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Elliott Morss has spent most of his career teaching and working as an economic consultant to developing countries on issues of trade, finance, and environmental preservation. Dr. Morss received a B.A. from Williams College in 1960 and a Ph.D. in political economy from The Johns Hopkins... More
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  • Is Your Favorite Californian Wine Really From California? The Growing Bulk Wine Business

    Is Your Favorite Californian Wine Really from California?

    The Growing Bulk Wine Business

    Elliott R. Morss, Ph.D. ©All Rights Reserved


    In earlier pieces, I have documented how the wine industry is changing. It used to be that vintners grew their own grapes. No longer. Wine makers are increasingly buying "grape juices" and blending them to make their own wines. And moving forward, we can see grape growers joining other farmers at the bottom of the supply chain.

    John Casella, the CEO of Yellowtail, is the "poster boy" for this movement. He grows only 5% of the grapes that go into his wines. In one recent year, he bought grapes from 650 different sources. Instead of employing farmers, he has a number of staffers that do nothing but buy grape juice for him.1 Another example of what is happening: Castle Rock, ranked as the 25th largest wine seller in the US, owns no vineyards (the company does not talk much about this).

    Bulk Wine

    So what does this tell us? No need to be a grape farmer to produce good wines. Good wine can also be made by "urban vintners" who know how to find and buy the right grape juice. And this trend suggests a growing trade in grape juices (bulk wine) rather than bottled wine. Live data supports this. Comtrade estimates that 42% of global trade measured by wine exports is bulk shipments (Table 1). The differences are notable. South Africa leads all countries in the portion it exports in bulk followed by Spain and Australia. France exports very little bulk, as do Germany and Portugal.

    As one would expect, the average prices for bulk are much less than for bottles, at 93 cents and $4.27, respectively.2 Interestingly, New Zealand gets a higher average price for its bottles exports than even France. And New Zealand has by far the highest export price for its bulk. At the other extreme is Spain getting only 67 cents for 750mL.

    Table 1. - Bottled and Bulk Wine Exports, 2014

    (click to enlarge)

    Source: Comtrade

    The US Case

    US grape growers/wine makers, like those of other countries, get some export assistance from the government. The USDA Market Access Program uses funds appropriated by Congress and matched by wineries to encourage the development, maintenance and expansion of commercial agricultural export markets. And as a result US winemakers probably export more wine than they otherwise would. Table 2 gives US wine imports and exports. Note that the US imports more bulk than it exports. In all likelihood, the US wineries are taking advantage of their brand names and good wine reputation by exporting high-priced bottle wine and replacing it with bulk for domestic consumption.

    Table 2. - US Wine Imports and Exports, 2014

    (click to enlarge)

    Source: Comtrade

    Not surprisingly, vintners who have taken the time to market their brand names and beautiful vineyards do not spend time talking about their purchases and sales of bulk wines. The French talk of their Bordeaux, Champagnes and Burgundies while the Americans make their beautiful vineyards tourist attractions. And of course, wine distributors and restaurants are on their side: they make more money on higher priced wines. And these promotions work with many customers who view wines as "fashion" statements like perfumes and watches - more expensive means better.

    However, recent tastings of the Lenox Wine Club suggest very excellent bulk wines are available at very reasonable prices. In 9 blind tastings against wines costing as much as $85, box wines came in first in six tastings, second in two and third out of five in one. Bota Box was the box wine in most of the tastings. It sells its wines in three liter boxes. Two of its wines come from Argentine grapes with its other 10 from California. Bota Box does not give vineyard appellations. One can presume it buys bulk.


    China is an interesting case for the wine industry. It has had pretty good wines for a number of years, but recently, interest in the wine industry has skyrocketed. The International Organisation of Vine and Wine (OIV) ranks it 5th in global wine consumption behind the US, France, Italy and Germany. It currently ranks 8th in wine production but is growing rapidly. The Chinese sense there is money to be made.

    Yantai is a city in northeastern Shandong province with a population of about 7 million. It is building the Yantai Changyu International Wine City with construction scheduled to be completed next year. It will include a wine research institute, a wine production center, and a wine trading center. In addition, it will include a demonstration area for grape planting, wine making, automated winemaking equipment and industrial production. The Wine City is also being billed as a tourist attraction.

