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U.S.-China trade war squeezes Ohio wine industry

www.crainscleveland.com by JEREMY NOBILE11/09/2019  

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There's growing concern among Midwest grape farmers and winemakers that the U.S. trade war with China, which has been adversely impacting the American wine industry, could have a trickle-down effect for businesses in Ohio and elsewhere.

Ultimately, the situation could lead to a glut of wine in the U.S. as foreign markets for American wines dry up. An oversupply could drive down prices, which would be especially hard on the smaller wineries that make up the remainder of the domestic wine sector outside of California. It could also make it more difficult for smaller wineries to claim shelf space in the first place.

It's a worrisome scenario for the industry in markets like the Buckeye State, said Donniella Winchell, executive director of the Ohio Wine Producers Association.

"The locals are not feeling the crunch yet," she said, "but the crunch will be coming."

Those concerns are mounting at a time when grape farmers and winemakers are already being challenged by 2019's wild weather patterns, which slammed the Midwest with storms and rain through the spring and summer, pushing back the planting/harvesting cycle and creating additional disease pressure. Several vineyards said they're battling crop-damaging mildew as a result of some particularly wet months in 2019, which could affect the year's vintage and reduce total yields.

California, with its storied Napa Valley, is rightfully synonymous with the U.S. wine industry. The Golden State both makes and exports more than 90% of the country's wine. However, all 50 states produce wine. And while everyone else is comparatively small when set against California, it's a significant industry in Ohio, particularly in the northern regions of the state along Lake Erie, where the bulk of vineyard acreage managed by Ohio's 326 wineries is located.

The complete wine-related industry in Ohio accounted for more than 32,000 jobs and had an estimated economic impact of about $6.1 billion in 2017 — the eighth-largest out of all 50 states — according to a report from New York's John Dunham & Associates commissioned by WineAmerica, the smaller of two U.S. wine trade associations. (The other is The Wine Institute, which focuses more exclusively on the California industry.)

Understanding the situation for the wine industry in states like Ohio means looking back to 2018, when China first imposed 25% retaliatory tariffs on U.S. products in response to the U.S. levying taxes on Chinese imports.

As for many affected industries, that's a significant blow to U.S. wine sector. Hong Kong and China are the third- and fifth-largest importers of American wines.

The Wine Institute reported this spring that total U.S. wine exports in 2018 were down 4.8% in value and 1.2% in volume because of a strong dollar, retaliatory tariffs and competition from foreign wine producers, which are "heavily subsidized by their governments and benefiting from free trade agreements in key markets."

The situation has only worsened since then.

The latest rounds of retaliatory tariffs have created a combined tax rate on American wine that now stands at about 93%, according to The Wine Institute. That means a bottle of American wine sold in China today costs effectively double what it did before the trade war. That creates opportunity for wines from countries like Australia, New Zealand and Chile to come in at significantly lower price points.

Naturally, California's wine industry is bearing the brunt of that. And if it's struggling to sell product in one of its largest export markets, that will build up the domestic supply. That could lead to a trickle-down impact in other regions as California companies, which have economies of scale and leverage with distributors, look to push their oversupply in other U.S. markets instead.

"So, all of a sudden, you get a lot of California wine backing up from the export markets," said WineAmerica president Jim Trezise. "Their prices will be pushed down. And the smaller wineries could be hurt quite a bit."

While the largest producers control the greatest share of the market, the vast majority of the country's 11,000 wineries are small, often family-run operations that have to charge a little more than the large companies to make a profit. A locally produced Ohio wine might sell for $10 to $20 a bottle, competing against, say, a bottle of Barefoot Wine (made by Barefoot Cellars of Modesto, Calif.), which at its cheapest is already retailing for about $5 to $8.

The concern is an oversupply could result in companies like that possibly dropping prices even further, causing local vintners to struggle to compete, Winchell said. And wine is already a particularly price-sensitive product. Many consumers will simply go for the cheapest options when buying bottles to take home.

What's more, larger producers pushing for sales will almost certainly use their leverage with distributors to pack store shelves, which could push out the local brands.

"Fifteen years ago, there were probably three or four Ohio wineries on grocery shelves," Winchell noted. "Now, there are probably 80 on shelves in the regional market. Those are the ones that will begin feeling pressures as California wines come in."

"The power of wholesalers in this industry is very strong," Trezise said. "Even though everybody loves local, the distributors have a lot of clout. If we have a situation where there is this glut of wine, you will see it hurting small, local producers for sure."

Just as in other industries reeling from the trade war, the fear in the wine sector comes with uncertainty over how long it all lasts. Trezise called the current state of U.S. trade policies a "whack-a-mole circus" that's virtually impossible to predict.

"Will China retaliate again? Will more tariffs go into effect? If so, for how long? We just don't know what's going to happen," Trezise said. "That's the big problem right now."