Di Mase Eglantina Thesis

8/6/2019 Di Mase Eglantina Thesis

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5th Annual Conference American

Association of Wine Economists

STIMULUS AND RESPONSE

THE COMMON MARKET ORGANIZATION WINE REFORM

How does it affect economically, socially, and environmentally?

Eglantina Di Mase


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Introduction ...................................................................................................................................................................... 5

1. The Worldwide Wine Market ........................................................................................................................... 71.1.World Production........................................................................................................................................... 71.2.World Consumption....................................................................................................................................10

2. The EU Wine Market ..........................................................................................................................................122.1.Wine Impact on the EU Economic........................................................................................................122.2.Wine as a Source of Employment .........................................................................................................132.3.EU Wine Production...................................................................................................................................142.4.EU WineTrade: Imports/Exports..........................................................................................................17

3. The EU Wine Industry Regulations...............................................................................................................213.1.The Common Market Organization......................................................................................................213.2.The CMO regulations inefficiency........................................................................................................253.3.The EU Situation/ Problem Definition ................................................................................................26

4. The Common Market Organization For Wine...........................................................................................284.1.The CMO problems ....................................................................................................................................284.2.The CMO Reform ......................................................................................................................................294.3.The CMO Options Evaluated for the Situation ................................................................................30

5. The Profound Wine reform: Option Chosen by the CMO ....................................................................345.1.Profound Reform of the CMO Variant A: One-step ..................................................................355.2.Profound Reform of the CMO - Variant B: "Two-steps" ............................................................355.3.Common Features of Both Variation A and B ................................................................................365.4.Budget ..............................................................................................................................................................51

6. Expected Effects of the Wine Reform .........................................................................................................566.1.Economic Impact .........................................................................................................................................566.2.Social-Economic Impact on the Rural Areas ....................................................................................596.3.

Environmental Impact................................................................................................................................61

6.4.International Effects ..................................................................................................................................637. Recommendation ..................................................................................................................................................66Conclusion ......................................................................................................................................................................72

ANNEXO 1 ....................................................................................................................................................................74

ANNEXO 2 ....................................................................................................................................................................77


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ANNEXO 3 ....................................................................................................................................................................80

ANNEXO 4 ....................................................................................................................................................................82

ANNEXO 5 ....................................................................................................................................................................84

ANNEXO 6 ....................................................................................................................................................................85

ANNEXO 7 ....................................................................................................................................................................86

Figure Index ...................................................................................................................................................................87

Bibliographical Reference ........................................................................................................................................89


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Water separates the people of the world, wine unites them. Anonymous


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Introduction

Wine is the perfect blend between nature resources and human creativity. Its production

requires both art and science, its consumption just passion and like this, just with time wine

becomes a culture, a career, a business, an storyteller. It is because of its delightful effects, that

sometimes we forget that overall wine is a commodity. Its production is not only sensitive to the

environment but it is mainly affected by economic and legal factor.

In the last decades, a pleasure that used to be reserved only to the well educated and

owners of a refine taste,has become increasing popular among a wider spectrum of social classes

and geographical locations. Peoplehave been leaving behind the discourse of seeing wine as a

rare and luxury commodity, to incorporate it in their common choices when considering what to

consume, in other words, winehas taken a greater share of the stomach. This has set off a

chain reaction that changed the landscape of the industry forever: wines exports and income

activities have increase, retailers now devotegreater shelve space to wine, marketers often come

up with new cutting-edge ideas to appeal to their target markets, and producers have innovated

with new strategies to increase sales and gain a larger market share. This is theglobalization of

wines. Even though many trading barriers have been eliminated withglobalization and trades

agreement, many others have been created with wines laws and regulations.

Wine needs to be regulated not only as an agricultural product, but also as an alcoholic

product. It has to undertake production regulation, trading regulations,environmental regulationsand even social regulations. Even though these regulations areessential for the over all good of

the community, most of them affect the market flow of wine, causing a greater market unbalance.

The problem is not on regulating the wine; the actual problem is that when creating the

regulations the mind is set is under the countrys economic reality, monetary availability, and

social necessity, and not on the wine industry itself. Which is perfectly illustrated in the

European wine industry.

The European Union (EU) is the worlds leading producer, consumer,exporter and

importer of wine. Still due to theglobalization of wine the European wine industry is suffering a

loss of market share, world recognition and business profitability. As a reaction the European

Commission has made a reform of the EUs Common Market Organization for wine. This

reform aims to create a sustainable wine sector by: increase the competitiveness of the industry,

strengthen the reputation of EU wines, recover old markets,gain new ones, create new rules to


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operateeffectively, while respecting theenvironment.

The objective of this report is to provide an understanding on the 2006 Common Market

Organization profound wine reform, while discussing the different economical, socials, and

environmental effects that this reform will bring to the European Wine industry. The research

will explore several themes. The first part of the dissertation examines and discusses the

worldwide wine industries and its production and consumption. It then specifies in the European

wine industry, studying the role of wine in different sectors of the Community, its weaknesses

and strengths. Subsequently the study describes and illustrates through tables and graphs the

legal framework of the EU wine sector and its development through time. The dissertation

bodys focus on the Common Market Organization of wines, mainly on theexplanation of the

new reform measures. From whicheconomic, social, and environmental impact are then

evaluated. Then the study attends to provide futures reform recommendation leading to the final

thesis reflection.

Data analysis includes an examination of the past EU wine regulatory scheme and how the

new reform affects the EU economic, social and environmental sector, and the international wine

sector. Primary data was obtained through interview withexecutives from diverse countries, who

work in different wine industry areas. Also by asking a simplequestion to 50 people, both

European and International, about the Common Market Organization reform. While secondary

data was mainly obtain from the European Commission Agricultural webpage, newsletter articles,

wine documentaries, and books. The dissertation seeks to accurately predict theeffects of the

new CMO wine regulation on different levels of the EU wine industries.

A limitation of this study is that not all reform measures have being put into practice. In

addition the ones that have put into practicehave been in the market for just a short time, not

reflecting the overall real effects ofeach measures. In addition another limitation is that most of

the data comes from the EU agricultural commission, whichgives sometimes information which

is not subjective. However, the original findings of this research come from academic knowledge

and comprehension gain from common past events.


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1. The World Wine Market

1.1World Production

Wine production is found in all continents of the world except Antarctica. In 2009 there

was a total of 268.7 million hectoliters of wine produced (not including juices and musts). Last

year the overall world wine productionincreased by 1.1 million hectoliters compared with the

267.6 million hectoliters produced in 2008. (Indian Wine Academy) Figure 1, illustrates the total

of wine production through different continents.

Figure 1: Global Wine Production Distributed by Continent.

Source: Indian Wine Academy

The European continent is the major wine producing in the world, producing over 65% of

all worldwide production. The American continent is the second biggest producer, with almost

18% of the total worlds production. Oceania and Asia go hand-to-hand, increasing their

production continually. China is the country that drives the forces of the continental vineyarddevelopment. The last position is for Africa producing only 4.1% of the overall world wine

production. In 2009each continent had a country or more in the top 10 wines producers. Figure

2, illustrates in quantity and quality, the worlds most powerful wine producing countries.

4.1%

17.9%

5.1%

67.8%

5.1%

AFRICA

AMERICA

ASIA

EUROPA

OCEANIA


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Figure 2: Top 10 Wine Producing Countries

Source:Winebiz

Almost 50% of total wine production is done by three European countries; Italy, France

and, Spain. In addition, USA, Argentina and Chile represent thegrowing wine producers from

the American continent. The fact that China is in the top 10 world producers reflects its rapid

growth. Finally South Africa, represent the African continent with 3.4% of the world wine

production.

Source: FAO

47.7%


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Figure 3: The Principal Wine Producing Countries (in thousands of hl) and Its Development.

