The Port wine time bomb

Friday, 4. August 2017 - 11:45

Douro by António Alfarroba (WikiCommons)

The Douro industry can look very gentlemanly from the outside, and so it was like throwing a bomb into the Factory House sitting room when Adrian Bridge, CEO of The Fladgate Partnership (controlling the Taylor, Fonseca, and Croft brands), wrote in The World of Fine Wine: “The ability to make table wine in the Douro valley profitably … is due largely to an indirect subsidy from Port. Without this, many Douro table wine projects would simply not be economical. This system … is not compatible with the needs of a great classic wine region. It would be unthinkable, for example, for Bordeaux to declassify half the production of a Médoc First Growth to allow a mediocre vineyard in Entre-Deux-Mers to sell its wine at a higher price.”

He bluntly classified the thriving new Douro table wine projects as “rare examples of having your cake, eating it, and getting someone else to pay for it.” Bridge was attacking the benefício system, a venerable regulation of Port production that is coming under increasing scrutiny as the region moves into 21st-century market reality.

What is benefício?

The benefício is the amount of grape must that a producer is authorised to fortify with spirit to produce Port wine. The allowance depends on the grade of the vineyard. For example, the quota for a top-graded quinta (domaine) in 2016 was 2,130 L per hectare. The remaining grapes can be used for table wine or distillation. Each year, the Port and Douro Wine Institute (IVDP) revises these quotas based on current sales and stocks.

The benefício is directly tied to the Douro vineyard classification. Introduced in 1948 by Álvaro Moreira da Fonseca, it grades quintas into six classes from A to F based on a complex assessment of terroir, grape varieties, vine age, and density – the system is so precise the grading evolves even if the trellising is changed. The benefício quota depends on the grade: from 2,130 L for grade A to 636 L for grade F.

The amount of Port that can be sold is also governed by the lei do terço, or ‘one-third law’, a bureaucratic regulation where producers can only sell one-third of their current stock in any given year (another way of stabilising supply and elevating quality – older Ports make for better blends).

There was a logic behind the benefício when the Douro region produced only Port. It stabilised supply and demand, elevated quality by prioritising top-graded quintas and encouraging the production of special categories, and ensured a redistribution of wealth toward the countless small growers who tend the vineyards. Many other regions, such as Champagne, set a maximum yield and production volume for an upcoming vintage. However, with the advent of dry table wines in the Douro – which received DOC status in 1979 and have been steadily growing since – the situation grew more and more imbalanced.

Until the early 1970s, Port grapes with benefício commanded roughly double the price of table wine grapes. From 1974, that demand for Port grew sharply, and with it the imbalance. At times, the ratio reached 8:1, and a pipe (750 kg) of grapes sells today for around €950.00 ($1,062.00) with benefício and as low as €150.00 without. Yet the Douro has some of the highest cultivation costs in the world, estimated at €650.00 per pipe. Meanwhile, Port sales have steadily decreased after a peak in 2000. In 2016, 76m L of Port were sold, 18m L less than in 2007, although partly offset by an increase in premium Ports. In the same period, table wines grew by 16m L to 36m L and now constitute 32% of the region’s sales. The IVDP has followed this decline by reducing the benefício by 25% since 2001. The problem is that vineyard area over that period increased by about 20%, so the allowance per vineyard has been further reduced.
 

Artificial system

The obvious negative effect for Port is that with benefício quotas, a producer can never use all for their top-graded fruit for Port production. The current benefício for an A-grade quinta is 21 hL per hectare while the permitted yield is 55 hL and actual production around 35 hL.

When Port producers lack allowance to satisfy demand, there’s only one way to increase it: buy it from growers who don’t market their wines. Legally, benefício cannot be sold without the tied grapes, but producers can use the extra quota for their own-farmed grapes and resell the grapes they bought for table wine. It is also a public secret some farmers declare more than they actually produce and subsequently sell the benefício with ‘paper grapes’.

Port producers also have to pay a premium, whereas table wine producers don’t. If a quinta (domaine) sells grapes with benefício for Port and proceeds to market its own table wine, it essentially gets a subsidy. Mathematics suggests good money can be made exploiting the system. A quinta producing 100 pipes will have a total production cost of €65,000.00 and can sell half its yield for Port for €50,000.00. By selling the balance as table wine at the current average price of €3.34 per litre, it is achieving a margin of almost 50%.

