Elixir Wine Group Blog

What's Wrong with Argentina's Wine Industry

Kirk Ermisch - Saturday, December 27, 2014

I have just returned from Argentina and was fortunate to be able to sit in on a round table discussion that is currently setting the viticultural agenda for the presidencial candidacy of Mauricio Macri in 2015.

I brought with me several points that I have observed during my administration of Bodega Calle since the 3 successive Kirchner governments have been active since May, 2003. Most of these items are obvious to Argentines involved in the industry, but are not so well known to the outside world. They are also isolated to the part of the wine industry that is focused on exports and don't include the many additional challenges faced by the traditional producers for the national market.

When considered together it would certainly appear that the current government is actively pursuing the demise of small wineries throughout the country. If they don't see the pattern, then perhaps this will help frame a discussion of their mistakes more clearly.

Through inflation, now several years in, and poor management of public funds, the economic conditions in Argentina are being made worse via the following specific governmental actions. Some are legacy practices handed down by successive governments, others are relatively new ones. The thing that they all have in common is that they are all in need of far reaching reform immediately.

The legacy practices include, export rights payments and their return, value added tax (IVA) returns, and National Viticultural Institute, (INV), punitive enforcement of wine volume bookkeeping rules, (similar to TTB and state Alcoholic Beverage Control, (ABC) practices we are used to in the USA).

Export Rights: Currently, Argentines pay 5% of the value of each export invoice to the government for "rights" to export. The government is supposed to immediately return the 5% plus 1% to the exporter as soon as the invoice is paid in full by the buyer. This no longer happens. Because the Argentine government does not have sufficient cash reserves, it is delaying these payments. Due to inflation and the ongoing threat of a large currency correction, there is a real threat that if this money is ever paid back in pesos, it will be worthless in the original dollar value that it was paid.

IVA Likewise with IVA returns. If a winery buys bottles for bottling or labels for labeling or corks for corking, the winery must pay 21% tax on the value purchased to the government. If this finished bottle is exported, the tax is to be returned by the government to the winery. Unfortunately, this process has also ground to a halt for the same reason as above. Government lack of available funds.

INV enforcement. Nobody is asking to halt the enforcement of the law. All professional wineries should comply with all the laws surrounding the reporting of wine volumes and their movements. However, there is a new environment being experienced where INV officials are literally raiding wineries looking for anything they can find to punitively fine the wineries for. Most of the issues these days are mere technicalities or minor accounting errors, which used to go with just a warning. But now these fines are strictly applied and can add up quickly and have become a new financial cost to wineries to produce their goods. Additionally, they slow the wineries from exporting or selling their products, since the fines must be paid in full before the winery is permitted to continue its business. The obvious (and quietly admitted) reason behind these tactics are to bring fresh dollars into the government. Taken together, these costs are rapidly eroding wineries' ability to continue day to day business.

Relatively new changes that are eroding the Argentine winery's ability to stay in business include, double digit inflation, the related disappearance of trade credit, the prohibition of imported inputs, increase in fuel costs, (during a period in which the rest of the world is seeing decreasing fuel costs), and a falsely managed "official" exchange rate with all the world's currencies.

Inflation continues to hammer Argentina at a nearly 41% annual rate this year. This is in stark juxtaposition to the limited gradual "official" devaluation of the peso to the US dollar of only about 29% year to date, but only 6.3% since March, 2014. In simple terms from March to Dec, 9-month inflation has been 30.75% or 24.5% in real terms adjusted for the official exchange rate decline. In order words, exports with all their roadblocks both new and ongoing, buy 24.5% less the last months of the year than they did in 2013.

This is in contrast to the 16% devaluation that the Chilean Peso has undergone this year relative to the dollar with only mild inflation, (+/-5%) positioning Chile to be able to cleanly beat Argentina in profitability per average bottle in USD terms suggesting better prices to come per unit of equivalent quality wine from Chile in 2015. (Chile's challenge however is to continue to position higher price wines in the US market which are its long term strategic play, in the face of a fresh wave of $10 and below retail price point wines that have become once again economical for this country to produce).

2014 has been the worst for the industry in at least a decade for the availability of imported inputs. A recent example: I asked my Argentine printer, what choices I had for wine label paper. His reply: Only two options: Nationally produced paper A or nationally produced paper B. No imported paper available.

With the crushing inflation, there are no payment terms with suppliers any longer. With prices updated weekly, all "dry goods," (bottles, corks, labels, etc.) are all paid COD. 3-4 years ago it was common to get up to 90 day terms on significant purchases.

This has had an undesired effect. Since fewer and fewer wineries can handle both higher real costs (and resulting net profits close to zero or negative) and be able to pay cash to produce their bottled products, there has been an active market in bulk wine at extremely affordable prices in dollar terms and an increasing number of winery closures. A further example is reports that glass bottle plants, last year at capacity and unable to keep up with demand, are seeing soft sales and talking about turning off some of their furnaces to reduce unused capacity. This can only lead to more recession in the industry.

Argentine boutique wine exporters will need a lot of help if they are to halt the sector's contraction. The INV will need to be reformed to be once again a civil servant whose representatives are elected by the industry and whose taxes and fees go back to the industry and not to the country's general fund for the use on social transfers. The import sector will need to be opened back up and Argentines will need to decide if they are to negotiate with their Mercosur partners or unilaterally for more free trade agreements. This lack of thoughtful presence in the international arena has held Argentina back and made its exports more highly taxed than its Chilean neighbor as they pass through over the US border, creating a further roadblock to profits and growth in volume.

The currency must be allowed to float freely on the international market in order to close the gap with the real market exchange rate known as the Blue Rate and the country must balance the budget and curb its spendthrift ways as it buys votes to illegitimately prop up its corrupt administration soon to be under indictment for embezzlement of hundreds of millions of dollars from the people and money laundering to prevent its discovery. More than a decade of bad government has bankrupt the country and impoverished the business community. Now, firmly in recession, Argentina needs broad, deep reaching change immediately.

I hope there is still time. 

What can you do to help? Support small Argentine producers by purchasing their wines. They need you now more than ever!

Thanks for your attention.

Kirk




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