Beneficio Simplified

[Roy Hersh]

Here is an article that a friend of mine wrote, explaining the Beneficio with input from SFE and TFP of course. Controversy will always surround this topic and Adrian Bridge, CEO of The Fladgate Partnership is obviously very invested in his way of viewing this topic.

https://www.meininger.de/en/wine-busine ... -time-bomb

[Luc Gauthier]

Interesting read .
Better understanding of the economics of douro wines and port.
A must read , I think .

[Andy Velebil]

Yes a good read. I think one thing often overlooked but very important is the shear number of old tiny land owners who grow grapes and sell them or the finished Port to others, and those land owner's children. It's two trains on a track heading toward each other at an ever increasing speed. When they collide it will not be pretty.

These small old farmers need the Beneficio to survive from an economic standpoint. One hectare of "A" graded Port vines, or worse a lower grade, is not economically viable to own in modern times. Yet as these farmers get older and as their children get older and see life outside the Douro, many of their children want nothing to do with the backbreaking work and low wages their parents and generations before them have endured. Until you see most land being owned by moderately sized companies or bigger, or until consolidation of these small properties into larger self-sustaining ones, the Beneficio is needed. Take it away before any consolidation and the region will implode.

I have to agree with some that the region is quickly coming upon a crisis. It's clear the current system is in need of some type of fix for not only short term issues we're seeing but even larger looming long-term issues.

[John Trombley]

See the "Bergrettung ("mountain rescue') movement among smaller and, especially, younger, energetic, and passionate new winemakers along the Mosel River in Germany especially. Is this model in any way applicable to the Douro? These folks really supprot one another, albeit as competitors, which makes it even more interesting. In addition, it's not a government program.

[Al B.]

I have a huge amount of sympathy for both sides of the argument, but I also wonder whether the port business model is outdated. Volumes of premium port are small, but the margins are good. Volumes of basic port are high (I am told) but margins are very thin. If the price of grapes with beneficio was too high to use them in making basic port, the port producers wouldn't buy grapes.

The region has the ability to generate a finite amount of wealth from the rest of the world. Some of this ability is based on the process of growing grapes, converting grapes into wine, fortifying some of that wine but not all of it and selling the wine. I have no idea how much wine is made and sold, but it is a relatively simple calculation to work out the wealth once you know the volume. The debate appears to be about how that wealth is fairly shared across all the interested parties and whether changing the different shares would allow an overall increase in the wealth generated by growing grapes in the region.

Once you've answered that question, you then have to figure out how to manage the change from today's model to tomorrow's model with as little pain as possible.

Socio-economics is simple!

[John Trombley]

In Germany, the problem was complex, but was the result of well-meaning but incompatible actions in the Federal and business spheres last half of last century. A decades-long demand for inexpensive mildly sweet ('lieblich') wine led to 'rationalization' of production in the direction of volume, supported by private and public research that seemed to show that you could have high yields, high quality, and reliable ripening with new vine crossings . This was based largely on what today seem like naive viticultural notions.

Government economists preached efficiency, without the necessary market support being created. The wine inevitably lost favor, mainly, in the view of this writer and many others, simply because under this arrangement, even the lowest quality wines suffered further erosion of perceived consumer value, and actually, except for better cellar hygiene and shelf stability, did become almost immediately of little interest to the next generation, whose interest in food and wine would take off in a different direction.

The action at this point became that of borrowing famous marks, style descriptors, traditional marks of quality and applying them wholesale to what was not quality. For instance, many of the greatest vineyards of Germany were amalgamated with lesser land incapable of a certain level of quality production; some were expanded to thousands of acres, sometimes not even including the original acreage. Styles of wine made from heavily labor-intensive select late harvesting had their names applied to any wine with sufficent, or insufficient, sugar in the grape must. Why go to all the hard work on these danagerous cliffs? For instance, a tiny, distinctive vineyard of highest quality called the Scharzberg was now to be the 'greater vineyard name' of the entire Saar production region. So on one day the same label, Wiltinger Scharzberg, would indicate something special, the next, on the day the regulation took effect, Jan 1, 1971, it indicated something entirely else, covering a bottle very unlikely to be made anywhere in or near the village of Wiltingen.

