EU's wine reform could hurt, not help, CEE winemakers

By bne IntelliNews August 6, 2007

Robert Smyth in Budapest -

Concern is growing that EU Commissioner Mariann Fischer Boel's impending overhaul of the EU's winemaking industry won't actually benefit the fledgling modern wine industry in Central and Eastern Europe; it could end up harming it instead.

On July 4, the European Commission unveiled proposals for reform of the EU wine sector that are designed to eliminate overproduction and make better use of subsidies. However, Hungary's Ministry of Agriculture and Rural Development claims the proposed legislation, expected to come into effect next summer, discriminates against the 12 countries that joined the EU in 2004 and 2007, and won't provide the necessary resources to restructure or make their wine industries more competitive.

While the agriculture ministry agrees there is a strong need for extensive reforms, it sees the proposals as preserving, rather than solving, the structural problems of winemaking in the EU. It also objects to the way the funding is to be distributed.

Fischer Boel has pledged that the national financial "envelopes," or budgets, will allow member states to adapt measures to their particular situation. The overall budget for the national envelopes will vary from €623m in 2009 to €830m from 2015. The amount available for each country will be calculated according to vine area, production and historical expenditure, and it's that last point that has Hungarian alarm bells ringing.

While Hungary is not one of the biggest EU wine producers, its producers had expected to be granted equivalent funds on a per capita basis. However, from what can be gleaned from Fischer Boel's proposals, Hungary and other recent EU entrants are set to remain amongst the EU's poorer cousins.

"As it's based on subsidies that have been received before, France, Spain and Italy will be the winners; newer EU members like Hungary will receive proportionally less subsidies than existing players," says Laszlo Meszaros, president of the Tokaj Renaissance Association, a group of winemakers and wineries that aim to re-establish the once legendary status of the Tokaj region. He is also managing director of Disznoko, one of the leading Tokaj estates.

Richard Nemes, head of the recently formed Hungarian Wine Marketing Agency, agrees. "It's unfair how the so-called national envelopes will be calculated. It's kind of obvious that money-wise the winners of the reform will be again Spain, Italy, Portugal and France."

He laments that Hungary, being a "micro producer" in comparison to the big guns, won't have a strong word in proceedings and will, therefore, have to live with the final decision.

Nemes adds that he's happy to see that EU distillation subsidies - money paid for converting unwanted wine into spirits - will finally be abolished as part of the reform, which will result in €120m being switched into wine promotion. "However, I believe that it still should be more since that's not even 10% of the whole EU wine budget," he says.

While Hungary's wines are getting better all the time, with an explosion in the number of quality minded producers in the last few years, the truth is that few consumers outside Hungary, and even in the EU itself, know much about them.

"As far as we know, the encouragement of consumption within the EU will be not supported," says Laszlo Romsics, who as a winemaker of the Torley group has made international award winning wines for low prices, especially under the Gyorgy Villa label.

Hungarians, unsurprisingly, had expected EU membership to improve its access to EU markets and Romics is perplexed as to why the EU wants to focus solely on promoting EU wines outside the EU, while the funding won’t apply to important non-EU European markets such as Norway.

According to the consultancy Budapest Economics, the EU's plans to reform the European wine sector are likely to have the greatest impact on emerging Europe's larger wine producers, such as Hungary, although the country's relatively few high-end producers already competing at the top should be spared.

"It remains to be seen how the proposals translate to different countries, but the quality regulations are likely to place extra costs on smaller producers that have been quite profitable locally, making it more difficult for them to compete," says Gergely Hudecz, political analyst at Budapest Economics.

Bitter-sweet symphony

While the practices of adding sugar (chapitalization) and concentrated must - the mixture of unfermented grape juice and grape solids - to boost the alcohol content in wine are to be forbidden and unsubsidized, respectively, under the reforms, Meszaros notes this could work against European producers in their bid to roll back the advances made by the all-conquering New World producers. After all, one of the key aims of the EU's new legislation is to see off the New World's increasing dominance in global wine sales.

"Some northern hemisphere producers can benefit from a small amount of chapitalization, which is used in some of the greatest European wines. Southern hemisphere producers typically correct the acidity," he says.

Boosting alcohol content can also increase the body of the wine.

The top-flight winemakers of Hungary's Tokaj region, including all the members of the Tokaj Renaissance Association, won't be affected by the chapitalization ban, as they achieve sufficient ripeness and hence do not require must adjustment, Meszaros says. Tokaj, which is regarded by wine experts one of the world's finest terroirs and is very much a region attracting new investments, might, however, be impacted by the reforms that will make vineyard expansion considerably more expensive until 2013.

The other part of the reform, removing the subsidies on concentrated must, will probably force winewmakers to buy more expensive and non-EU supported unfermented grape must from other southern countries," warns the Torley group's Romsics. "In this case, of course, some of our products will be also more expensive. The other option is not to use any sugar in order to chapitalize our musts, but the style and quality of our wines could change."

Torley, which makes wines from a number of Hungarian regions, often raises the alcohol content by around 1%, though not more.

Torley is right to be concerned about higher prices, because it sells between 5-8m bottles abroad, with Sweden as its number-one export market and the UK second. In Sweden Torley claims the market leading position in the sparkling wine segment, with Chapel Hill Sparkling Chardonnay costing around €6 per bottle retail.

Hungary's agriculture ministry maintains that the practice of adding sugar to boost alcohol content was accepted without question in its negotiations to join the EU and there was no hint that the practice would be stopped. If banned, the costs of production will rise, simple as that, it argues.

Not all bad

However, the EU Wine Law could also bring benefits to a wine region plagued by the continued production of some truly stomach-churning wine, which is destroying the hard work of a growing band of quality focused producers.

Grubbing up - the process of digging up and eradicating existing vines - will reduce some of the surplus of production in both Hungary and the rest of Europe, according to David Copp, author of "Hungary: its fine wines and winemakers."

"It makes sense that the vines grubbed up be those of the lesser quality or less productive vines. Hopefully, the Hungarian government will take the opportunity to strengthen its wine laws, giving greater support to quality wine producers," says Copp.

Romsics doesn't expect cheap wines to disappear right away, however. "Consumers usually need cheap products such as wine, but probably there will be less really poor quality wines on the market," he says.

For the first five years of the reform process, the EU says it will offer "an attractive financial incentive" to allow growers who can no longer compete to step out of wine production. "The level of payment would decline over the five years to encourage early take-up. The scheme would be entirely voluntary," says Fischer Boel.

Member states would be allowed to limit grubbing-up in mountains and steep slope vineyards, and in environmentally sensitive regions, and stop the eradication if the total reaches 10% of country's area under vines. The total amount of vines eradicated should be about 200,000 hectares, with the budget for this falling from €430m in year one to €59m in the fifth and final year of the reform process.

Another, as yet unpublicized, fear of Hungary's agriculture ministry is that the comparatively attractive compensation for grubbing-up is likely to reduce Hungary's already declining area under vine. However, in all likelihood, the best Hungarian vineyards should remain intact and the move will put greater emphasis on quality wines. Although some cash-strapped quality minded winemakers might consider cashing in their chips, the ministry hopes pursuing their craft will prove a stronger urge.

Only free of the shackles of more than 40 years of central planning since 1989, Hungarian winemakers are once again set to face a shake-up decreed by a larger power. They sure won't like being told what to do, but in all likelihood will be powerless to prevent it.

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EU's wine reform could hurt, not help, CEE winemakers

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