    I recently received an e-mail from a Henry Chen living in Yantai. He wanted me to help him sell his wine. I told him I am not a wine merchant but would be willing to blind taste his wine against others and write up my results. Henry agreed and sent me a bottle of wine for the tasting. The label said "Chateau Paladin, Languedoc Appellation Languedoc Controlee Vin, 2005, Medoc Manor Wine Co., Ltd. Yantai." He told me the grape varieties were 60% Cabernet Sauvignon, 30% Merlot, and 10% Cabernet Franc. Since this mirrored Bordeaux wines, I bought an inexpensive French Bordeaux along with two Cabernet Sauvignons for the tasting.

    Following the tasting, I sent him the following:


    Last Saturday night, eight people tasted your wine against three others. The results are presented in the following table. The numbers represent rankings, with 4 the best and 1 the worst.

    The three liter Bota Box Cabernet Sauvignon costing the equivalent of $4 per 750ML bottle was the clear winner.

    Your wine came in a grouping of three much below the Bota Box. The other two were modestly priced French Bordeaux and an even less expensive Cabernet Sauvignon. I was one of several tasters who noted that the color of your wine was much lighter than the other three, more like a Pinot Noir. It seemed very doubtful to us that your wine was primarily Cabernet Sauvignon.

    ​Given the very mediocre tasting results for your wine, the prospects of launching an effective marketing campaign for it in the US are not good. The US market has become quite sophisticated and a mediocre wine like yours has little chance. The wine shops are overflowing with low priced, good wines and are not looking for more.

    Perhaps you would be better served trying to sell it in India or some other country with a growing middle class that has little wine-drinking experience.

    There is also another possibility: there are two ways to sell wine - as a "brand" or in "bulk". It takes a lot of time and money to create a "brand". However, there is an ever increasing demand for wine sold in bulk. In fact, China imported 82 million liters of bulk wine in 2014 and exported only 91,000 liters of bulk.

    You might consider exporting bulk to the US. Many of the larger Californian wineries import considerable bulk to sell to US customers.

    In addition, I urge you to read two articles on the future of the global wine industry:

    1., and


    I hope this is helpful."

    I have not as yet heard back from Henry.

    1 For more on Casella and other vintner pioneers, see George M. Taber, A Toast to Bargain Wines: How Innovators, Iconoclasts, and Winemaking Revolutionaries Are Changing the Way the Way the World Drinks, Scribner, 2011.

    2 Prices in Table 1 are for three quarters of a liter (750 mL), the average wine bottle size.

    Jul 09 4:52 PM | Link | Comment!
  • Shiller On Too Many People In Finance And Bank Regulation

    Shiller on Too Many People in Finance and Bank Regulation

    © Elliott R. Morss All Rights Reserved


    I am glad Robert Shiller won a Nobel Prize in Economics. He works with and learns from data. He also has little patience for posturing. He was recently asked about his work at the Cowles Foundation for Research in Economics where data collection is so important. His response:

    "Our founder, Alfred Cowles, was a money manager who became disillusioned and skeptical. Money management has been a profession involving a lot of fakery - people saying they can beat the market and they really can't. He suspected that colleagues on Wall Street were just faking it, that they had no ability to predict the market….I have the same skeptical nature. When I was a child, my Sunday school teacher complained to my parents that I had a bad attitude. I didn't believe anything that guy said.

    It's still with me, that I'm just naturally skeptical of people who look impressive - but I'm naturally wondering if it's real. I guess that's what motivated Cowles and pushed him to collect data. There's an attitude in the profession that collecting data is for lesser people. That it's like janitor work; it would dirty our hands. There's social climbing in academia. So if you write a paper computing an index, that seems low-prestige, so you don't want to do that.… Some of the best theorizing comes after collecting data because then you become aware of another reality."

    Shiller has great curiosity and is always looking to data for answers. He recently wrote a piece questioning whether "too many of our most talented people are choosing careers in finance - and, more specifically, in trading, speculating, and other allegedly 'unproductive' activities".

    He noted "In the United States, 7.4% of total compensation of employees in 2012 went to people working in the finance and insurance industries."

    And that got me thinking about what we pay people. In the same article, he asked: "Why shouldn't banks be allowed to engage in any business they want, at least as long as we have regulators to ensure that the banks' activities do not jeopardize the entire financial infrastructure?"

    I have thoughts on both topics. Hence, this article.