Of course those fostering this scheme did little to disabuse consumers of the obvious conclusions, and German wine took a prestige hit that in some ways it's still fighting to recover from. In the meantime, the pride of the tiny German family vintner was involved, but being far from major employment markets, these families often became impoverished, even if they owned some of the finest vineyard land on the planet. The whole market and tax and insurance system was revamped in a socially actiivist direction, but the fall in prices became so severe that there was no way the economy could support this. I remember being in Germany in 1999 when you could buy tank car quantities of what used to indicate fine Riesling late-harvest wine from the Mosel, for 17 pfennigs the liter (about 13 cents a bottle). Do you know that bulk spring water was available from the same region, but cost MORE? These form the aquifer that supports the production region, so we were having the vine and vintner caught up in a value-subtractive process! The answer from agronomic agents: if you're losing money, increase production, so you can make a profit on more volume!

This is the context for a remark about 'Bergrettung,' 'Mountain Rescue', as an adjunct to saving dying or dead vineyards whose products always at one time out-priced Premier Cru Bordeaux. As families perforce give up their land, it becomes the property of banks who have no interest and ability to exploit it. These young men and women have rolled up their sleeves on these agonizingly steep slopes and rediscovered what was forgotten, by working them, often iputting themselves at high economic risk with little immediate reward in sight. They are owning and working that which preserves irreplaceable viticultural resources, like century plus aged vines on their own rootstocks, and soil conditions that makes wines of great depth, clarity, and an almost haunting expressivity. And, not the least, the knowledge of theee complex hillsides and even perhaps a few hoarded 'treasure bottles' to drink with older folks who can point out to them how such a wine might come from such a place. Fortunately many German wine has extreme longevity,

This is reconstructing the market, albeit not without much pain, confusion, and delay, in a typically German smash-up of regulatory, economic, and private efforts. Slowly, things are turning around, very slowly. Cooperative effort is dear-bought in such situations.

[Roy Hersh]

The German model doesn't fit the Douro scenario, John.

Andy wrote:

I have to agree with some that the region is quickly coming upon a crisis. It's clear the current system is in need of some type of fix for not only short term issues we're seeing but even larger looming long-term issues.

Ok Andy, please elaborate on what you view as the long-term issues.



Al B wrote:

Once you've answered that question, you then have to figure out how to manage the change from today's model to tomorrow's model with as little pain as possible.

Al B., what do you envision is the model of tomorrow?

[Al B.]

Al B wrote:

Once you've answered that question, you then have to figure out how to manage the change from today's model to tomorrow's model with as little pain as possible.

Al B., what do you envision is the model of tomorrow?

Ultimately, my guess is that the beneficio will be removed and that the true costs of grape production will be reflected in the cost of the wines (fortified and table) made in the region. This is likely to fit with the general trend that we're seeing of the best plots of land being consolidated into the hands of a smaller number of larger farmers. In the meantime, the beneficio is having the effect of both limiting the volume of port produced to try to match demand while also helping to establish the Douro as a region that produces great quality wines.

However, now that the Casa do Douro has stopped (indirectly) setting the minimum price for port grapes I don't see the problem being as much of an issue as it used to be. Today we have two supply-demand positions being taken. One is where a port producer wants to buy in grapes / must to be used in port production. That port producer will be seeking to buy grapes from a limited pool, but he is not compelled to buy grapes. If the grapes are too expensive to make a margin when used to produce the cheapest type of port, he will not buy those grapes - regardless of the beneficio being offered. The wine producer is also offered grapes, but from a pool only limited by the total production in the region. The farmer growing gapes with a beneficio for port production probably has a more stable and more predictable price for his grapes, relatively steady year on year. The farmer growing grapes without a beneficio will be subject to much wilder swings in price from year to year, depending on the growing season.

I'd love to say that I see tomorrow's model as being one where there is no beneficio and producers are able to make as much table wine or as much port as they wish. But I can't see any Portuguese government being willing or able to tackle the social consequences of changing from the current model to that model. Perhaps the closest we will get to it is to see the current consolidation of beneficio rated vineyards into the hands of farmers who are also port producers. As more people produce their own port from their own grapes so the issue of the two-tier pricing becomes less relevant.

