Unintended Consequences: How the U.S. & Canada Nearly Destroyed Wine

Interesting to see how government intervention in Canada and the USA resulted in the opposite effect of that desired. It would be interesting to compare this with Georgia’s experience in the 1980’s, when Gorbachev’s anti-alcohol campaign to reduce USSR alcohol consumption resulted in thousands of hectares of Georgian vineyard being uprooted. There is no evidence that Soviet alcohol consumption declined as a result of Georgian vineyards being devastated; given that alcohol can be made from anything containing sugar or starch, such as stale bread, mill run or green potatoes, bootleggers will have just swapped to distillation of cheap spirit instead.

At one point in Kym Anderson’s new book about the Australian wine industry he reflects on what can be done to shorten that country’s current wine slump and to get things sailing again on an even keel. One of his suggestions caught my eye:

“Governments need to keep out of grape and wine markets and confine their activities to generating public goods and overcoming market failures such as the free rider problem of collecting levies for generic promotion and R&D.”

This is more than the simple Adam Smith “laissez-faire” idea. Anderson’s book clearly demonstrates the law of unintended consequences — how well-meaning government policies sometimes have had unexpectedly negative side-effects. No wonder he recommends a cautious approach to wine and grape policy.

I was reminded of this when I was researching the history of the Canadian wine industry for a recent speaking engagement in Ontario. I was struck by Canada’s experience with Prohibition in the 20th century, how it differed from the U.S. experiment, and how both ended up crippling their wine industries but in very different ways…….

……………..Thus did government policy in both Canada and the United States create wine booms during their respective Prohibition eras, but the worst kind of booms: bad wine booms. Quality suffered as quantity surged. It is no surprise that consumers turned away from wine once other beverages were available. It took decades for these industries to recover.

Both the Canadian and U.S. wine industries are vibrant and growing today, having recovered from the crippling effects of poor quality wine. But they both are still hampered by other policies — especially regarding distribution and sales — that date back to the end of Prohibition. Economic policies can obviously have unintended effects and the shadows they cast can be long indeed.

No wonder Kym Anderson is skeptical about government interference in the Australian industry. Prohibition is an extreme case, to be sure, but such cases clearly show the unintended consequence potential that exists even with other seemingly harmless proposals. A cautious approach makes sense.

The article can be read in its entirety here  . The blog is well worth reading; while focussed on the US market it analyses global wine markets in a logical and methodical manner.

The Wine Economist

At one point in Kym Anderson’s new book about the Australian wine industry he reflects on what can be done to shorten that country’s current wine slump and to get things sailing again on an even keel. One of his suggestions caught my eye:

“Governments need to keep out of grape and wine markets and confine their activities to generating public goods and overcoming market failures such as the free rider problem of collecting levies for generic promotion and R&D.”

This is more than the simple Adam Smith “laissez-faire” idea. Anderson’s book clearly demonstrates the law of unintended consequences — how well-meaning government policies sometimes have had unexpectedly negative side-effects. No wonder he recommends a cautious approach to wine and grape policy.

I was reminded of this when I was researching the history of the Canadian wine industry for a recent speaking engagement in Ontario. I was struck by Canada’s experience with…

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Food Product Brand Development

One of our consultancy activities is in Brand Building for food produced in Georgia.

Marketing and brand development is at an early stage of development in Georgia. With competition between domestic players intensifying, new market players entering the market, and imported products with established brands an ever-present threat, it is imperative that cost-effective brand development take into account local consumer preferences while still meeting world’s best practice for efficiency and clarity. Effective differentiation of your product from your competitors can mean the difference between success and failure.

An example of a brand that we have helped develop is Berghofer. A cheese brand owned by Austrian-owned dairy factory Cheeseco Ltd, we have helped establish this new brand in the Georgian market, with customers educated about the rigourous food safety attributes and modern Austrian production technology, while traditional Georgian taste preferences are still addressed.

Our Marketing Consultant Mziko even managed to get herself included in the commercial !

In addition to television advertisements, the brand awareness is being developed in print media, social media and in-store promotions. If you see attractive young women in Austrian tracht in a supermarket, more than likely they will be offering samples of Berghofer cheese.

If you believe your product has potential as a branded product, with the superior margins that this yields, or if you feel that your brand portfolio could be improved, you should contact us to discuss your needs.

Debate on Land Ownership

ISET Policy Institute recently held a debate on foreign ownership of Georgian farmland. Simon was one of the panellists.

As readers will recall, since June 2013 the Georgian government imposed a moratorium on farmland purchasing by foreign individuals or foreign-invested enterprises. In 2014 a challenge by an Austrian citizen to this ban was upheld in Georgia’s constitutional court, but despite this the Georgian Ministry of Justice still refuses to transfer land titles to foreign invested enterprises or individuals.

A new draft Land Law was made public by the Ministry of Justice, over 2 1/2 years after the current government gained power. Regrettably consultation with key stakeholders has been less than ideal. The basic terms are:

Foreign-invested enterprises may acquire land between 20-200 ha without special permission. Land plots outside this range require special permission.

Foreign individuals may acquire land plots of between 5-20 ha, under one of three conditions:

(a) The individual has a Georgian spouse

(b) The individual lives in a “Georgian Household”

(c) The individual holds Georgian residency

If the individual loses their status (a), (b) or (c) , they must sell the property within six months.

A discussion from various investors, business organisations, parliamentarians and government officials followed.

Our comments:

(1) It appears this draft with developed by people with no knowledge of agriculture, and the restrictions appear completely arbitrary.

(2) It is unclear that the legislation will protect smallholders any more than existing legislation does.

(3) Excluding or restricting foreign capital from broadacre cropping of basic commodities such as wheat, sunflower, and maize (which require properties of 1000-3000 Ha to be produced cost-effectively) damages Georgia’s national security. In particular, Georgia’s dependence on imported wheat for bread (over 70% imported from Russia, Ukraine and Kazakhstan) makes Georgia’s future as a sovereign state vulnerable to naval blockade and aerial destruction of road and rail links with Azerbaijan and Turkey, should a future conflict with our northern neighbour resume. The full force of foreign capital and expertise, which is typically obtaining yields four times that of domestic smallholder producers, should be brought to bear on this segment for the food security of the nation.

(4) The restrictions on individual purchases almost certainly conflict with the Georgian constitution, and hence will be challenged in court once again. This will likely delay the adoption of a new land law even further, damaging Georgia’s credibility as an FDI destination.

(5) A six-month deadline for disposing of a farmland asset is unreasonably short.

(6) Forced sale due to loss of residency could be abused by the Ministry of Justice to expropriate land from foreign individuals. In addition, it fails to recognise the highly mobile nature of professional people today, who may take assignments all around the world during their working life while returning to a home base, or several homes bases, between engagements.

(7) Being a member of a “Georgian Household” must be the coyest euphemism for a foreign businessman shacked up with his mistress ever conceived………

To develop Georgia’s 2 million hectares of farmland to a fully productive state will require more than USD$2 billion in state expenditure on basic infrastructure over the next decade (irrigation, drainage, roads, electricity and gas) and a further USD$8 billion in private capital on farmland property development and processing facilities. Georgia does not have the domestic capital base nor the managerial capacity to accomplish this without foreign investment, technology and managerial inputs. Any legislation that impedes the flow of capital into the agricultural sector will ultimately harm the very people it is intended to protect.