What’s in a Name? Wine, Economics, and Terroir

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Today, I’m pleased to offer a temporary respite from analysis of climate change policy (and other environmental policies, for that matter), while remaining well within the general province of environmental and natural resource economics.  I do this through a merger of profession and avocation, in my case, economics and oenonomy (the study – as well as the enjoyment – of fine wine).

A Blend of Economy and Oenonomy

As some readers may know, in addition to having served as the founding Editor (and current Co-Editor) of the Review of Environmental Economics and Policy, I have had the distinct pleasure of being one of the founding Editors (along with Kym Anderson, Orley Ashenfelter, Victor Ginsburgh, and Karl Storchmann) of the Journal of Wine Economics.  If you’re laughing, let me quickly note that the Journal consists of serious, refereed articles, many by leading economists, and has been referenced by the New York Times, The Economist, and The Financial Times.  And – in what may be our high point or low point, depending upon your perspective – a discussion paper from the affiliated American Association of Wine Economists was referenced – and mocked – by Stephen Colbert on his “Colbert Report.”

A New Article

In an article that is forthcoming in the Journal of Wine Economics, Robin Cross, Andrew Plantinga (both of the Department of Agricultural and Resource Economics at Oregon State University), and I examine a concept that is central to the thinking of wine geeks around the world – terroir.  The Journal article – “The Value of Terroir:  Hedonic Estimation of Vineyard Sale Prices” – has not yet been published, but a brief version of our analysis – “What is the Value of Terroir?” – has just been published in the American Economic Review Papers and Proceedings 2011, and so I’m pleased to provide an even briefer summary here (quoting and paraphrasing from our AER P&P article) – both for wine geeks and for others.  First, however, let me acknowledge Chuck Mason and other participants in a session at the 2011 American Economic Association meetings for having offered helpful comments on a previous version of the paper.   Now, to the subject at hand.

Some Background

Wine producers and enthusiasts use the term “terroir,” from the French terre (meaning land), to refer to the special characteristics of a place that impart unique qualities to the wine produced.  The Appellation d’Origine Contrôlée (AOC) system in France, and similar systems adopted in other wine-producing countries, are based upon the geographic location of grape production, predicated on this notion of terroir.  Under the U.S. system, production regions are designated as American Viticultural Areas (AVAs), with finer geographical designations known as sub-AVAs.  Such designations allow wineries to identify the geographical origin of the grapes used in producing their wines, and – equally important – seek to prevent producers outside an AVA from making false claims about the nature and origin of their wines.

Some Empirical Questions

“What is the value of terroir in the American context?”  Does the “reality of terroir” – the location-specific geology and geography – predominate in determining the quality of wine?  Does the “concept of terroir” – the location within an officially named appellation – impart additional value to grapes and wine?  Does location within such an appellation impart additional value to vineyards?

The central question we sought to address in this work was whether measurable site attributes – such as slope, aspect, elevation, and soil type – or appellation designations are more important determinants of vineyard prices.  We did this by conducting a hedonic price analysis to investigate sales of vineyards in Oregon’s Willamette Valley, one of the most important wine-producing regions in the United States.

Thinking About These Questions

How should site attributes and sub-AVA designations influence vineyard prices?  If site attributes significantly affect wine quality and if consumers are able to discriminate such quality, then vineyard prices would depend on site attributes, and AVA designations might be redundant.

Alternatively, consumers might not be able to discriminate among wines perfectly and might use AVA designations as signals of average quality of wines from respective areas, and/or might derive utility directly from drinking wines which they know to be of particular pedigree.  In this case, site attributes and AVA designations would influence vineyard prices, with parameters for site attributes indicating how producers value intra-AVA differences in vineyard characteristics.  Presumably, producers attach premiums to site attributes that enhance wine quality, provided that consumers can perceive and are willing to pay for such quality differences.

What if, at the extreme, variation in vineyard prices were explained completely by AVA designations (that is, site attributes are irrelevant)?  This would indicate that terroir matters economically – as a concept, though not as a fundamental reality.  In other words, producers recognize the value of the AVA designation because they know that consumers will pay more for the experience of drinking wine from designated areas.  (Likewise, producers might bid up the value of vineyards located in designated appellations because there is prestige associated with owning vineyards in these areas.)  But if site attributes known to affect wine quality have no impact on vineyard prices, this would suggest that consumers cannot discern quality differences.  Any appreciation they might express for an area’s terroir would essentially be founded on reputation, not reality.