Source: Organisation Internationale de la Vigne et du Vin (OIV) .

Figure 3 illustrates the top 20 worldwide producers and its significant positioning change

through out the years. As shown before France, Italy, and Spain are the top producers of the

world. Therehas been a drop in French and Italian wine production over the last ten years,

compensated by a stronggrowth in Spain wine production. There is an anticipated increase in

production from China and Romania. Robert Beynat, Vinexpo chiefexecutive says China is

among the top 10 producers in the world in volume now days and India is getting close.In

addition we see theemerging of new wine producing countries such as Russia and Austria,

which were not present in the late 80s, but are present in todays wine industry, developing

every day more and more. Also New World1 producers such as Australia, Chile,and the United

States, are continually increasing their production of wine. These countries have been increasing

their overall vine plantation area in the second half of the 1990s and early in this

decade.Unfortunately, while there an increase in world wine production, there is a decrease in

the world consumption of alcohol, creating a worldwide wine surplus (Wine Instituted).

1New World wines: are those wines produced outside the traditional wine-growing areas of Europe, in particularfrom Argentina, Australia, Canada, Chile, Mexico, New Zealand, South Africa and the United States.www.goldmedalwine.com/member_benefits/education_terms


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1.2. World Consumption:

Theglobal wine consumption decreased by 8.785 million hectoliters in 2009 with a total of

236.5 million hectoliters vs. 245.2 million hectoliters of wine consumed in 2008 (Indian wine

academy). There is a slow down in the consumption of wine. The decline in the wines demand

can be a result of the worldwide crisis, combining with the rise in beers and spirits. For the pass

three years the world has been in an economic crisis, people are spending less money,especially

in luxurious products. Economical drinking options such as beer and local spirits are coming

back in trend, since they are cheaper.

Figure 4: Evolution of the World Wine Consumption

Source: winebiz


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Figure 5: Top 10 Wine consuming countries (wines below 15% of alcohol)

Source: VinExpo Asia-Pacific 2010

The 2010 VinExpo studies predicted Asia's wine consumption to growth by 25% in the

next five years. In Addition, it predicted the Asian wine and spirits market would be worth $6.4

billion by 2011. Figure 5 illustratehow Asia's wine consumption is set to grow by 31.61% in the

next three years. In addition, it forecasts the European wine consumption to fall, over the same

period experiencing a rise of the United States consumption of about 9.54%

Figure 6: Global over supply 1997-2004

Source: OIV, 2010;

Rothfield & Wittwer,

2008; IWSR, 200


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Figure 6 confirm thehigh increase of the wine production comparing to the decrease of the wine

consumption. Theglobal wine market is currently unbalanced by a production surplus. Over the

past few year supply has exceed demand by about 30 million ofhectoliters, which is equal to an

extra production of 12%. Even though some of this surplus is use in the liqueur industry, it is still

an important number.

2. The EU Wine Industry

The European Union is the worlds largest wine producer, consumer,exporter and importer

in the world. (European Wine Commission, 2006) The EU is the fathers of wine, throughhistory

it havegive wine life and recognition. It produces about 175mhl of wine per year. Which

accounts for 65% of world production, 45% of wine growing areas, 57% ofglobal consumption

and 70% of theglobal exports. (Common Market Organization, 2010) However, EU wine is not

as important to the world as it is for the EU its self. Nowadays, 17 out of 27 countries produces

wines giving European Union more than 1.5 million properties producing wine. This covers

about 3.4 million hectares, whichequals to 2% of the EU-25 agricultural area. Therefore, wine

products make up an important share of the EUs agricultural output, mainly in value. In 2004

the share of wine in agricultural value was 5.3% more than twice that of olive oil 2.2% and sugar

1.7%. (Common Agriculture Policy)

2.1 Wine Impact on the EU Economic

Wine is one of the main products of the EU agricultural sector. In 2004, the wine industry

in the EU accounted for 5.4% of agricultural output (17.4 billion) and employed about

1.5million people (15% of agricultural job). Average production over the past five years was

about 178hectolitres, worth about 16 billions. (Common Agriculture Policy)

Wine production plays a primary role in the agricultural activity of most wine-producing

countries. It represents around 10% of the value of agricultural production in France, Italy,

Austria, Portugal, and Luxembourg. The importance of wine production in economic activity is

even greater at regional and local level: for certain regions the value of wine production exceeds

20% oreven 30% of total agricultural production; the percentages can beeven higher, when

considering more restricted geographical areas. Figure 7; show the share percentage of wine in


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producing countries.

Figure 7:

Source: Eurostat-Economic Accounts for Agriculture

The table shows how production is also important to some of the new member state of the

EU, such as Greece, Austria, and Slovenia. In countries such as Italy, Luxembourg, Portugal, and

Slovenia the wine production is very important it is similar to its their total cereal shares. The

table also shows how wine is extremely important for the French agricultural industry. The wine

share is higher than its wheat share and almost seven times higher than the sugar beet production.

In the case of Spain, which is the third largest producing country of wine in the EU, wine onlycontributed with about 3% of value. In contrastthe share of wine is lower in the Czech Republic

0.7%.

2.2 Wine as a Source of Employment

Wine is very important source of labor in the EU, it not only produce farmers and

producers job, but also agents,exporters, importers and more. Only in the agricultural level, in

2005 EU wine producinghad more than 2 200 000 full time workers, which is equal to 22% of

the total EU agricultural work force (Eurostat). This will increase amazingly by including others

upstream and downstream part of the sector. In addition wine producers have always enjoyed

higher incomes than those in the agricultural level as a whole. Moreover, the average income

varies depending on the region and the kind of wine being produce.


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Figure 8: Average incomes of the EU wine producers according to the type of wine (2003)

Thegraph show us how in well develop Member States such as France and Luxembourg,

enjoy ofhigher incomes when producing wines. On the otherhand in countries such as Spain,

Greece and Portugal the income is very little. This can explain their low wine price. Furthermore

thegraph show us the important different between quality wine and table wine.

2.3 EU Wine Production

The European Union continues to be the world leader in terms of vinegrowing area and

wine production volume. France, Italy, and Spain are the three main producing countries of the

EU accounting for 85% of the EUs wine production. Other important producers include

Germany, Portugal, Romania, Greece and Hungary. In addition as shown in figure 7, winehas

and important role in countries such as Austria, Bulgaria and Slovenia. The following map show

how the wine production areas are spread through out the EU territory.


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Figure 9: Map of the EU Wine Producing Areas

source: Wine in the old world: new risks and opportunities.

The Following table shows the wine production of the leading EU countries in the past

couple of years.

Figure 10: Wine Production in Selected EU countries (1,000 Hectoliters)

Source: EU Commision andF

AS EU Offices

Due to thequality of the wines there is a big different between the volume of wine

production and the volume by value of wine productions of the different EU wine producing

member state. The following two graphs compare the Produce wine volume with the value wine

money.


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Figure 11: Volume of wine production by Member State (EU-27) ave. 200206

Figure 12:Value of wine production by Member State (EU-27) ave. 200206

Theses graph illustrate the production distribution of wine in volume and value. France is

the biggest producer in volumes and value. In average it produces about 53 million hectoliters,

whichequal to 28.6% of the overall EU production. Furthermore, with 47.3% of value

production it accounts for almost half of the value of the EU wine produce. Italy comes next with

around 50 million hl and a value of 4 billion. The third production place is for Spain with 45 hl,

but in value it only account for 1.2 billions. This reflects the low price of Spanish wine. This


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graph includes Bulgaria and Romania, whichhave been member of the EU since 2007, they

produce about 2 million and 5 million hl respectively. (Angelini, Franco)

For many decades now, the European wine market has suffered from a wine

overproduction problem. Every year the EU wine market imbalance changes, with a rises of

fallen of the wine surpluses this is done mainly because production varies significantly from year

to year, depending on weather conditions.

