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Wine Clusters

Wine Clusters New Products, Marketing and Rural Development June 20, 2005, Sonoma California Daniel A. Sumner University of California Agricultural Issues Center and UC Davis Department of Agricultural and Resource Economics

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Wine Clusters

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  1. Wine Clusters New Products, Marketing and Rural Development June 20, 2005, Sonoma California Daniel A. Sumner University of California Agricultural Issues Center and UC Davis Department of Agricultural and Resource Economics

  2. Analysis of the Price of WinegrapesRegression: Price of Grapes = P (Year, Variety, District)

  3. What Determines the Price of Wine?Regression: Price of Wine = P (Appellations, Variety, Score, Age, Vintage, Vineyard, Reserve)

  4. Sample of Grape Growing Costs Definition / Example • Operating Cost = all the expenses that are assigned to a particular operation during the year (planting, cultural, and harvest costs). • Example Chardonnay in SonomaOperating Cost = 2,900 $/acre.Source: UC Cooperative Extension, Karen Klonsky

  5. Sample of Grape Growing Costs Definition / Example • Cash Overhead Cost = various cash expenses paid out during the year that are assigned to the whole farm (property taxes, interest on operating capital, office expense, liability and property insurance, and equipment repairs). • Example Chardonnay in Sonoma Cash Overhead Cost = 1,635 $/acre.Source: UC Cooperative Extension

  6. Sample of Grape Growing Costs Definition / Example • Non-Cash Overhead Cost = capital recovery cost for land, equipment and other farm investments. • Example Chardonnay in SonomaInterest rate assumed = 7.40%Non-Cash Overhead Cost = 4,660 $/acre.Land Recovery = 2,590 $/acre. • Important: the land price is assumed as given in the Non-Cash Overhead Cost, thus in the Total Cost.Source: UC Cooperative Extension

  7. Sample of Grape Growing Costs/Revenue

  8. Sample of Grape Growing Costs/Revenue • The revenue for Chardonnay grapes in Sonoma covers largely the Total Cost of Production, and even more: there is a rent of 3,000 $/acre. Why isn’t the price of land in Sonoma higher? • The price of land in Lodi cannot support the costs of production of Cabernet grapes in the area. Either the price of land is too high, or the price of grapes is too low.

  9. Illustration of Value - Added Up & Down the Marketing ChainCompare 3 illustrative examples:Cabernet Napa, Chardonnay Sonoma, Cabernet Lodi

  10. Illustration of Value-added Up & Down the Marketing Chain

  11. Illustration of Value-added Up & Down the Marketing Chain

  12. Effect on Wine Prices of a Land Price IncreaseExample: Chardonnay Sonoma, land price increase of 10,000 $/acre

  13. Another Way to Estimate theEffect on Wine Prices of a Land Price IncreaseExample: Chardonnay Sonoma, land price increase of 10,000 $/acre

  14. Price Endogeneity and Price Elasticity? Price of wine Supply of wine P0 P1 Returns to Land D0 D1 Quantity of wine

  15. Effect on Land Prices of a Wine Price DecreaseExample: Chardonnay Sonoma, wholesale price decrease of 0.10$/bottle

  16. Substitution Effects • We did the calculations, assuming that there is no substitution effects between inputs. • However, there may be some adjustments happening along the chain that would allow for less rigidity in the results. • If for example we assume that a decrease in wine prices would affect not only land but also other inputs supply and demand (oak use, cork and glass prices, etc…), the impact on land prices would be smaller.

  17. Agricultural location and agglomeration • Agronomic basics determine location, terroir does matter for quality wine grapes. • Transport costs matter for heavy and cheap agricultural raw materials. • Processing depends on raw materials and vice versa so the location of processing is not a mystery either. So does the cluster idea make any contribution? • Knowledge and information positive spillovers are easier within regions (space still matters, we are meeting here even though we are all on the web • Local input supplies depend on some local scale economies

  18. Agricultural location and agglomeration • Hypothesis: • Higher quality high prices raw material can be economically shipped farther for processing. • High value per $ of transport cost. • If transport costs of raw materials is the major issue clustering would matter more for cheap wine and less for fancy wine. • Will this allow a test of the importance of: • local input suppliers • Local knowledge networks? But terroir probably matters more for fancy wine.

  19. Networks in the wine industries of Italy & Chile Case study by Giuliani:

  20. Network density: 0.043 Network density: 0.09 Network density: actual no. links / max. possible no. of links Note: The positioning of nodes does not refer to geographical distances between firms. “The network draws on a directed 32x32 matrix.” Linkages represent the existence technical advice knowledge flows between any two nodes considered. The direction of arrows indicate the direction of knowledge flows.

  21. Colline Pisane, Italy Colchagua Valley, Chile Note: The positioning of nodes does not refer to geographical distances between firms. Linkages represent the existence technical advice knowledge flows “valued 3” between any two nodes considered. The direction of arrows indicate the direction of knowledge flows.

  22. Wine clusters in Italy and Chile “Most empirical evidence shows that only a small subset of the firms actively participate in the knowledge diffusion process at intra-cluster level and in the absorption of extra-cluster knowledge, while the bulk of firms are either peripheral or totally disconnected from the intra-cluster knowledge system.”

  23. Sources • Guiliani, E. 2004. “Laggard clusters as slow learners, emerging clusters as locus of knowledge cohesion (and exclusion): A comparative study in the wine industry.” LEM Working Paper No. 2004/09, Laboratory of Economics and Management, Sant'Anna School of Advances Studies, Pisa, Italy. • Giuliani, E. and Bell, M. 2005. “The micro-determinants of meso-level learning and innovation: evidence from a Chilean wine cluster.” Research Policy 34:47-68. • Porter, M. 1990. The competitive advantage of nations. London: Macmillan. • von Hippel, E. 1987. “Cooperation between rivals: informal know-how trading.” Research Policy 16:291-302. • von Hippel, E. 1994. “’Sticky information’ and the locus of problem solving: implications for innovation.” Management Science 40(4):429-439.

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