    Too Many People in Finance?

    Table 1 provides employment and compensation data for broad sector categories. And yes, as Shilling said, 7.4% of all compensation went to the Finance and Insurance sector. But there are other interesting features in the data.

    Table 1. - US Compensation by Sector, 2012

    (click to enlarge)

    Source: US Bureau of Economic Analysis

    Look first at overall employment. It is notable that Government is largest US employer followed by Health Care and a Professional, Scientific… catch-all category. But then, greater than manufacturing or any other sector is Finance and Insurance.

    Looking at compensation levels, CEOs get the most. And as I have noted elsewhere, this is a rigged, self-perpetuating market: boards hide behind head-hunter recommendations, and head hunters are loath to recommend anyone who has not succeeded or failed previously as a CEO. The high pay in the Utilities sector reflects high unionization rates and the lack of any foreign competition. Mining is a capital intensive sector. And then we have Finance and Insurance.


    It is worth looking more closely at the sub-categories under the "Finance" part of Finance and Insurance. In Table 2, all the financial sub-sectors are included along with the other sub-sectors with the highest average compensation.

    Table 2. - US Compensation in Selected Sub-Sectors, 2012

    (click to enlarge)

    Source: US Bureau of Economic Analysis

    Not surprisingly, the "packagers/deal-makers" (top two sub-sectors) in the financial industry make the most and their regulators the least. And these data miss a good portion of what the "packagers/deal makers" actually earn because it will come to them via delayed capital gains and other uncovered payment methods. Clearly, the energy and information industries also pay well.

    Back to Shiller's Question

    Shiller points to a 2006 study "25% of graduating seniors at Harvard University, 24% at Yale, and a whopping 46% at Princeton were starting their careers in financial services." Shilling adds that evidence suggests that much of the increase in financial activity since 1950 has taken place in the more speculative fields, at the expense of traditional finance. Anecdotally, I can believe this: my father was the President of a bank in 1950: the bank held on to the loans they made and spent considerable time making sure they got paid back. Think how far things have evolved since then….

    But can we really say there are too many people in finance? As Shilling says, "We surely need some people in trading and speculation. But how do we know whether we have too many?" Shilling points to some studies suggesting all the benefits of many financial transactions accrue only to those making the transactions.

    So if these activities caused the largest global depression since 1929, I would argue something should be done to rein in financial activities. And that leads us to Shiller's thoughts on regulation.


    Shiller concedes society may have been harmed by some financial activities but he is "careful" when it comes to imposing new regulations: "We need to be very careful about regulations that impinge on such [speculative] activities, but we should not shy away from making regulations once we have clarity."

    I have a very different view on this point. Glass-Steagall legislated that depository institutions should not "gamble" with deposits. That meant no trading. The most important result of removing Glass-Steagall meant banks could trade. Among other things, that meant banks could sell off the loans they made. Think of what that did to bank incentive structures: instead of knowing their survival depended on their loans getting paid back with interest, the primary incentive became making money on commissions from selling off their loans. That meant banks should make more and more loans with little regard for their quality. And it all spun out of control….

    So I think there is "clarity": Banks should have to hold the loans they make to maturity - no selling them off. One might argue that is too harsh: let's just regulate what banks can trade. It won't work. Regulators are overwhelmed. They keep trying new regulations and they all fail. Financial transactions are simply too complex. Get the speculative activities out of banks. Let the hedge funds, the private equity companies and investment banks do the gambling. But not banks.

    Too Many People in Finance?

    I think things have changed since 2006. While finance remains an attractive profession because of compensation, the new "heroes" for the college-aged are the information gurus - Steve Jobs, Bill Gates, Jeff Bezos, Pierre Omidyar and Mark Zuckerberg. This is good: make (or lose) a billion or two like them. Just don't cause another global collapse.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 28 3:46 PM | Link | Comment!
  • Argentina: A Partial Defense Of The Lady

    Argentina: A Partial Defense of the Lady

    © Elliott R. Morss All Rights Reserved

    April 2013


    A couple of weeks back, an American friend living in Buenos Aires asked me: "Have you been following this crazy woman? I would love to hear your take on her." In what follows, I offer a little background on the Argentina's financial situation and review the most controversial actions President Kirchner has taken. I conclude with a prescription for the future of the country.