Our Analysis

We estimated a hedonic model of vineyard prices in Oregon to examine whether such prices vary systematically with designated appellation, after controlling for site attributes.  In other words, we carried out an econometric (statistical) analysis to examine the factors that appear to affect vineyard prices.

We employed a new data set we developed on vineyard sales with extensive information about respective properties, combined with GIS-based information on specific parcels.  In our sample (actually, the universe of sales of vineyard – and potential vineyard – properties in the Willamette Valley between 1995 and 2007), the average price of vineyards was about $10,000 per acre, with prices ranging from $2,500 to $42,000 per acre.

We also carried out a check on our vineyard pricing analysis by examining price premiums paid by consumers for wines from related origins.  If you’d like to read about either methodology, or see our quantitative results, please take a look at the article.  But, for now, I will just summarize our results.

Some Answers

We found that vineyard prices are strongly determined by location within specific sub-AVAs, but not by site attributes.  These appellations are supposed to reflect the area’s terroir, but our finding that the physical characteristics of vineyards are not priced implicitly in land markets raises questions about whether sub-AVA designations have a fundamental connection with terroir.

On the other hand, our results make clear that the concept of terroir matters economically, both to consumers and to wine producers.  Buyers and sellers of vineyard parcels in the Willamette Valley of Oregon attach a significant premium to sub-AVA designations.  One possibility is that buyers are less informed than sellers about how the attributes of a vineyard will affect wine quality and, therefore, rely on sub-AVA designations as quality signals.

In any event, consumers are evidently willing to pay more for the experience of drinking wines from these areas.  While they may not discriminate among wines in terms of their intrinsic qualities, consumers are apparently responding to extrinsic qualities of wines, such as price and area of origin.  So, terroir survives – as a concept, but somewhat less as a fundamental reality.

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2 Responses to What’s in a Name? Wine, Economics, and Terroir

  1. Pingback: Dry (as in Bordeaux) Friday reading « Hunting Fishing Nature Tradition

  2. jcb says:

    I’m not sure how much can come of this approach to understanding the pricing of a (relatively speaking) luxury commodity, particularly using a literal definition of terroir. A large part of wine-pricing is marketing and “reputation.” And I suspect that there is a locational effect that comes from first exploiting land suitable for vineyards, that then clusters other growers.

    Though I’m certainly not a wine expert — I’m a connoisseur, if at all, of cheap wines — I do study the history of alcohol consumption in Europe, including wine. But a recent visit to a few Willamette Valley wineries (in the Dundee Hills) with a visiting cousin convinced me that terroir (except in the narrowest possible definition of label) doesn’t count for very much.

    First we visited Domaine Drouhin, a state of the art winery, owned by a well-known family of French producers from Burgundy (snob appeal!). It has relatively elevated southern exposure. Its pinot noir is relatively expensive ($40-65 a bottle). The wine was fine by me, and tasted like . . . pinot noir. My cousin bought a case, and gifted me a bottle.

    We visited several other wineries in the hills overlooking the valley. All fine. Most costing somewhat less. Finally, we went to Archery Summit, at the summit. Big, bold pinot noirs. So bold they tasted like, um, cabernet sauvignons. More sun maybe? Dunno. Their prices: $85-100 dollars. Well, I thought, if you want to drink a cabernet sauvignon, why buy a very expensive pinot noir? Then I saw a framed clipping on the wall from the Wine Spectator. It rated Archery Summit’s wines in the 90s. So, the Wine Spectator likes bold red wines. And getting good reviews in the Wine Spectator means you can charge $85-100 a bottle for your wine.

    Attempting to correlate “quality” and “price” and “terroir” strikes me as requiring very complex calculations for a result that, based on the full article, appears to be a null hypothesis. Unless you are providing analyses of soil, moisture, sun-exposure, controlling for particular harvests, and distinguishing wineries that produce their own grapes on site from those that buy and mix grapes from elsewhere, “terroir” comes down to a name or a brand, or perhaps a particular winemaker (separate from a winery). (Some of these are done in the full article.) Therefore it is likely to depend on marketing and reviewing and creating a mystique. Allowing for some obvious physical and financial constraints (which can be studied, see below), wine making and taste for wines most resembles art appreciation: one of life’s enjoyments, but subject to fads in the determination of value or quality.

    P.S. Incidentally, perhaps the best book every written about the history of wine is Roger Dion, Histoire de la vigne et du vin en France. He goes out of his way to demolish the notion of geography and terroir as determinants of quality or popularity. (He’s a historical geographer; the analysis is subtle and complex.) The book is old, and has not been translated into English. Perhaps a useful undertaking for the Journal of Wine Economics….

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