UC Davis Study Finds Federal Program Has Significant Effect on Wine Market

News Release
August 31, 2011

Sacramento, Calif. – Today, the University of California Agricultural Issues Center released an economic study which finds that use of the federal drawback program expanded rapidly over the past decade, resulting in significant movement in bulk wine supply and prices for California winegrapes.

However, determining whether the drawback program is helpful or harmful to California’s winegrape growers depends upon several factors: a grower’s crush district; whether a grower’s grapes are destined for use in economy-priced wines and/or bulk wine, or in bottled wine at higher price points; and, the relative balance of wine imports versus exports.

“I applaud UC Davis for their thorough analysis of the drawback program,” said Kim Ledbetter Bronson, chair of the California Association of Winegrape Growers (CAWG). “The drawback program is obscure and complicated, but the study makes clear the program has a significant impact on our industry.”

Under the drawback program, a wine exporter can receive a drawback payment from the federal government equal to 99 percent of the duty and excise tax paid on imported wine when matched against an equal volume of exported wine, of similar price and like color. Only firms that import and export wine can claim a drawback payment, while firms that exclusively export domestically produced wine, without corresponding imports, cannot claim drawback payments.

The use of drawback for bulk wine climbed rapidly from 2001 to 2007, when bulk wine export volumes exceeded bulk wine imports. During that time, the program acted as an incentive for the import of bulk wine. According to the study, for those firms that import and export bulk wine, the average value of drawback payments received was about 40 percent of the per liter price of imported bulk wine, thus creating a large incentive to expand imports.

Between 2004 and 2007, the study estimates the drawback program likely depressed or suppressed prices for California winegrapes destined for economy-priced wines by between 2.7 and 5.7 percent, particularly affecting growers in crush districts 12, 13 and 14.

Conversely, when the volume of wine imports exceed exports, the drawback program promotes exports and is believed to benefit winegrape prices. In recent years, with bulk-wine imports having grown substantially, the program encourages bulk-wine exports when import volumes clearly exceed export volumes. In this instance, the study indicates the program may contribute to a 10 to 20 percent rise in prices for winegrapes used in economy priced wines.

While the effects of the drawback program on bulk wine imports and exports may see-saw back and forth, it appears the program is more consistent in promoting exports of bottled wine. This is due to the fact that bottled wine imports to the United States historically exceed exports by a wide margin. Thus, generally, it is comparatively easier for an exporter of bottled wine to make a drawback claim by matching an export transaction – of like color and approximately equal value – against an import transaction.

The study concludes that more data is needed on wine exports and imports, broken out by color and price, to gain a fuller understanding of the market effects of the drawback program.

“The conclusion is clear, the drawback program has a significant effect on supply and prices for bulk wine,” said CAWG President John Aguirre. “What we need now is serious discussion within the industry about the long term ramifications of this program.”

You can find the full study at http://www.aic.ucdavis.edu/. The study’s lead author, Dan Sumner, Ph.D, can be reached at 530.752.1668.

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sharlene garcia | California Association of Winegrape Growers | Communications Director

1325 J Street, Suite 1560 | Sacramento, CA 95814
office 916 379 8995 | cell 916 803 6443| www.cawg.org | www.california-vineyards.com