During the 70s the problem of over production was address by the creation of different

production laws. They deal withlimiting production potential by prohibiting new plantations and

motivating the abandonment of certain producing areas through the process ofgrubbing up.

The use of these instruments contributed to a decrease in the EU wine area and in the total

production of wine. The mix between the uses of these instruments and a higher demand let to a

better market stability until the mid 90s.

In addition, for most EU wine-producing countries, wine is one of their most valuable

export commodities, both for the agricultural sector and for theeconomy in general. For those

countries, therefore, wine contributes significantly to the trade balance

2.4 EU Wine Trade: Imports/Exports

Wine is one of the most EU trade products. EU wineexports are worth 15 billion, which

accounts for 3.5% of all the international agricultural trade. Globally around 83 million hl of EUwine, 30% of wine production, was export in 2006. The EU exports more than 17 million hl to

international countries and between 2008 and 2009 a total of 43.2 million hl were trade between

Members State. (EU Commison Data). A large portion of this trade involves the shipments of

bulk wines, used mainly for blending purposes, from both Italy to Germany (about 3 million hl in

January-November 2009) and France (0.8 million hl) and from Spain to France (2.4 million hl in

the same period) and Germany (1.1 million hl). (Calwinexport)

Excluding the intra-EU trade, wineexports from the European Union to third countries in

2009 declined by 8% in volume and 17% in U.S. dollar value. The main reason for this decrease

can be theeconomic crisis. In addition thehigher value decrease can beexplained by both the

decline of the wine prices and the stronger preference from the consumers in the importing

countries towards cheaper wines and the new world competition. The following table shows

exports from the EU-27 during the three most recent years.


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Figure 13: EU-27 wine Export. Quantity in 1,000 Hectoliters. Value in $.

The United States is the leadingexporting country for EU wine, 25% of the total volume

and 32% of the total value. In addition Russia is the second largest exported, base on volume,

since most shipment to Russia are of inexpensive Bulgarian and Spanish wine. Still figure 13

shows how in 2009 export to Russia decline by a -18%. On the otherhand we seehow the Asia

market growth. Chineseexport increase both in term of volume (+38%) and value (+ 36).


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Figure 14: Value of U.S. Wine Imports, Totals and Shipments from EU25, 1996-2007

The EU is not only the largest wineexporter in the world, but its also the largest wine

importer. Most imported wine comes from Australia, Chile, South Africa and the United States.

Last year total imports had slight increase in quantity but a decrease in value. These show how

EU market is changing its demand from expensive wine to moreeconomic wines. (European

Commission, agricultural and Rural Development)

Figure 15: EU Wine Imports. Quantity in 1,000 Hectoliters. Value in $.

On the otherhand, the unit price ofexports has increased compared to ten years ago;

therefore, the value ofexports has grown. The market is consuming less wine but more

expensive ones. Nonetheless, in 2005 the EU exported 351/hl compare with the 207/hl of wine


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imported. Therefore, the overall commercial balance for the EU wine sector remain with a

positive constant trade surplus of about 2billion. This is illustrate in Figure 16 and 17.

Figure 16: EU Wine Exports and Imports in Volume

Source: European Commission; Agricultural and Rural Development

Figure 17: EU Wine Exports and Imports in Value

Source: European Commission; Agricultural and Rural Development


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3. The EU Wine Industry Regulations

In the EU wine is treating as an agricultural product, made mostly by farmers and their

cooperatives. This is why the EU wine is control by the Common Agricultural Policy (CAP).

The main basically principles of the CAP are to; unified the market creating free trade, protect

European products against international products and financial solidarity with Europeans farmers.

The CAP subsides regions where winegrowing is an important economical activity, but there are

few viable agricultural activities. These payments ensure farmers income providing social

stability.

In addition within the CAP there is The Common Market Organization (CMO) for wine. It

is one of the most complex and detail legislation since it not only deals with standard topic such

as price, intervention, and trades but also with more specific topics as production, circulations

and release to the market, oenological practices, among others. The CMO follow the principles

of a single market model. It tries to keep preserve tradition and prevent destructive

commercialization through the used of technical and administrative legislation. It eliminates all

customs duties and other trade barriers to accomplish the free movement of wine between

Member States. (Common Agriculture Policy) The counter size is that some of the CMO policies

tend to stifle innovation and prevent effective market adjustment.

3.1. The Common Market OrganizationThe CMO aims are consistent with the objectives of theCommon Agricultural Policy, in

particular, to stabilize markets,ensure a fair standard of living foragricultural communities, and

ensure fair competition within the Single Market. The regime contains all ofthe basic

components of classic CAP support measures, including:

y Support of internal prices through planting restrictions, storage and distillationarrangements;

y Protection from low priced imports through a duty system; andy Export refunds to facilitateexternal sales into markets with lower prevailing prices.

In addition, the regime includes a complex set of rules on winemaking practices and labeling.

Over the past three decades the CMO policies haveevolved significantly. It started out

very liberal with a stable market, wine production had nocurbs on plantings and very few market

regulations.This freedom on plantings waseventually coupled with a program that virtually


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guaranteed sales, but whichgenerated a serious structural surplus that was partially addressed

throughexportrefunds (subsidies). In 1970, the first CMO for wine was established. It

distinguishes two categories of wines:quality wines produced in specific regions, so-called

quality wines psr, and table wines. Nevertheless, the responsibility to classify and control the

quality wines psr was left over to Member States. (Campbell, G. and Guibert, N)

During the 1970s there was a remarkable increase of wine production, which was

supplement by a constant high demand. However, this same principle of freedom of plantings

and virtual guaranteed sales started causing wine surplus. So in1976 the CMO became very

interventionist. It prohibited new planting for table wines production, the obligation to distil the

surplus wine, and subsidizing the conversion of vineyards to other agricultural products.

Moreover, in 1980s the wines demand decreased, while the wine production increased, creating

a huge wine surplus. Also this increase of production created a negativeenvironmental effect,

with water pollution and soil impoverishment. The CMO answered to theenvironmental problem

by reinforcing financial incentives forgiving up vineyards.

Important changes occurred during the 1990's on the European and world wines market.

The EU wine market stabilizes and new wine producing countries appear. With the pressure of

the wine market beingglobalized the EU find the need to sing the Uruguay Round agreement in

1995. So with it the wines community market was not longer isolated from the world market.

On the contrary the EU wines wereexposed to the world market competing with new world low

price wines. In addition, another consequence of the agreement is that when competing in a open

market, it is more difficult to improve market conditions and to support prices by just

withdrawing surpluses quantities (which was how it was done before). In fact, the market is fill

with new quantities of wine from international producers,giving customers more options,

making EU wines prices dependable of its new competition prices.

This change and combined bad use of certain rules induce CMO to write a new reform in

1999. Thegoal of the new reform was to improve competition in the long term, reaching better

balance between the demand and supply of the EU wine market, and guaranteeing better incomes

for framers. It also financed the restructuring of a large part of present vineyards.

Figure 18 and 19 below give an overview of the CMO instruments enforce following the

1999 reforms and theirexpected impacts.


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Figure 18: CMO Instruments in Force in Planting.

Source: Common Agricultural Policy

Figure 19: CMO Instruments Enforce in Distillation.



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Figure 20: CMO Instruments Enforce.



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3.2 The CMO Regulations Inefficiency

Still due to different factors such as the success of the new world producers, the EU

distillation crisis, demand changes, production and commercialization strategy the CMO have

not yet reach sustainable point for European wine market.

In addition due to different trade agreements the EU wine sector is very complicated. In

the wine sector any laws that deals with protected geographical indications or designation of

origin, depends of the WTO trade its intellectual property rights agreements (TRIPS).