I'd love to know how today's volume of grapes purchased under beneficio compares to that of 20 years ago. I suspect it's a smaller volume, partly because of land changing hands but also because a number of farmers are now port producers (such as Quevedo and de la Rosa).

[Andy Velebil]

Roy

I mentioned one of the long term issues that's coming to roost already in my post.

[Roy Hersh]

Alex,

Today's Beneficio numbers pale by comparison to what they were 20 years ago. It was not uncommon at that time for Beneficio to surpass 120,000 and even 140,000 pipes in a given year. We don't see anything like that anymore. I believe the last time the Beneficio hit 120,000 was about 2008.

[Al B.]

Today's Beneficio numbers pale by comparison to what they were 20 years ago. It was not uncommon at that time for Beneficio to surpass 120,000 and even 140,000 pipes in a given year. We don't see anything like that anymore. I believe the last time the Beneficio hit 120,000 was about 2008.

True enough, but whether the Beneficio is 110,000 or 140,000 pipes doesn't really matter. It's just a number that is expected by the IVDP to keep port production roughly matched with demand over the medium term while also taking into account the law of 2/3rds.

We already know that the major port producers do not produce anything like as much vintage port as they could. 2011 was a tiny production year compared to 1970 or 1985. Part of that may be due to climate but part of it was due to a natural desire of the big producers to match supply of vintage pot with demand for vintage port. In general, they seem to get it right since prices were good at the time of first release and are still strong. Volume certainly wasn't held back by a limited availability of quality grapes. Smaller producers have to work really hard to sell their vintage ports and invest a lot of time and effort into building their market presence, but they can do so. But even they only produce a few hundred cases of vintage port.

Colheita ports have a much longer lead time. There we are seeing price being used as the means of reducing demand to match supply. 20 years ago (maybe even 10) the idea of a newly released 50 year old colheita selling for $250 would have ben laughable. The supply of these rare wines is only getting smaller so prices for these will continue to increase. Perhaps a larger proportion of port must is going into barrels these days to feed the demand for colheitas in the 2050s and 2060s, but the volumes are probably still relatively small compared to the overall Beneficio.

Which means that all the impact of the Beneficio has got to be elsewhere in the quality spectrum. Perhaps LBVs (lots of volume, great quality and hopefully a decent margin for the producers) are being limited in volume due to the artificial restriction on the number of grapes which can be used to make port. But really to know where the impact is being felt, we'd have to understand the volume and margin generated by each type of port.

It could be done. There's a reasonably well known study in the UK which says that it costs an average of £3.55 to get a £5 bottle of wine on the shelf. The Meininger article suggests that it costs €650 to grow enough grapes to fill a 55 litre pipe, which is €11.82 per litre or €8.86 per 75cl bottle. Setting aside the issue of fortification and the cost of brandy for the moment, the UK study says it then costs £0.20 to ship the bottle of port, £0.36 for the bottle and packaging, duty on port is £2.89, VAT is 20% plus the retailer and agent need to make a margin of, say, 15% each. That means before the producer makes any money at all on a bottle of port, it has to have a shop price in the region of £18 ($23 / €20) or £12 in bond.

So if the average cost of producing grapes in the Douro really is around €650 per pipe, there's an awful lot of port being sold in the UK (and presumably elsewhere) which is making a loss!

[Roy Hersh]

Alex wrote:

Part of that may be due to climate but part of it was due to a natural desire of the big producers to match supply of vintage pot with demand for vintage port.

Many states here in the USA, would likely appreciate this type of pairing nowadays.

[Eric Menchen]

See the "Bergrettung ("mountain rescue') movement among smaller and, especially, younger, energetic, and passionate new winemakers along the Mosel River in Germany especially. Is this model in any way applicable to the Douro? These folks really supprot one another, albeit as competitors, which makes it even more interesting. In addition, it's not a government program.

