Make Mine Wine: The Evolution of Argentina's Wine Industry
For many people, the mention of wine evokes a vision of rolling French and Italian vineyards, each boasting a unique and storied terroir. And while these countries have earned their place in the annals of wine history, less well known South American players, like Argentina, are on the scene shaking up this traditional industry with differentiated varietals and an eye toward export markets.
The Evolution of the Wine Industry in South America
Most people have at least heard of Argentine and Chilean wines, and some may even have had the good fortune to visit the beautiful regions where these wines are produced. But the history of wine in the region is much more complex than just these two countries.
According to the Universidad Católica Argentina, wine was first brought to South America by Spanish colonists. Evidence indicates that Peru was the primary point of origin, after which the industry spread south into Chile and Paraguay. The 1800s would prove to be a pivotal century for wine in the region as Chile made major advances related to production and Brazil began to foster the growth of their own industry. Perhaps the most profound impact, however, would be the immigration of numerous Europeans, and especially Italians, into Argentina - a demographic shift that would accelerate the development of the country’s fledgling wine industry. By the beginning of the 1900s, the continued flow of immigrants, combined with a strong economy would propel Argentina to produce twice that of Chile.
By the end of the 20th century, Chile would make an important shift in their market strategy by shifting varietals and adjusting production techniques to suit a more global palette. These tactics, combined with a comparatively open attitude toward global trade, elevated Chile to secure the region’s top spot for wine exports.
Today nearly every country in South America produces some wine, however the vast majority of production occurs in Argentina and Chile. In fact, these two countries have truly cemented themselves among the global top ten, both in terms of acreage planted and annual wine production.
Armed with this understanding of the regional industry, let’s dig a little deeper into Argentina’s story.
The Modern Wine Industry in Argentina
Argentina has several wine growing regions, although Mendoza (located against the Andes on the country’s western edge, about parallel with Buenos Aires) is by far the largest and most well known. According to Argentina’s Instituto Nacional de Viniviticultura, about 70% of Argentina’s wine grapes are produced in Mendoza. San Juan, to the north of Mendoza, is the next most important province, accounting for approximately 24% of grape production.
Although Argentina is perhaps best known for production of the iconic Malbec grape, this is but one of a wide range of varietals produced in the country’s vineyards. According to the USDA, red wines make up about two thirds of Argentina’s wine production. Malbec accounts for about one third of this, while other popular red varietals include Bonardo, Shiraz, and Cabernet Sauvignon. The most popular white wine varietals, in order, are Pedro Gimenez, Torrontes, and Chardonnay.
Wine consumption in Argentina has been falling for years. Some sources estimate that at one time per capita consumption of wine in the country equaled an incredible 90 liters. Today, consumption estimates are closer to 25 liters per person. While this level of consumption still allows for a healthy domestic market, over the last several decades, Argentine winemakers, anxious to find alternative outlets for their product, have turned to the export markets.
Argentine wines have had considerable luck in global markets and exports have grown dramatically in both dollar and volume terms. Just last year, Argentina exported 267 million liters of wine, representing almost 18% of production, and worth about $819 million US dollars. But more than sheer size, what is really impressive about Argentine wine exports is the rate of growth. In value terms, since 2000, Argentine wine exports have grown at an annual rate of over 13% per year.
Most of Argentina’s wines are exported already fraccionado, as opposed to bulk wine, although bulk wine exports did enjoy a burst of popularity during the mid 2000s. The vast majority of Argentina’s wine exports are sold under a specific varietal label. However, generic wines do account for a not-insignificant 15% of wine exports by volume. Of the varietals, Malbec is by far the most popular, accounting for over half of varietal exports, with Cabernet Sauvignon, Chardonnay, and Torrontes Riojano taking second, third, and fourth place, respectively.
Argentina’s wines have found strong resonance with consumers in the United States, the destination for over half of Argentina’s varietal exports. Other popular markets for Argentine wines include Canada, the United Kingdom, Brazil, the Netherlands, and Japan. Wine experts, including Lettie Teague of the Wall Street Journal, credit the rise of Malbec in particular, to the wine’s ability to strike an attractive balance between taste and price point.
However, despite the rising popularity that Argentine wines have enjoyed over the last couple decades, the story has not been entirely a fairy tale. It is tempting to think of the wine industry in purely consumer terms, discussing legs and noses over crystal glasses and white tablecloths. Yet, at its core, wine is an agricultural product. As a result, it has not been exempt from the difficulties that have plagued Argentina’s agricultural sector in recent history.
Argentina’s Wine Sector Faces Adversity
If you follow global agriculture, or have been reading our blog posts, you are probably well versed in the challenges that have threatened the well being of Argentina’s agricultural health over the last decade are so. Though the difficulties are many, three of the most severe facing the wine industry include:
1. Import Restrictions on Equipment
2. Declining Foreign Investment
3. Uncompetitive Trade Dynamics
One of the most important threats to the well being of the Argentine wine industry was the restrictions that the prior Argentine government had placed on imports of technology and equipment. While the government claimed that these measures were designed to promote domestic industry, the effect was highly detrimental for the wine sector which, according to USDA, imports nearly 90% of materials required for winemaking. Even when imports were allowed, bureaucratic obstacles were often so severe that huge inefficiencies were created for the industry.
From the mid 2000s through about 2013 much of the expansion in Argentina’s wine industry was spearheaded by foreign investment, particularly in the Mendoza region. In many cases foreign monies were sponsoring the growth of ‘wine resorts’ that combined the viticulture and tourism industries, creating a boon for the area and leading to a dramatic rise in land prices. However, regulation on foreign ownership of lands (see our blog post on that subject), increasingly unpredictable government behavior, and insurmountable currency dynamics spooked many investors until foreign investment in the industry slowed to a standstill.
In addition to policies that the government had put in place regarding imports and foreign ownership, another issue had been brewing in the economy regarding the currency. In an effort to prop up a faltering economy the Kirchner administration had implemented a series of currency controls that kept the Argentine peso artificially strong. Although it was common knowledge that this ‘official’ peso rate was not reflective of the currency’s true value, it was nevertheless the exchange rate that had to be used in foreign transactions. As a result of the artificially strong peso, Argentine wines became less competitive in global markets. Furthermore, as their competitiveness abroad withered, farmers domestically struggled with the other effects of the manipulated economy, especially inflation.
These difficulties were all compounded by the fact that domestic consumers, struggling with the same economic challenges, had less purchasing power and were therefore reducing their purchases of many foods and consumer goods, including wine.
While the story seems dire, and it has certainly been a challenging few years for Argentina’s wine industry, the current situation is not without hope. A new president and new economic policies are unwinding many of the measures that had harmed the industry in the past. Import restrictions have been greatly reduced, the currency is now floating freely, and investor confidence is gradually returning. The transition will undoubtedly be rocky, but I suspect that Argentina’s wine industry will have much to prove in the coming years. So let’s raise a glass of Malbec and toast the health of this dynamic South American industry.