On the otherhand there are also problems with the concept of quality wine produce in

specific regions (QWprs) since there is not an actual definition at the international level, there is

not concept ofgeographical indications. This and the fact that qualities wines have increase

make consumers more confuse, therefore weaken the value of thequality wine system and the

credibility of the label. Figure 21 shows the increase ofquality wine consumption.

Figure 21: Consumption by type of wine (EU-15)

source: Eurostat

On the mean time new world countries created easy geographical indications gaining

market share in world winescostumers. EU production of vin de cpage is limited, since no

blend of one variety wine of differentorigins is allowed. This regulation reduces the EUs

competitiveness. Therefore a reform of the current wine structure is need it, to improved the


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quality wine system.

Thehistory of the CAP reform and the CMO for wine is summaries in figure#22. First in

theearly years (1960) the wine was produce with not any regulations. Subsequently different

market situation took the wine sector to a crisis, obligating it to created new regulation in order

to reach competitiveness. Until nowadays where the market keep changing and thegoal is to

actually reach a sustainable wine sector, being both productive and competitive.

Figure 22: History of the CAP reform and the Wine CMO

Source: European Commison, Common Agriculture Market

3.3 The EU Situation/Problem Definition

The past information have shows us undisputedly the EU is a leader when it comes to

wine. Still when making and objective analysis the EU wine industry has weakness as well as

strengths.

The main strength of the EU includes wine producing traditions; centuries of well know

highquality reputation, 2.4 million wineries providing rural employments, cultural identity. In

spite of its huge market potency, the past years the industry have been facing some complex


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problems that are causing the falling of the EU wines in both the international market and the EU

market.

The wine sector is evolving in an increasingly competitive international scenario

characterized by the irruption of new producing countries with innovative strategies in

production and trade (Campbell and Guibert, 2006). The new world producers have taken an

significant market share of the tradition European wines market, like UK and new emerging

markets, like China. In the new world wine producers arehighly concentrate: the five top

companies control 73% of wine production in the United States, 68% in Australia and 47% in

Chile, against respective figures of 13% in France, 10% in Spain and 5% in Italy (Anderson et al.,

2001). Having smaller production structure make it difficult to reach to economy of scale,

causing a higher production cost that are then reflect in the price. The small production is not

adequate to the needs of today large-scale retailers, and expensive marketing strategies.

Anotherexplanatory factor of increasing competition on the world wine markets is the

evolution of demand. In aggregate terms, the tendency towards reduction in world consumption

experienced during the decades of 1980s and 1990s has been reverted in 2000 (since then,global

wine demand has increased by 9%, according to OIV (2008). Over the last ten years, imports

havegrown by 10% per annum, whileexports are only increasing slowly. However, in the major

producing and consuming countries the net tendency has been to decrease: between 1989 and

2004, total wine per capita consumption has fallen from 72 to 55 liters in France, from 62 to 49

liters in Italy and from 54 to 34 liters in Spain. EU wine consumption, is declining by about 750

000 hl or 0.65% annually. This decreasehas concerned almost exclusively table wines, whereas

higherquality wines have seen their market share increasing progressively. In the European

Union (EU), the proportion ofquality wine consumption within total wine. Consumption has

increased from 30% in 1986 to 46% in 2006 (European Commission, 2008).

While on the otherhand European wine follow the model of product differentiation. The

wine is differentiated base on where it was produce through the recognition of Designations of

Origin (DO) and Geographical Indications (GI). This appellation models affect the production

and commercial strategies. The CAP bases the control of vineyard production potential on the

prohibition of new plantations and yield limitation in the DO areas; preventing producers from

adapting their wines to changes in consumers taste. In addition labeling rules are complex

andinflexible, confusing consumers and restraining the marketing of EU wines.


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Another cause for concern is that European wine market is being left with largequantities

of surplus wine that require costly measures to manage (through disposal, storage or distillation

into alcohol). If continue current trends,excess wine production will reach 27 million hl (15% of

annual production) by 2010/11.Overproduction of wine depresses the market price and is very

costly to the CAP,especially when the surplus is distilled into bioethanol. The EU spends around

half a billion Euros every year just trying to eliminate surplus wine for which there is no market.

Thesehandicaps have led to a large loss of the market share of EU wines relative to competing

wines, both on the domestic and on theexport market.

4. The Common Market Organization for Wine

4.1 The CMO Problem

This situation reflects the inefficiency of some of the CMO policies. The over supply and

distillation crisis of the pass years show how the ban on new plantings has not completely

managed to control production. On the opposite the CMO distillation measures and other market

tools encourage overproduction, making it impossible to reach market equilibrium. Furthermore,

even though there is a grubbing up regulations, most of it activities have stop. Which until a

certain level shows the inefficiency of applying the law of the CMO.

On the otherhand some other regulations have created barriers for in the EU wine

industry. They do not allow efficiency and obstruct the development of new production

techniques and marketing methods. A perfect example is the labelling rules, which are very rigid

and varies too much, making it extremely confusing for customers. Moreover, the fact that each

state in the EU can define the table wine from thequality wine, today this classification does not

provided trust to consumers. It also contradicts with the concept ofgeographical indications for

wines.

Overall the EU wine sector is indeed in decline, not only due to decreased

consumption, but also because of continue use of traditional production techniques and a

lack of willingness to adapt to consumer trends. In addition competition is coming from

new regions with modern business techniques; whichhave succeed in their prices, taste

and marketing. The New World wines are competitively priced, modern in image, and


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some consumers think they have a better taste. The of the EU wine industry will depend

on its ability to counter to the ongoing threat from the New World. The CMO have

decided to change some of its regulation and reform the current CMO policy, to a more

competitive one. This changes will determining its success.

4.2 The CMO Reform

As a responded to this situation the European Commission created a new reform towards a

more forward-looking, market-oriented and sustainable wine sector.In 2006 it released a

discussion paper, Towards a Sustainable European Wine Sector, to facilitate debate among

growers, wine makers, retailers,exporters, importers, consumers and other stakeholders on the

future of the EU wine sector. In addition topics such as ensuring the sustainability for

producers, making provision for the smooth integration of the Bulgaria and Romania wine

market and keeping full respect of our international obligations, were also in the agenda of the

Commission.

In order to reach this target the CMO should achieve the following objectives:

y Ensure a betterquantitative and qualitative balance between supply and demand.y Increase the competitiveness of the EU wine sector by:

o Strengthening the reputation of EU quality wine as the best in the world, recoveringold markets and winning new ones in the European Union and worldwide.

o Meet the requirements and preference of consumersy Enhance market orientation,horizontal approach and cross compliance2.

2Cross compliance is a mechanism that links direct payments to compliance. Farmers may receive direct payments

provided that they maintain their land in good agricultural condition and comply with the standards on public health,

animal and plant health, theenvironment and animal welfare (cross-compliance) contained in the

Regulation. (http://europa.eu/legislation_summaries/other/l11089_en.htm)


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y Create a wine regime that operates through clear, simple and effective rules that balancesupply and demand.

y Create a wine regime that preserves the best traditions of EU wine production.y Safeguard producers' incomes,y Integrate wider society concerns,e.g. health and consumer protection and environmental

matters.

y Respect international obligations,e.g. WTOy Provide for a smooth integration of Bulgaria and Romania in the EU by enhancing the

modernisation and restructuring of their wine sectors.

4.3 The CMO Options Evaluated for the Situation

Taking into account the situation of the wine sector and what the policy aims for, on July

4th 2007, the European Commission approved proposals for a reform in the European wine sector.

Mariann Fischer Boel, Commissioner for Agriculture and Rural Development introduced the

proposals in 2006. The final version of the reform included several steps meant to increase

efficiency in the EU wine industry, as well as increasing its competitiveness in theglobal market.

Figure 23, show the sustainable legal framework that the EU will like to reach with the new

CMO reform.

Figure 23: The Three Elements of Sustainability for the EU Wine Sector.


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The Commission considered four possible options for the modification of the wine CMO.

