Will Argentina Flood The US?

Source: WineSur

Will Argentina flood again the US market with Malbec?

January 31, 2014 by Javier Merino

Only two hours after the official exchange rate exceeded ARS 8, this title, but in the affirmative, appeared in one of the US leading wine information websites. It is a really interconnected world!

Argentina did not flood the market in the past time and it has no chances to do it now, from my point of view. It is true that Argentina has lost an export market of 2 million cases per year since 2011, within the segment below Premium (under USD 26 a case), and more than 40% of which was Malbec, hitting the price of this grape and some of its supportive varieties like Bonarda. However, this did not mean a drought for the US market as it was not flooded. There is still a very interesting spot to compete if Argentine costs allow to do so.

The devaluation itself is far from being an engine of this market recovery due to different reasons:

The exchange rate climb is not so high

Firstly, as the chart shows, if dollar keeps its value at ARS 8 and inflation does not shoot up, the current value would be 16% higher than 12 months ago, clearly benefiting exporters. However, it is worthy to consider that this value is similar to that registered in 2011 and 2012, years in which exports of lowest-priced bottled wines dropped significantly. Moreover, it would be 20% below the value in 2010 and more than 30% below that registered in 2009, when exports had a good performance.

What we do expect is that the downturn in exports within high price ranges has a breathing space to stop affecting both exports and the relationship with distributors and importers, who have already a tight margin to accept rising prices.

On the other hand, 2006 and 2007 experienced certain competitive balance. During those years, Argentine company’s profitability was on the par with other rival countries’, and it was then when Argentine wines consolidated their position in foreign markets, but with an exchange rate double than today’s.

Domestic costs move on

Government seems to have lost most of its instruments of economic policy in the past few weeks. Apart from the great uncertainty around Argentina’s macroeconomic policies, there are advances and setbacks, worthless actions and contradictions. To face up those problems, some of the few financial measures, amid the lack of credibility, are the use of reserves to keep dollar value from going up and government bonds to increase interest rate. If this allows to calm down expectations, prices would keep growing but not at an unbridled pace. Consequently, threats of uncontrolled inflation and bank runs appear on stage. It is expected that current price index, already increased before these measures, remain growing. If so, the growth of exchange rate would be ephemeral, leading to a fall in profitability of producers and wineries.

Salaries, on their starting point

As soon as announcements were issued, last Thursday and Friday, Argentina’s leading trade unionists talked about the next collective bargaining. They said that the basis for negotiations would be higher. Therefore, the wine sector, where salaries account for over 50% of the total costs, is expecting a decline in profitability. This may impact on sales in the domestic markets, if salaries are positioned over inflation, something unlikely in this context.

Bottled wine market is not a commodity market

Lastly, if export prices improve due to a better exchange rate, rise in sales will be reported after a year, unless selling current bulk stocks, because wines will be available on shelves in a few months. So, it is so difficult to predict what the exchange rate will be in the next months to take sales decisions right now.