Production and Trade of Port Wine: Temporal Dynamics and Pricing

Abstract

(ProQuest: ... denotes formula omitted.)1. IntroductionOver the last decades the wine industry has been subject to an intensive globalization process, with an impressive growth rate in the volume of exports relative to world wine production levels (Anderson and Nelgen, 2011), a fact that poses both challenges and opportunities.Port wine, named after the city of Porto from where it was traditionally shipped, is a fortified wine produced exclusively in the Demarcated Douro Region (DDR), and constitutes a typical case of a globalized product, sold in the world market for more than two hundred years, with almost 90% of its production being exported. The production and trading of Port wine are characterised by temporal cycles (Rebelo and Correia, 2008), with the sector witnessing a decrease in global demand over the last decade (Rebelo and Caldas, 2013).In line with globalization, there has been a tendency for fine wines to emerge as a financial asset able to compete for a place in investment portfolios. Indeed, a survey conducted by Barclays (2012) revealed that one quarter of the wealthiest individuals around the world has a wine collection that represents about 2% of their wealth. As Dimson et al. (2014) remark (p. 3) One reason that it is interesting to look at the effects of aging on prices and returns is that even wines which have lost their gastronomic appeal can be valuable if they provide enjoyment and pride to their owners. The recognition that holding wine can be legitimately viewed as an investment encouraged analysts to estimate the corresponding rate of return, and the economic literature now contains a number of interesting studies of the investment potential of wine, namely Fogarty (2006; 2010), Sanning et al. (2008) and Fogarty and Sadler (2014). However, these studies have mainly focused on the quality of table wines (in particular, French wines) and do not specifically refer to liquorous wines, such as Port wine, the subject of the present article.Due to its organoleptic characteristics, Port wine is capable of improving in quality over time (aging), progressively conferring higher prices on the product. This faculty of Port wine lies behind corporate and individual decisions to stock Port wine as a longterm investment. For instance, vintage Port wines are frequently included in Christie's auctions.1The main objective of this paper is to analyze the productive and trade dynamics of Port wine and to examine the impact of wine aging on its price. To achieve this goal, in addition to the introduction and conclusion, the paper includes a brief presentation of the wines of the DDR, an overview of temporal dynamics (trends and cycles) of the production, trading and prices of Port wine and, finally, an estimation of the impact of Port wine aging on its price.2. The Wines of the DDRWine is the economic base of the DDR, whose indisputable terroir characteristics were acknowledged when UNESCO classified the region in 2001 as a world heritage site (Rebelo et al., 2013). The DDR covers an area of 250,000 hectares, about 18% of which is planted with vines.Two categories of wines are produced in the DDR: Port wine and still wines. Historically the main production of the region is Port wine, a product that has been highly regulated ever since the creation of the DDR.2 The regulatory entity, the Port and Douro Wine Institute (Instituto de Vinhos do Douro e Porto - IVDP), supervises the production and trading of both types of wine. Recent annual figures for the 2005-2012 period (Table A.1 in Appendix) show that DDR production have averaged almost 1.5 million hl (1,468,954 hl), equivalent to 32.51 hl/ha, and constitutes around 23% of total Portu guese wine production.3 Port wine represents 53% of the DDR's production and 12% of domestic production.The history of Port wine exports stretch over more than two centuries. Data for the 2005-2012 period (Table A.2 in Appendix) shows that the Port wine is currently witnessing a negative phase, expressed in the 11% and 12% contraction in total sales value and volume, respectively, between 2005 and 2012. …