The Economic Effect of Climate Change on Viticulture

Regardless of what you believe is the cause, global warming and climate change is occurring.  Depending upon where one looks around the globe, climate change affects specific areas of the world differently.  Specifically, in regards to wine and viticulture in California, studies have shown that global warming could have negative effects on the quality of wine (Pinot Noir, specifically) in the region, which would likely be reflected by lower prices.

Is it possible that some areas of the world will see positive benefits of global warming?

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The paper reviewed today, though now a couple of years old at this point, aimed to examine the economic impact of global warming on viticulture in the Mosel Valley of Germany, which lies between 49.61o and 50.34o latitude.  Within the Mosel Valley, production of grapes depends upon specific site characteristics such and steep slopes on rocky/infertile soil and specific weather conditions to allow for winter survival and successful ripening.  As a result, wine quality (as well as prices) depend upon weather and can therefore vary widely from year to year.  Due to these specific limitations and characteristics in the Mosel Valley, it is expected that temperature-induced changes due to climate change will have a direct impact on the economics on this part of Germany.

In order to study the economic impact of global warming on viticulture in the Mosel Valley of Germany, the authors used the “Ricardian” approach that has been verified and validated by other studies focusing on the effects of climate change on agriculture.  To be more specific, the authors created their three models based on different price data, including retail, wholesale, and auction prices.

Model and Data

The data this model focused on revenue and its components.  Per hectare revenue between 1997 and 2008 in each of the 5 viticultural areas of the Mosel Valley were examined (Upper Mosel, Middle Mosel, Lower Mosel, Saar, and Ruwer Valley).  Revenue is basically calculated by the product of price and crop yield, though there are some other complexities that result in deviations from this simple formula, such as how wines in the Mosel Valley are labeled and marketed. 

Basically, German wines are classified and labeled according to the natural sugar content of the grape must (unfermented) based on the Oechsle cale (oOe):  the sweeter the must; the higher the alcohol; the stronger the aroma; and finally the higher the quality.  The quality of wines increase in the following order: Quality Wine (no oOe requirement), Kabinett (70oOe), Spätlese (76oOe), Auslese (83oOe), Beerenauslese (110oOe), Eiswein (110oOe), and Trockenbeerenauslese (150oOe).  Wine prices are thereby determined by the vineyard where the grapes were grown and by the quality level.

Data for revenue per hectare are not readily available; however, they can easily be calculated by multiplying crop yield data by the average prices for each region and each wine quality level.  Wine prices by region and by quality are not readily available; however, they can easily be calculated by drawing on various wine price data using three different sources (retail, wholesale, and auction).

Wine production data by region and by quality between 1997 and 2008 was provided by the Statistical Office of the State of Rheinland-Pfalz and its agricultural commission (Landwirtschaftskammer).

A disadvantage to using retail and wholesale price data is that they refer to posted prices, not transaction prices (though sometimes they are).  Conversely, an advantage to using these data is that they cover a wide range of wine producers in the Mosel Valley.  Auction prices, while they do represent actual transaction prices, only a very small percentage of Mosel Valley wines are represented and sold, so auction prices may not be representative of the Mosel Valley region in general.

Retail price data from 1994 to 2008 came from the Gault Millau Wine Guide for Germany.  This guide contained detailed information about wine age, geographic origin, and quality classification, as well as the data to allow for the calculation of wine prices and quality levels per region.  Wholesale price data from 1993 to 2001 came from the Mainz Wine Trade Fair (Mainzer Weinbörse).  Auction price data from 1981 to 2008 came from the wine associations VDP Grosser Ring and Bernkasteler Ring.

Auction wines, though in the past represented a great variety of wines in the Mosel Valley region, primarily serve now as a showcase for a few very high quality wines.  For example, only 0.13% of wines auctioned are Quality Wines (lowest quality), while 74.1% of all wines produced in the Mosel Valley are at the Quality Wine level.  Also, 12% of the wines sold at auction are Eiswein, Beerenauslese, or Trockenbeerenauslese quality levels, whereas these quality levels only represent 0.2% of the total production of the Mosel Valley. 

According to the authors, responses of prices to temperature during the growing season are very sensitive to these higher quality wines, making it likely that these data will suffer from selection bias.  Also, the auction price data are likely to overstate the average effect of temperature on price.  In years of good weather, yield reduction is practices in vineyards production higher quality wines, therefore prices of these quality wines are already partially a result of weather.  Crop yields more fully reflect weather variation in the Upper Mosel region, where quality of wine is lower and yield reduction is seldom practiced.

Results

  •       Wine quality and price are highly dependent upon weather, as seen in other studies.

o   In more northern latitudes, warmer and drier weather are expected to yield higher quality fruit.

o   Warmer weather had a significantly positive effect on prices.

o   Higher quality wines benefitted from a warmer growing season than lower quality wines.

o   The effect of temperature increase on price was greatest in the regions of Saar and Ruwer.