    The Financial Situation of Argentina - Not the Lady's Fault

    Argentina's debt to GDP ratio of 43% is not high by international standards. But troubling problems remain following the country's 2001 default on $132 billion of debt. According to a Reuters report, 92% of Argentina's defaulted bonds were restructured in 2005 and 2010 with bondholders receiving 25 to 29 cents on the dollar. But there were holdouts. And a New York Court ruled in March that further payments could not be made to the bondholders who did settle until a deal is negotiated and payments are made to those still holding out. However, a failure to pay those who did settle would constitute a default and violate the 2005 and 2010 agreements. This would most definitely not be good.

    The holdouts are owed $1.3 billion. And in a court of law, their position is quite strong: they have a loan agreement and want to be paid in accordance with the terms set forth in the agreement. In such cases, it is common for courts to allow the claimants to attach other assets of the debtor. As a consequence, the Lady has resorted to chartering a plane rather than use one owned by Argentina for out-of-country flights.

    In this case, the New York Court ordered Argentina to come up with a proposal to settle with the holdouts. Argentina responded by saying it will make payments to the holdouts on pretty much the same terms it settled on with its other bondholders. The lawyer for Argentina said the country has a law that keeps new governments from improving the terms of previous restructurings. The Court has given the holdouts until the end of April to review and respond to the Argentine proposal. But Elliott Management, one of the largest holdouts, has already said it will not accept the 2010 terms.

    The uncertainty surrounding this issue makes Argentina's financial position quite precarious - nobody in the right mind would lend Argentina money unless it was secured by something that could be seized - like commodities.

    Seizing the Pension Funds

    And yes, a few years back, the Lady did take over the country's pension funds. Kirchner's opposition claimed this was done so pension monies could be used to "award" provincial governors for political support. Maybe this is true. But there were economic reasons for the government to take control of the funds: not performing well, not invested in Argentina, and rumors of corruption.

    How About the Repsol Takeover?

    In the "civilized world" government takeovers are generally frowned on. But as I have reported, there were mitigating circumstances in the Repsol case. Keep in mind that a country's energy strategy is fundamental to its well-being. And Argentina is an extreme case inasmuch as it cannot borrow on world markets. That means it is extremely important to keep its trade and current account balances from going negative. Table 1 shows that Argentina's energy imports are growing rapidly.

    Table 1. - Argentina: Energy Import Shares









    Mineral fuels
















    Source: UNCTAD

    Kirchner wanted Repsol to develop Argentine energy reserves so it could cut back on its imports. Repsol had other priorities.

    The Lady's Shortcomings

    While one can argue the problems discussed above are not the Lady's doing, what follows are her responsibility.

    1. Falsifying Inflation Data

    The Argentine rate of inflation has grown in part because Kirchner reversed the long-standing tradition of federal subsidies for critical services including public transit and basic utilities. Most economists would applaud this move.

    But the continuing falsification of inflation data and the intimidation of anyone who questioned the data have taken on a life of its own. The International Monetary Fund has censured Argentina for these actions. It has given Argentina until Sept. 29 to implement reforms before it risks losing membership privileges. If Argentina does not comply, it would be the second country to be forced out for failing to provide accurate economic information. The former Czechoslovakia was kicked out for the same reason in 1954.

    Why does the Lady continue this charade? Is it because, as the Palisades Hudson Group claims, that by reporting inflation lower than it really is, the country has avoided paying the full interest due on its $37.6 billion of inflation-linked bonds. Is this a legitimate reason for falsifying the data? Of course not.

    Just how much falsification is taking place? To answer this question, I turn to data assembled by LatinFocus, arguably the best source of information on Latin America economies that there is. LatinFocus provides two sets of inflation data:

    • Projections made by 25 financial/academic/consulting institutions projections of the falsified government inflation rates (I presume institutions dutifully make projections on this false data because they don't want the Lady to get angry with them), and
    • Projections made by 16 unnamed "panelists".

    The projections for 2013 and 2014 appear in Table 2. If the panelists are right, the inflation rates reported by the government are less than half the actual rates.