Can the market support a whole bunch of micro-Port labels and producers? For that matter, how easy is it for a small producer to get started, with the law-of-thirds and other regulations in place? I don't think that model is quite applicable. I would be excited if it could be made to be, but that probably won't be a factor for the timeline of my Port buying.

[Eric Menchen]

The Meininger article suggests that it costs €650 to grow enough grapes to fill a 55 litre pipe, which is €11.82 per litre or €8.86 per 75cl bottle.

A pipe is not 55 liters, no matter how you spell it. It is roughly twice as big as a wine barrel. My first google hit comes up with a pipe of Port being 115 gallons, presumably Imperial as it is a UK source. That gives 522 liters. Second google hit says 550 liters. So are you off by a factor of 10?
https://www.nottingham.ac.uk/manuscript ... lumes.aspx
http://www.winespectator.com/drvinny/show/id/5440

[Al B.]

The Meininger article suggests that it costs €650 to grow enough grapes to fill a 55 litre pipe, which is €11.82 per litre or €8.86 per 75cl bottle.

A pipe is not 55 liters, no matter how you spell it. It is roughly twice as big as a wine barrel. My first google hit comes up with a pipe of Port being 115 gallons, presumably Imperial as it is a UK source. That gives 522 liters. Second google hit says 550 liters. So are you off by a factor of 10?
https://www.nottingham.ac.uk/manuscript ... lumes.aspx
http://www.winespectator.com/drvinny/show/id/5440

Yes I am. Thanks for spotting the typo! The pipe used for the beneficio calculation is 550 litres.

So my calculation says that at cost the port is €0.90 per bottle. That makes a lot more sense given what we see in terms of selling prices in the UK. That makes an in-bond bottle cost £2.65 and a duty paid bottle £6.65. If the port producer has to pay more than the production cost for the grapes used for port production, he'll only do so up to the point where he will stop making money on the cheapest selling price - which is about £8.00 in the UK.

[Tom Archer]

at cost the port is €0.90 per bottle

It's when you note how few bottles are made per vine, and how much pruning, training and sprayng is required - not to mention the costs of vinification, aguardente, bottles, closures etc.. you realise just how much graft and how little reward attaches to the production of standard ports..

[Andy Velebil]

See the "Bergrettung ("mountain rescue') movement among smaller and, especially, younger, energetic, and passionate new winemakers along the Mosel River in Germany especially. Is this model in any way applicable to the Douro? These folks really supprot one another, albeit as competitors, which makes it even more interesting. In addition, it's not a government program.

Can the market support a whole bunch of micro-Port labels and producers? For that matter, how easy is it for a small producer to get started, with the law-of-thirds and other regulations in place? I don't think that model is quite applicable. I would be excited if it could be made to be, but that probably won't be a factor for the timeline of my Port buying.

From what I've been told it's super hard to get started due to the law of thirds. You basically need to buy a ton of Port from someone else (Casa do Douro comes to mind...imagine that ). As a result the start up costs are very prohibited for most people who are not already in possession of a large amount of finished port.

I suppose one could get around this to a degree if they had something like a BOB set up. Where they just put their label on something bought from someone else. But they wouldn't be an actual "producer" in the legal sense.

[Luc Gauthier]

Do the small producers make a significant impact regarding the beneficio

[LOUISSS J]

Alex,

Today's Beneficio numbers pale by comparison to what they were 20 years ago. It was not uncommon at that time for Beneficio to surpass 120,000 and even 140,000 pipes in a given year. We don't see anything like that anymore. I believe the last time the Beneficio hit 120,000 was about 2008.

In the book of Richard Mayson / Port and the Douro, the beneficio was : (Beneficio Authorisation / Port wine fortified with arguadente):
2001 : 154 000 / 198 352
2002 : 135 000 / 172 404
2003 : 107 900 / 138 415
2004 : 126 000 / 159 227
2005 : 120 000 / 153 666
2006 : 123 500 / 157 656
2007 : 125 000 / 159 528
2008 : 123 500 / 158 521
2009 : 110 000 / 140 676
2010 : 110 000 / 140 323
2011 : 85 000 / 107 354

[Roy Hersh]

Thank you for including recent years and before that, as mentioned ... circa 20 years ago, the numbers were even higher.