  •        Auction prices were significantly more sensitive to temperature changes than retail or wholesale prices.
  •       There was a greater production of higher quality wines in warmer years.

o   Increases in temperature resulted in an increase in wine prices within each quality level.

o   Increases in temperature resulted in higher number of higher quality wines than lower quality wines.

  •       Revenue per hectare significantly increased with increasing temperatures.

o   The extent of this effect depends on which price structure one is considering:

§  Auction price data suggested increases in revenue of 63% per degrees Celsius increase.

·         Since auction data focuses mostly on high quality wines, this result is most likely an overestimate of the revenue increase due to increasing temperatures.

§  Wholesale price data suggested increases in revenue of 27% per degrees Celsius increase.

§  Retail price data suggested increases in revenue of 37% per degrees Celsius increase.

Conclusions

All three models employed in this study suggest that the vineyards of the Mosel Valley in Germany will increase in value as a result of increasing temperatures caused by climate change.  Auction prices will likely overestimate this increase, whereas retail and wholesale prices more accurately represent the potential effect of global warming on changing prices of wine. 

According to the results of the models, the authors predict that a 3oC increase in temperature would more than double the value of the vineyards in the Mosel Valley region.  A more moderate increase of 1oC is predicted to result in an increase in revenue of about 30%.

One thing that’s not certain is whether we will continue to see this trend as the future progresses, or if we are in a more transitional period with much more change to come.  The only thing we can do is to continue running these models and adjust parameters accordingly depending upon any new changes observed.

The authors described a few more limitations of the models used in this study.  The first limitation is that the model does not take into account any general equilibrium effects that may occur with the restructuring of land prices.  Specifically, if there were to be any dramatic changes in prices of vineyard land itself due to climate change, there could be consequences for the final results of the price analysis.  Another limitation presented by the authors is that the results presented represent only a small fraction of the overall appraisal of the role of climate change on vineyard and general agricultural values.  Finally, it’s possible that too high an increase in temperature would be detrimental on price, if the grapes were subsequently damaged by excessive heat.

I’d love to hear your thoughts on this topic.  Please feel free to comment below (no html tags, please).

Source: Ashenfelter, O., and Storchmann, K. 2010. Measuring the Economic Effect of Global Warming on Viticulture Using Auction, Retail, and Wholesale Prices. Review of Industrial Organization 37: 51-64.

DOI: 10.1007/s11151-010-9256-6
I am not a health professional, nor do I pretend to be. Please consult your doctor before altering your alcohol consumption habits. Do not consume alcohol if you are under the age of 21. Do not drink and drive. Enjoy responsibly!

4 comments for “The Economic Effect of Climate Change on Viticulture

  1. April 30, 2012 at 9:22 pm

    Average increases due to global warming are not evenly distributed. Some regions will face droughts, and most will have far more extreme weather events.

    A 3 week heat wave followed by torrential rains might have the same average temperature as a year that yielded high quality grapes. Yet it might be horrible for wine production.

  2. May 1, 2012 at 3:09 am

    Great points, Daniel! It appears as though the authors used a simplified model of climate change, which apparently did not include such extremes as you described. I'd be curious to see what the results of that model would be, but I can imagine it doesn't look good for the poor grapes (among many other things).

  3. Keith
    May 1, 2012 at 6:07 pm

    There are a lot of variables to price affecting demand and supply issues. So that sort of mdeling is poor as well as limited. Global warming as such has been proven to be a farce. Even the inventor of it (Lovelock) has pretty much become an apologist and is trying to make amends before he dies. I guess he has a guilty conscience for foisting that nonsense on us. As far as climate changing it is a matter of it always has and always will. So we just need to adapt. Pretty much all the theories we have anything to do with it have been debunked. Pretty much all scinetists who have reaped golden eggs from the global warming government goose should have there eggs cut off. The whole process has pretty much destroyed the validity of peer review which used to be valid. So now we have no idea of what is even half true in science anymore. Most changes in wines have been the new cultural methods employed in the growing of the grapes and demand by wineries that growers take greater risk in letting grapes hang longer so the new "international styles" of wine may be made.

  4. Paul Verdegaal
    May 1, 2012 at 10:00 pm

    A well fed person has many problems, while a person suffering hunger has only one.
    Global warming/Climate Change/Exteme Weather are problems of well fed people who no longer have to farm for a living.
    I have 30 years of data that shows no trend in Growing Degree Days increase for the Lodi region of California. And recorded dates for budbreak also indicate no trend; earlier or later.
    Since average upper level temperatures have not increased in the last 12 years (NASA and NOAA) maybe we should prepare for Global Cooling as in the 1975-80 "crisis".
    It would seem to follow that vintages with earlier harvest or higher sugar accumulation would result in more revenue, if wines are graded on sugar content as with Rieslings. This is not the case for California Zins or most other New World wines.
    Cheers

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