Once Marginal Terroirs Take Argentina’s Wines to New Heights

BY STEPHEN TANZER | SEPTEMBER 05, 2019

Having tasted with a number of top Argentine producers in May and June in New York in the course of sampling about a thousand new releases from Argentina, I can tell you that they were buoyed by the high quality of the 2019 harvest following a coolish though dry growing season and a relaxed harvest. But since then, the shockingly weak performance of Argentina’s President Mauricio Macri in a primary election on August 11 has thrown yet another curveball at the constantly beleaguered Argentine wine industry, so 2019 will probably be remembered more for its economic and political jolts than for its favorable weather conditions. The mood in Argentina was grimmer as I finished my annual tastings of new releases in late-August.

A 100+-year-old vineyard planted with pre-phylloxera Malbec at Colomé Estate in Salta

Once Again, Argentina’s Economic Future Is Murky

I wrote at length last year about the economic challenges facing wine producers in Argentina. But the local wine industry - and the country in general - faced a larger shock just a few weeks ago, when Argentina’s center-right President Mauricio Macri, a former civil engineer who also briefly attended the Columbia Business School and Wharton, and who has introduced numerous market-friendly policies since taking office in late 2015, was unexpectedly swamped in a primary election. This presages a defeat in the upcoming presidential election in October and a possible return to the old interventionist policies of his populist predecessor Cristina Fernández de Kirchner, who is technically running as vice president on a ticket led by Alberto Fernández. On the surface, it appears that much of Argentina’s population has grown tired of waiting for Macri’s policies to bear fruit, as they are still dealing with recession, austerity and extremely high inflation, which had reached an annual rate of over 50% by July.

The most recent devaluation of Argentina’s peso of virtually 33% against the U.S. dollar in the three business days following the primary election triggered yet another increase in inflation estimates for the rest of 2019. (The peso has stabilized, at least for the time being, between 55 and 60 to the dollar – compared to 20.5 when I spent two weeks in Argentina in April of 2018, just over a year ago!) This incremental inflation will only deepen Argentina’s current recession and cause further declines in domestic wine consumption. Costs will go up, producers will raise prices, and consumers will drink less – a vicious circle. Wine prices had already increased in the local market in the past 18 months due to short crops in 2016 and 2017.

The short-term effects on the wine industry – and the domestic economy in general – will be confusion and paralysis. The sharp devaluation of the Argentina peso that followed the primary election will result in salary adjustments, which in turn threaten to paralyze the economy. For wineries, it will push up production costs. And that’s not even accounting for short-term disruptions to the marketplace: with suppliers of such dry goods as bottles and corks reluctant to sell until the exchange rate settles down, only buyers willing to pay in U.S. dollars or Euros will be able to purchase what they need, but then these wineries would get no positive effects of the devaluation.

It will also be a difficult time for growers who sell grapes to domestic producers, and this poses a longer-term threat to Argentine wine as a whole, as some vineyards that produce bulk wine will no longer be economically viable. In fact, it’s already a problem, as growers received their first payments for the 2019 grapes in July, based on prices that had been established in March. After devaluations in April and August, the value to them of these payments has declined considerably.

In contrast, Argentine producers that are oriented toward export markets should benefit from at least a short-term boost in their margins – an exchange rate windfall – as they are paid in U.S. dollars or Euros, and these currencies will now go farther in Argentina. But eventually, the producers will have to pay the same higher prices for imported dry goods. And of course, whether they export or not, they will all have to deal with continuing political and economic uncertainty. Export-oriented wineries seeking to remain competitive in important international markets have already struggled for years; in many instances they have essentially held their prices steady (in U.S. dollars or in Euros) for a long time. The pressures on them will only continue to increase.

Just as important, it will become more difficult than ever for wineries to make medium- and longer-term business decisions, such as purchasing vineyards, expanding wineries and so on, as their likely future costs and sales margins become harder to predict. And, of course, nothing will be certain until the Presidential elections in late October, and even then the ultimate fate of Argentina’s large debt obligations may still be unclear. In late August, Argentina’s government declared a selective default, which further clouds the situation.