The challenge was to obtain a reform that will create a sustainable and competitive European

wine industry, while usingefficiently the budgetary means. Three of the propose options; to

maintain the status quo, to reform the wine CMO along the lines of the CAP reform model and to

pursue a complete deregulation, do not gives the right answers to the problems, the needs and the

particularities of the wine sector. Instead, after more than one year of consultation and four

month of negotiation the CMO believed that making a profound reform of the wine sector was

the most adequate solution for the situation. This reform option would provide for in-depth

revision of all the policy tools of the CMO, which nevertheless would still preserve its specific

character. ( European Commission)

Figure 24 evaluates and summaries the different economical, social, political and

environmental effect that each option could have in the overall EU and wine industry.

Wine SectorSustainability

EcomicViability

SocialAcceptability

EnviromentalIntegrity


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Figure 24: Expect Impact of different Options.

Source: European Commision Common Market Organization

Option 1: Status quo with possibly some limited adjustments

In view of the serious difficulties of the current CMO in terms of:

y Achieving a better market balance,y Applying the rules correctly in some Member States, notably the plantingy Restrictions, andy Fitting in with the reformed CAP,y a merely cosmetic amendment would not be sustainableeconomically or politically.


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The commission believes this is not a good option since the current CMO regulations

have not provided the right solution to changing wine industry. It has not eliminated surplus or

increase international and national market share. Maintaining today's wine regimeeven with

small changes, would lead to increasing surpluses, making impossible a market balance. On the

otherhand in all other policy options, the abolition of market measures would guarantee a better

market orientation of wine production, therefore achieving market balance in the long term.

Overall the commission believes that many changes are necessary for this option to work in

todays wine market.

Option 2: Radical reform of the CMO of wine:

This is the option that Commission seems to prefer. This option gives the most

appropriate answer to the current wine industry crisis. It combats in both the short and long-term

the problems of the wine sector. This option will introduce a national envelope, which aim is to

transfer funds to Member State for rural development. This subsides will help winemaking

regions in Members States to adapt EU measures to local circumstances and needs, resulting in

more targeted subsidize.

It has three main elements:

y Reducing production through a ban on new plantings and permanent abandonment(uprooting) of vineyards

y The removal of measures such as crisis distillation, potable alcohol distillation andexport refunds that provide price support and encourage over production of wine and

y A reduction in over complex rules associated with winequality policy (productionand labeling rules) and oenological practices.

It has two variants A and B. A short term one, variation A, which provides a quicker

respond to the present difficulties, but required a more rapid and demanding adjustment. In

contrast, variation B, the long term variants, aim to obtain the same results but providing longer

time frame, makingeasy to adapt and apply the new regulations.

Later on a deeply description off option 2 and all its measure is given on the section call

CMO Profound Reform

Option 3: Reform along CAP reform lines


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For this option the main change is the conversion of all or part of the wine budget from

direct payment Single Payment Scheme (SPS).This will be distributed on winegrowing

hectare basis, solving someenvironmental concerns. In addition an advantages would be a major

simplification and the introduction of cross-compliance for all vinegrowers. This reform will

frame flexible.

The commission have agrees that overall this policy is adequate for the long term but not

for the short term. In the long run it will achieved market equilibrium and will address

environmental concerns. However, this is not the appropriate reform since in the short run the

market will have to undergo through a very difficult adjustment process, which could cause a

major crisis in the EU wine sector. With this policy, public intervention would mostly focus on

supporting farmers income and not in improving the market balance. In addition the overall

budget would be too little to compensate for the loss of market support for many growers.

Option 4: Deregulation of the wine market

This policy aims to achieve a complete liberalization of the sector by eliminating all

policies instruments for the management of the production potential and of the market. Tools

such as the ban on new plantings, and grubbing-up, the policy of restructuring and reconversion

and all market measures would be abolished. On the otherhand the budget would be cancelled or

transferred to the second pillar for Rural Development RD policy in general.

Even though the liberalization of the sector could in the long term achieved some of the

CMO, but the fact that this policy would have to be implement immediately in the short term it

can cause several economics and social impact on the wine regions because of the lack of

complementary structural measures.

5.The Profound Wine reform: Option Chosen by the CMO

"While strengthening our best traditions, this reform marks a point of no return for a

greater orientation towards the market and will help us mobilizing our sector in order to better

meet the consumers' expectations in an increasingly open and competitive context", said

Lamberto Vallarino Gancia, President of the CEEV. (6)

The Commission considers this option as the most appropriate response to the challenges. The


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reform has two variants, which main difference time frames in which they are suppose to be

done.

5.1 Profound Reform of the CMO Variant A: One-step

The key point for this option is that by the 1st of August of 2010 all the planting right

system and thegrubbing-up scheme should beeliminate. Vine-growers would be free to do

grubbing-up but at their own expense. In addition cultivated areas will enter into a single

payment scheme. Furthermore,each member state would maintain the right to limit the areas of

wine production withgeographical indications.

Figure 25, summaries the first step of the reform. It was implemented on August 2008.

Figure 25: First Step Action of CMO Wine Reform.

5.2 Profound Reform of the CMO - Variant B: "Two-steps"

The target of this variance is in the first phase is to restore market balance and the second

step is to improved competitiveness. The principal characteristic of variance B is that it acts as a

structural adjustment, i.e. temporarily reactivating thegrubbing-up scheme. In addition the

VariantA: FirstStep

August1st2008Measures keptand/orStrengthened

Plantingrights

Grubbing-up

RestructuringRuralDevelopment

EnviromentalRequirement

Promotion/information

Measures Added

NationalEnvelopes

Measures Deleted

Private storage

Distilation subsides

Exportfunds

Alcoholpublic storage

Mustaidforgrape juice

MeasuredeletedatEU levelbutremainoptionalatMemberStatelevel

Potablealcoholcrisis andby-productsdistillationsaid

Mustaideforenrichment


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regulations on plating rights would beextended until 31 December 2013. Like this, the least

competitive wine producers would have a strong incentive to sell their planting rights. Rapidly,

competitive producers can beexpected to focus more on the competitiveness of theirenterprise,

as the cost of planting rights will no longer slow down expansion. Therefore in the long term this

could reduce the farmers fix production cost. Thegrubbing-up premium will be set at an

attractive level. Oncegrubbed up, the agricultural area formerly used for vine production qualify

as an area under the SPS and begranted a certain payment. Furthermore, minimum

environmental requirement would be attached to thegrubbing up premium to avoid land

degradation.

Figures 33, 34, and 35 show the timetable of Variation B

5.3 Common Features of Both Variation A and B

Both variants contain common measures such as:

Abolition of all market measures:

Market management tools would be abolished from day one, such as:

ySupport for by-product distillation,yPotable alcohol and dual-purposegrape distillation,yPrivate storage support,yMust aid in relation withenrichment and for makinggrape juice.

Crisis distillation:

The aim of this measure is for the distillation scheme of surplus wine to begradually

eliminated. It would be dropped or replaced by an alternative safety net mechanism using the

national envelope. With this change producers areexpected to produce more wine only when

they are sure they can sell it. There would no longer be an incentive to over-produce. The

abolition of the crisis distillation will have different steps. The next four years will be the

transitional period. During this period EU member States, can finance crises distillation only

under certain conditions. Furthermore the distilled alcohol must be used in the industrial sector.

The subsidies for this crisis distillation will vary during this four years. On year one, the budget

for distillation may be up to a maximum amount of 20% of their national envelope. Following by


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15% in the second year and a 10% in the third and 5% in the final year. This information is

illustrated in the followinggraph.

Figure 26: Crisis Distillation: National Envelop Limits


Creation of a National Envelope:

National Envelope is the term created by the CMO to describe the fundinggiving to each

Member State according to their individuals priorities. Each wine producing state will have a

budget envelope calculated to a certain criteria. This will allow EU Members States to choose,

according to their preference and needs from a list of 11 measures to support its wine industry.