Dominic Symington of Symington Family Estates summarises the system thus: “The benefício system simply isn’t conceived for a dual demand, and therefore the Douro wine business is currently built on a model that is essentially subsidised by Port.” Adrian Bridge goes further in condemning the regulation as “unfair and anti-quality”. “It is expensive to buy the other farmers’ grapes just to make your own into Port. This reduces the financial performance of a vineyard and undermines quality. It sets Douro wine and Port producers on different sides of the industry rather than working together to grow sales and value.”

Even table Douro wine is negatively affected by the system. Because of the high premium, most of the top fruit will go into Port. Additionally, Port wine production volume is regulated while table wine is not, so supply and price fluctuations are shifted to the latter. If yields are low, Port is under supply pressure and even fewer grapes are left for dry wine. In abundant years, an oversupply of table grapes leads to increased stock. Benefício generates an artificially low price for table wine, but so does oversupply. This gives entry-level Douro wines a price advantage on the market, but also makes them dependent on the benefício system in the future. Rupert Symington argues, “The only reason you can obtain a low fruit price is simply because the grapes are a by-product – all of the fixed costs are being paid for by Port.”

Not all producers are critical of benefício, however. Dirk Niepoort of the eponymous winery says, “the A–F-grade classification for Port is very intelligent”, but it applies far less well to table wine vineyards; F-graded quintas can often make the best dry wines. Those will most often be made with propriety plots, making the concept of subsidy from Port shippers irrelevant.

Cristiano van Zeller, owner of Quinta Vale D. Maria, sees the benefício as necessary. “It is not at all a subsidy. It regulates supply, not prices – so it is more of a stabiliser for the Douro region.” Production quotas avoid gluts in more abundant years and balance supply with demand. The real problem of the Douro is the high cost of production, especially for larger estates (from 3 ha to 50 ha) where overheads soar quickly. Van Zeller says, “Everyone in the middle is losing money every day.”

Further up the ladder, the five largest shippers control 80% of the Port market. They are 15% to 20% self-dependent in terms of grapes, having to buy the balance (with the attached benefício) at high prices. Similarly, around 18% of Port sales are in the ‘special categories’ that sell at the highest prices and have largely bucked the downward trend in sales. Special categories are thus made with shippers’ own grapes while cheaper Ports are made with bought-in grapes. So the benefício paradoxically affects basic Ports more than premium ones – which is obviously why large shippers are most critical of the system.

Another way to look at the benefício is not as a subsidy from one group of producers to others. Since entry-level Port is most strongly affected, it’s essentially consumers who pay an artificially inflated price for Port to keep the region going.
 

Evolution or revolution?

Despite the controversy, the status quo looks set to persist, as a silent majority are in favour of the benefício. But if the imbalance between Port and table wine production deepens, proponents of the abolition of benefício might get the upper hand. What happens in such a scenario? A race to the bottom for cheaper Port brands as prices fall. Table wines go up in price and entry-level bottlings are wiped off the market, a logical consequence of their unrealistic current prices. What remains is a handful of upmarket boutique wines: the Napa-ization of the Douro. Farmers are hard hit, and vineyard area shrinks, followed by an exodus of the rural population. On the other hand, Port shippers’ margins expand, and more grapes become available for top-quality Ports. A free economy motivates surviving growers and producers to raise quality.

The vision of a complete shake-up and related social meltdown is terrifying to some. “I prefer an artificial system that works to a radical solution that will kill the region,” Dirk Niepoort says. He does not share the optimistic part of the scenario – that table grapes will grow in value: “The current success of Douro wine is partly based on low prices. If the latter disappears, so will the former.” Symington agrees: “Considering the production costs, it’s difficult for the Douro to compete globally with large-volume brands.”

Niepoort advocates a “slow pragmatic approach” – raise the image of Port by focusing on special categories, and only then reform the benefício. Contrast this with Adrian Bridge: “Just get rid of this piece of 1933 economics. Liberalise the market and allow farmers to choose what they make – Port or table wine – and live with the economic consequences of their choice.”

It is debatable whether the benefício indeed subsidises dry wine producers at the expense of Port. What is beyond doubt is the intricacy of the system – if it needs an article in Meininger’s to elucidate, it is arguably too complicated for the region’s good. In essence, benefício is the relict of a former economic system, imposed to achieve social aims and economic control. As real-life demand for Port fluctuates and Douro table wine becomes a major reality, pressure on that system mounts. The laws of economy cannot be endlessly bent. 
Wojciech Bońkowski       

This article first appeared in Issue 3, 2017 of Meininger's Wine Business International.