    Table 2. - Argentina: Inflation Estimates

























    Source: LatinFocus

    b. The Peso/Dollar Paranoia

    When I was last in Argentina (2009), both Pesos and Dollars were used, and the system worked well. If you had one and wanted the other, you could buy them, and the buying and selling rates were quite close. But the Lady, fearful of running out of dollars, wants everyone to use Pesos. She also appears to be under the illusion that she can "mandate" the exchange rate. Her paranoia on this score has led to:

    • requiring that all Argentine real estate transactions be done in Pesos;
    • limiting high tech imports into Argentina;
    • limiting dollars available for travel outside Argentina;
    • charging a tax on credit card charges made outside of Argentina and payable in dollars;
    • controlling/limiting payments made to suppliers outside Argentina
    • establishing the "official" peso/dollar exchange rate.

    This is all crazy nonsense. Whenever one tries to set prices that are out of line with supply/demand forces, a secondary market develops. So Argentina now has the dólar blue secondary market where it will take more than 8 pesos to buy a dollar versus the official rate of 5+ pesos per dollar. So now there are "criminals" making illegal currency exchanges making lots of money. Government policy that encourages such activities is bad government policy.

    And what happens if anyone speaks up? The Lady does not like objections: you might get fined or worse….

    Explaining the Lady's Behavior

    As is true of most Latam countries, Argentina has a history of military dictators with little regard for free market mechanisms. They like to issue commands to get things done. It reminds me of my first trip to Ghana for the IMF when the military had just ousted Nkrumah and was running the country. The military had no understanding of economics and markets. They were used to commanding things to happen and seeing their commands followed. So if the exchange rate was not to their liking, they would tell the banks and the money traders what the exchange rate should be. Money changers normally worked on the streets near the central bank. If the military did not like the exchange rates being offered by the money changers, they would put a few of them in jail and disperse the others. It never worked. After a few weeks the money changers would return…. I observed the same behavior by Myanmar's military leaders a couple of decades later.

    I think this explains the Lady's behavior. I also think it is the way Chavez was. They both operate like military generals, using commands and intimidation to get things done. This approach never works. If you don't let markets clear, a black market will develop allowing criminals to make a lot of money.

    The Economic Condition of Argentina

    With all that has been reported above, keep in mind that Argentina, like Russia, Argentina is a natural resource rich country. And a lot of its exports are food. The world's growing population has to eat. I quote from an earlier piece I wrote with Marcela Gonzales on Argentina: "The size and role of government will probably continue to grow (it has grown from 20% of GDP in 2002 to more than 30% now). And political power grabs will probably continue. But at least the first quarter of the 21st Century will be good to natural resource rich countries. And it is hard to imagine things will be bad in Argentina in the long run. Its exports will rebound."

    With this rosy backdrop, let's look at some economic data. Table 1 provides GDP growth rate data for Argentina and other Latam countries. Both before and during the global recession, Argentina did as well or better than its neighbors. That is now changing. Can a significant portion of the slowdown be attributed to Kirchner's economic policies? Yes.

    Table 3. - Latin America: GDP Growth Rates





    Latin America
















































    Sources: Latin Focus and IMF

    In recent months, my writings have focused on the weak sisters in the Eurozone. The "weak sisters" (Greece, Italy, Portugal, and Spain) are in dire straits: their GDPs are declining and they have high unemployment, large government deficits, and massive government debts. As Table 4 shows, Argentina is not in such straits - not even close!

    Table 4. - 2013 Argentina and the "Weak Sisters"

    Growth, Unemployment, Government Deficits and Debt




    Govt. Def.

    Govt. Debt


    % Change

    Unemployment Rate

    (% GDP)

    (% GDP)


























    Sources: FocusEconomics

    There is one area where Argentina faces problems equal or greater than those facing the "Weak Sisters". While the European Central Bank and the IMF are providing huge sums to bail out the "sisters", nobody is eager to help Argentina out. But this is a resolvable problem.

    A Prescription for the Future

    Argentina has a bright future. The Lady temporarily taken it in the wrong direction. This can be easily remedied. To start, a group of the country's best economists working in academia, government and the private sector should draft An Economic Plan for the New President of Argentina. Every major sector in Argentina should be examined with an eye to removing all the foolish policies the Kirchner regimes have enacted. The group should also commission a set of in-depth studies looking at such issues as what the country's energy strategy should be for the next decade. To protect the group from Kirchner intimidation, it should work obtain support from the international private sector, international organizations and foundations.

    Legislative elections take place this fall in Argentina. And a new President will be elected in October 2015. It is time for work on this plan to start.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 15 5:14 PM | Link | Comment!
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