Some of these measures are:

yPromotion to third countriesyRestructuring and conversion of vineyardsyModernization production chainyGreen harvestingyMutual funds (mutual funds are a means of sharing risk amonggroups of producers

enabling farmers to be compensated in theevent of loss)


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yHarvest insurance (Crop insurance) against natural disaster.yVarious crisis management measuresyVineyard restructuring/conversion scheme.

Still theenvelope will be subject to certain common rules, includingenvironmental rules.

The main function of the rules is to prevent distortion of competition and to let Member States

adapt measures to their particular situation. In addition, the vineyard restructuring/conversion

scheme would be maintained under the national envelope. The overall budget will vary from

782.5 million in 2009 to 1,229.5 million in 2015. Table 7: shows the amount of national

envelopes corresponding to each EU wine producing Member Sate. The amount available for

each country is calculated according to vine area, production and historical expenditure. Overall

the national envelope will giveeconomic support to achieve the modernization of the wine

industry current structure.

Figure 27: Allocation of National Envelopes

Under the National Envelop there is the possibility of promotion in international markets.


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Still the Community funding contribution for these activities should not exceed 50% of thegiven

budget. In 2010, 140 million where allocated in the promotion of wine for third countries. Still,

the Commission believes that the current economic recession is less attractive for Member States,

since only 5% of the overall budget,has been used for this purpose. On the otherhand because of

this same situation the commission expects that for 2010 one third of the funds will be used for

the restructure and conversion of the wine yards. This activities will improved the

competitiveness of the Member States wine since it includes the relocation and improvements of

vineyard techniques.

Rural Development:

In order to finance structural measures for the rural development there will be a transfer of

funds from the CMOs wine budget to the European Agricultural Fund for Rural Development

(EAFRD)3, significantly reducing the wine budget. These development programs will play a key

role in the improvement of theeconomic welfare of the wine sector, as well as in preserving the

environment for the wine producing regions. Many measures in the Rural Development

regulation could be of interest to the wine sector, improving marketing, vocational training,

support for producers' organizations, support to cover additional costs and income foregone in

maintaining cultural landscapes.Early retirement and agro-environment support could provide

significant encouragement and benefit for vinegrowers.

The rural development activities will be financed by the EU and by each Member State.

The rate of EU co-financing varies between 50% and 80% depending on what are the funding

activities and the region. The reminder will be payed by theeach local authority. It is important

to highlight, that the rural development was created forentire agricultural sector, only three

Member States are allowed to use RDs funds for the wine sector, Italy, France and Spain.

The amount of wine budget to be transferred to the EAFRD is set at 50 million in 2009

and increased to 100 million in 2010, and to 150 million from 2011.

This is a much less significant amount than the one in the Commissions original proposal

which suggested Rural Development spending to be 400 million a year by 2014 (USDA

Foreign Agricultural Service). Mainly the budget will be used to improve thequality of the wine.

3Utilization of the European Agricultural Fund for Rural Development (EAFRD) is in accordance with theobjectives and strategic framework of Community rural development policy as defined in this Regulation.


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Still, some of the budget can be used forenvironmental purposes such as keeping vineyards on

slopes in areas where other types of agriculture are difficult and have a risk for land

abandonment.

Simplification of the Quality Policy:

Concept of Quality Wine:

Nowadays the Community definition forquality wines is: Quality wine produce in

specific region. Still with in the EU this definition received different treatments. In countries

such as Germany, Austria and Hungary the concept of quality is more important that the

concept of Origin on the otherhand in the south of Europe, countries such as France, Spain,

Italy, and Portugal, focus more on geographical indications. Causing confusion in customers

mind.

This policy aims to simplify the concept ofquality wine covering both the production and

the labeling. This policy aims to:

yMaintain a highquality standard forquality wines produced in specific regions, whichnowadays are the 40% of EU wines.

yEncourage balance production ofquality wineyEstablish conditions of fair competition in the EU

The Commission will try to achieve these aims by revising the current quality regulation

scheme with the purpose of balancing the policy with international rules. Furthermore the CMO

quality policy will be reliable to the current horizontal quality policy (on Protected Geographic

Indications (PGIs) and Protected Designation of Origin (PDOs)). The Commission proposes to

establish two classes of wines: wine without GI (Geographic Indication) and wine with GI.

Wines with GI would be further divided into wines with a PGI and wines with a PDO.

In order to gain market share and promote the EU wine, the CMO wants to keep working

with the concept ofgeographical origin approach. The aim is to confirm, adapt, promote and

enhance this concept worldwide. Furthermore, in order to better control and manage thequality

of the wine, there will be an expansion in the role of theinter-professional organizations.

Wine Making Practices (WMPs):


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This policy will transfer the responsibility for approving new or modifyingexisting

oenological practices to the Commission, which will include all those allowed by the

International Organization of Vine and Wine (OIV) incorporating them into the list of accepted

EU. Nowadays in the EU the adoption of new oenological practices depends on the competence

of the wine producing country (Member State) through the Council of Ministers of the European

Union.

Some of the changes the Commission has proposed are:

yAllowing European wine forexports to use the wine making practices forbidden by the EUlegislation. Still EU wines for the internal market will comply with the European

legislation for the winemaking practices.

yEliminating the minimum natural alcohol requirement. Nowadays this law is redundantsince there is a limitation of wineenrichment and there is a legal minimum for alcoholic

strength by volume of the wine marketed

yTo ensure an acceptable minimum level ofenvironmental care in the wine making process.yThe banning of sucroseyThe abolition of aid for concentrated mustyBans on imports of musts for vinification and on blending.

Although the Commission will allow the OIV wine making practice, it will continue

to block the production of rose by blending red and white wines together.

Enrichment:

Wineenrichment can be achieved by adding sugar before the fermentation process. This

process is called Chaptalization and is done to raise the level of alcohol. Overall the OIV does

not recommend this process. It is prohibit in several New World wine producing countries

such as: Argentina, Australia, Chile. In addition another way to raise levels of alcohol is by using

concentrated musts, which can raise the alcoholic level of wine by 1%-3%.

This process is mainly used in cold climates in which thegrapes may not ripen sufficiently

to generateenough sugar for the fermentation process. Therefore the wine producing countries in

the north of the EU strongly made the case for this process to be kept, whereas the wine

producing countries in the south of the Union considered this an unnecessary and unwanted


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practice. Unfortunately, producers frequently useenrichment to producegreater volumes of wine.

They increase the yield of wine with low alcohol and then use theseenrichment methods to raise

the alcoholic levels. Producing a bad quality product, which is difficult to sell and have to be

store or distilled.

To solve this problem the Commission had three options, these were:

y Increase the aid for must, to compensate the reduction in the sugar price.yLeave the level of aid unchanged, which may disturb theequilibrium.y Remove the aid and ban the use of sugar.

The Commission decided that removing the aid and banning the use of sugar would be the

best option since it will not only save budget while increasing the channel for must.

A second step of this policy is the reduction of maximum level ofenrichment, withgrape must to

2% except in winegrowing zone C (meaning certain parts of France, Spain, Portugal, Slovakia,

Italy, Hungary, Slovenia, Greece, Cyprus, and Malta) where the maximum should be 1%. Ending

chaptalization and the aid for must, will enable the balance to be maintained between north and

south. All producers will then make wine purely from grapes and unsubsidized must. In addition

Member States may request the Commission to increase the level ofenrichment with 0.5 percent

forexceptional climatic reasons. The following table shows the criteria changes of the use of

chaptalization depending on each zone.

Figure 28: Geographic Allowed Level Of Chaptalization

Zone Current Sugar % Starting 2009/2010 Sugar %

Zone A 3.5 3.0

Zone B 2.5 2.0

Zone C 2.0 1.2

With this measures the commission aims to improve thequality image of EU wine,

increase the outlet for concentrated grape must, and simplify the rules for producers.

