rivals
  informal know-how trading. Research Policy
  16291-302.
• von Hippel, E. 1994. Sticky information and
  the locus of problem solving implications for
  innovation. Management Science 40(4)429-439.