Wine Labeling:


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Wine labeling rules areextremely important since they give information about the product.

Most wine producers cannot allow them self to have an advertising budget, so the label is the

only medium for them to communicate with consumers. The labeling rules should be simple and

constant since they provide universal information to the consumer, trade partners and structure

wine supply on the market.

Todays CMO labeling regulations seem to prevent winemakers from achieving the

transparency that an increasingglobal market requires. The current EU wine labels follow

different laws such:

yDifferent labels between types of wines and location appellation wines, table wines withdifferent geographical indications and quality wine produced in a specific region.

yLimiting the information: vine variety or vintage can only be mention on the labels ofquality wines psr or table wines withgeographical indication.

The Commission proposes the liberalization of labeling by simplify the labeling setting up a

single legal labeling framework, which will be applied to all the different categories of wine.

When doing so the commission took into account WTO policies and tried to adapt the policies to

the trademarks structure. This labeling simplification will answer to the needs of consumers

whileenhancing with the winequality policy. The Commission proposed the possibility of the

vintage year (yearharvested) and the variety (type ofgrape) to be indicate on the labels of thewine. This would allow EU wine to compete better with the wines from the new world.

Furthermore, in the world there are a total of 2873 winegeographic indications. Most of then

belong to the EU and they are mainly divided between wine protecting the design of origin or

wine protecting thegeographical indicators. When comparing to the rest of the world the EU has

more than the double ofgeographical indications. This is one of the main factors that confuses

consumers, when buying EU wine. The followinggraph shows the world division of

geographical indications.

Figure 29: Division of Geographical Indicators Between EU and Third Countries.


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Source: Eurostat

The new reform bases the concept of the EU quality wines on geographical origins

(quality wine produced in a specified region). Wines with Geographical Indications will be

divided into wines with Protected Geographical Indications and those with Protected Designation

of Origin. However, already well establish national quality labeling system, such as Frances

AOC (Appellation d'Origine Controlee) and DOC (Denominazione di Origine Controllata) in

Italy,have been ke pt. Also the changing of language rules will help thegain internationals

customers market share. Another proposition was to have the option to put or not put the

Geographic Indication of vine, but still inform the consumer of the origin of the product through

appropriate labeling rules. These labels would inform customer about environmental and health

aspects.

Figure 30: Quality wines / GI s


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Promotion and Information Policy:This policy tries to gain the EU wines more market recognition by carrying out ambition

promotions products outside the EU. In addition information and responsibilities campaign will

also be carried out outside and within the EU. This will include a budget of 120 million out of

the national envelopes for promotion measures outside the EU, 50 percent co-financed by the EU.

There will be new information campaigns within the EU on wines with Geographical Indications

and responsible/moderate wine consumption, with an increase of co-financing rate by 60 percent

for the latter.

Each promotion activities will be different foreach member state and will be managed by

national companies. The following are the plans of the promotional activities of the main EU

wine markets.

yFrance:The domestic and international promotions are managed by the National companycall Sopexa. The main purpose of this company is to promote and educate about French

wines and food in the EU and overseas. In addition, Sopexa gives funds to the french in

the new French Association for Horticultural activities and Wine Products call Agrimer

and also for foreign promotions, mainly in Europe, the Americas, and Asia. Promotional

activities are mainly focused on advertising campaigns, promotion in different points of

distribution such as, in stores, in hotels, restaurants, specialized outlets, trade shows and

fairs. The overall French budget for wine publicity is unknown.

yGermany:The German wine industry is focusing mainly in promoting Riesling in the USA

WineClassification

TableWine

TableWine

TableWineGIs

Wine withoutGIs

Wine withGIs

PGI

PDO

QualityWinepsr


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market. For the period of 2008-2010 the German Wine Institute will spend 1.5 million

in different promotional activities of the Reisling wine in the USA. Mainly the budget is

being spend in media presence and the creation of a Reisling-week in restaurants in the

main US cities; New York, Chicago, Las Vegas, and San Francisco.

yAustria: the Austrian Wine Marketing Board (AWMB) manages the promotion budget.The main purpose of this organization is to market Australian wines within the EU and

international. Intra-State Australian wines are promoted mainly to Germany, Italy,

Norway, Sweden Great Britain, Ireland, Belgium, and the Czech Republic. On the other

hand their main non-EU target are Switzerland and the United States. The budget for all

this marketing and promotions comes from the Austrian wine industry, accounting for

about 3 million, the federal State, contributing with 2.5 million and the Australian

federal budget, with about 1.5 million.

ySpain: Spain exportations are concentrating in wine in bulk. Its exporting industry is highin quantity but low in value. New competitors of wine in bulk, such as Australia and

Chile are taking big market share of what used to be main exports. The Spanish wine

industry wants to create name recognition. The Spanish wines industry aims to promote

their wines undergeographical indicators, withhigherquality wine, thus more added

value. The institute of Foreign Trade called, ICEX, along Wine from Spain are the

organizations responsible for promoting Spanish wine. Currently they areexecuting the2010 Marketing plan that includes activities in 30 countries. Their main promotional

activities are, trade shows, seminars, wine tasting, wineevents, meeting with journalist.

y Italy: the company responsible Italian wine and food promotion is the Italian tradeCommission (ICE). Furthermore, the ICE is an agency of the Ministry of Economic

Development, which is the main funds source for the Italian wine marketing and

promotion. Due to budget constraints in 2010 the total amount ofexpenditures to promote

Italian wine with in the EU and in third countries has been cut to no more than 3.5

million. Italian wine promotion is mainly focus in the United States, United Kingdom,

Japon, Canada and Switzerland. Several promotion activities such as, wine tasting, sales

of point promotions, workshops and being done in the target export market. In addition

most of the budget is beingexpend on fairs and trade shows, where the cost of national

pavilions is shared with private companies. Other activities include financing trade teams


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to Italy, and organizing wine tastings.

Minimum Environmental Requirements for the Wine Sector:

The process of winegrowing and wine making produce a negativeenvironmental impact,

this policy aims to diminish this impact. It tries to introduce some small environmental

requirements, covering the main environmental effects (notably, soil erosion and contamination,

the use of plant protection products, and waste management).

Theeligibility of all wine-growing areas to qualify for the Single Payment Scheme means

that environmental standards under Cross Compliance1

will be applied more widely. Cross

Compliance will apply for all grubbed-up areas. There will be minimum environmental

requirement forgrubbing-up, restructuring and green harvesting, and increased funds for agro-

environmental schemes in Rural Development programs.

Other Point highlighted by the Profound Reform:

Grubbing-up scheme:

Grubbing up is the practice ofgiving money to winegrowers to turn vineyards over to

other use. The original proposal from the Commission was projected to reach 200,000 ofgrub-up

ha at theend of the five year period, and the cost expected to decrease from 430 million in the

first year to 59 million in the fifth year. In the final proposal a three-year voluntary grubbing-up

scheme is expected to help remove surplus and uncompetitive wine from the market. About five

percent of the total vine area (175,000ha) should begrubbed-up. Growers who wish to leave the

sector will be offered a voluntary grubbing-up premium. Thegrubbing-up scheme will not be

offer to countries that produce less than 50,000 hectoliters of wine per year. The budget for the

grubbing-up of the 175,000 ha will be divides the following way:

Figure 31: Yearly Allocation of Subside Budget

2008/2009 2009/2010 2010/2011

464 million 332 million 276

i.e. the current premium

raised by 20%

i.e the current premium

raised by 10%

i.e. the current premium


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In year one, the premium will be 20% higher than current levels and, to encourage uptake

from year one, it will decrease over the 3 years of the scheme. To avoid social orenvironmental

problems,each Member State is free to exclude or limit grubbing-up in mountains and steep

slope vineyards and in environmentally sensitive regions, and to stop grubbing-up if the total

reaches 8% of its area under vine or 10% of country's area under vines. In addition each Member

State is permitted to allocate additional national aid of 75% of theentiregrubbing-up subsidy.

The followinggraph shows the division of thegrubbing-up territory in the EU main wine

producing countries.

Figure 32: The Grubbing-Up Scheme in Countries Superficies

Source: Cal-Med Consortium Workshop IV

As mention before the EU has targeted an area of 175,000 hectares to begrubbed up over

periods of three years. The current wine industry situation characteristics such as, low wine

prices, financial difficulties, and labor intensity,have caused an oversubscription of the

grubbing-up program. Only in 2009, the sum of application submitted by Member States reached

about 160,000 hectares, which overall represent about 4% of the all EU vine planted area. With

the aim of controlling this oversubscription, the EU Commission responded by creating a


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reduction coefficient which scaled down thegrubbing up area for 2009 to 73,000 hectares.

Once again for 2010 there is oversubscription, the commission is expecting a reduction in the

coefficient of 45.9. Thegrubbing up program works by the commission distributing the

allocation to each interested Member State, which will then decidehow to spend that money.

The member state can decide whether to distribute its allocations to all applicants given them

only a small compensation or it could prioritize which applicants are accepted. The final decision

is within the Member State.

Planting Rights:

Planting rights are the right for a wine producer to plant vine, allowing competitive wine

producers to expand their production.The decision to increase production will depend on the

producers' ability to sell what they produce. In theCommissions original proposal the suggestion

was to fully liberalize planting rights as ofJanuary 1, 2014 for wines protected by designations of

origin and geographical indications. In the agreed reform, planting rights will be abolished in

2015, with some Member States being able to keep them at the national level until 2018.The

European Commission has been criticized for contracting the laws on having both a grubbing-up

scheme andabolishing the planting rights. It has answered by arguing that it is a two step

process; In step one,grubbing-up would help balance the market, and in step two planting rights

would beabolished, and wine-makers would base their production decisions on the market.

The planting right is not an immediately measure, there is currently a prohibition of new

plantings that will last until December 31, 2015. Still replanting is allowed where producers have

undertakegrubbing-up activities, the commission allowed equivalent areas to be planted with

vines. Furthermore Member States aregiven the possibility to extend the prohibition until 2018.

Single Farm Payment:

This policy aims to bring the wine sector in line with the reformed Common AgriculturalPolicy (CAP). The reform allows all areas under vines to bequalified for the Single Farm

Payment, and those that aregrubbed up will automatically qualify for the payment, thus ensuring

that they are maintained in good agricultural and environmental condition. However, the

payment will not exceed 350/ha. These activities will creategood environmental effects since

it would mean that the cross-compliance rules would be applicable i.e. keeping them in good


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agricultural and environmental condition.

The following figures; 33, 34, 35, summarize the time when each measure will be put

into action. They illustrate the addition and elimination of the new reform mention from August

2009 to 1st of January 2019.

Figure 33: New Reform Variant B, Time Table 1

Figure 34: New Reform Variant B,TimeTable 2

Figure 35: New Reform Variant B,TimeTable 3

Second Step, August1st2009keepmeasures in

actionPlantingrights

Grubbing-up

Restructuring

RuralDevelopment



Measures Added

NationalEnvelopesOenologicalpractices

GeopgraphicalIndications/QualityPolicy

Labelling

Eligibilityofthegrape(activate singlepaymententitle)

Measures Deleted

MeasuredeletedatEU levelbutremainoptionalatMember

Statelevel

Following Steps,between 2012 and 2015

keepmeasures inaction

RuralDevelopment



Measures Addedinaction

Eligibilityofvine

NationalEnvelopes

Oenologicalpractices

GeopgraphicalIndications/QualityPolicy

Labelling

Measures Deleted

Potabealcoholandcrisisdistilationaid

Mustaidforenrichment

Grubbing-up

MeasuredeletedatEU levelbutremainoptionalatMemberStatelevel

Plantingrights


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5.4

Budget:

The agency that finances the activities of the wine CMO is theguarantee of the European

Agricultural Guidance and Guarantee Fund (Guarantee EAGGF4). Overall the wine CMO

represents only 3% of the total EAGGF expenditure. Still, due to the fact that in the EU Wine

production levels depends mostly on weather, the budget fund is likely to change. Duringgood

weather years for wine, overproduction rises to the top, thus more money is need than in a

normal years, for distillation, market storage and different measures. Overall the budget varies

between 2.5 and 5.5% of the total EAGGF- Guarantee Section.

The followinggraph shows the budget expeditors since 1993. At first it shows the

budgetary changes for the reform of 1999. During that time almost theentire budget was

consume for the permanent abandonment and some other necessary measures for the application

of the reform. Due to the strongharvest years of theearly 2000 years distillation cost remained

high. Moreover, due to the over production of wine a important part of the budget was also

expended in the public storage of alcohol. However the new development of bio-fuels and other

distillation methods werehelping in the improvement of stock disposal.

Figure 36: EAGGF , Expenditures variations on the CMO wine (in Million)

4The European Agricultural Guidance and Guarantee Fund (EAGGF). It was replaced by the European Agricultural GuaranteeFund (EAGF) and the European Agricultural Fund for Rural Development (EAFRD) on 1 January, 2007

Final Step 1stJanuary 2019Keepmeasures inaction

Rural Development



Measures Addedinaction

Eligibilityofvine

National Envelopes

Oenologicalpractices

Geopgraphical Indications/QualityPolicy

Labelling

Measures Deleted

Planting Rights


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The CMO Wine budget is divided differently through the EU wine producing countries.

Sinceeach Members States has different weather conditions, production methods, and even

sometimes laws,eachhas different costs, and the overall expenditure varies widely. In 2004

from a total of 1092 million in 2004, 40% was allocated to Spain, 28% to Italy and 22% to

France, Portugal (5.0%), Germany (2%) and Greece (1.5%) (EAGGF) The followinggraph

shows how the budget of the EAGGF was allocated among different wine producing Members

States.

Figure 37: Expenditure for the COM in Wine by Member State in 2004

In addition the figure shows how the budget was distributed between 1993 and 2005, one

year before the new reform started being discuss. The main changes are since from 1999 to 2000


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when the past reform was putted into practice.

Figure 38: Wine budget expenditure 1993 2004 and 2005 the budget estimation, in Millions

In 2005 the CMO of wine distributed 1269 million the following way:

y 35% (446 million) whereexpend in the reconstruction program in place since2000.

y 65% whereexpend in market intervention measures, this were divided thefollowing way:

o 40% (506 million) In distillation a public storage activities.o 16% (198 million) aid for must used to enrich wineso 5% (70 million) in aide for private storage of wine and must.o 1% (17 million) export funds


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y Less than 2% ( 31 million) foe thegrubbing up vineyard measures.Thegraph shows us the change on the moneys allocation. Overall it reflects how after the

reform of 1999 less money was put to the permanent abandonment and forexporting funds.

Must of the money was concentrated on distillation and public storage of alcohol. The

distribution of the budget among the other measures did not alter significantly.

Even thoughThe CMOs new reform is budgetary neutral, about 1.3 billion per year.

This means that,even though there will not be an increase or a decrease in the overall level of

support to the sector, there will be many changes in the allocation of the money.

Mrs. Mariann Fischer Boel, Commissioner for Agriculture and Rural Development and

main person behind the CMO wine reform said after the approval of the new wine reform,

"Instead of spending much of our budget getting rid of unwanted surpluses, we can nowconcentrate on taking on our competitors and winning back market share. We didn't get

everything we wanted, but wehaveended up with a well-balanced agreement. I hope the

Member States will makegood use of

Di Mase Eglantina Thesis

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