Beneficio discussion

[Roy Hersh]

One of the more fascinating and "charged" topics and I know Andy will love this one) is the Beneficio Rights.

There are so many fun facets to this topic. Hopefully, we can get one of the Port shippers to chime in here ... but in the mean time, let's see if we can do this hot potato, some justice.

I'll start with this one aspect of Beneficio and I am sure others will be happy to do their thing.

The BENEFÍCIO is the authorization given by the IVDP to each producer to produce X litres of Port per harvest. Depending on how the wine develops, the producer will then decide how much of this X will become Vintage Port. It then has to be submitted to the IVDP for approval. If the Vintage IS approved, then the producer can opt NOT to release it, although most do.

[Andy Velebil]

I'm hoping some others will chime in here before I do. It's a topic that I love and I want to learn more about. After all this has to be one of the most important regulations yet is almost never talked about for some reason.

[Derek T.]

one of the most important regulations yet is almost never talked about for some reason.

1. IVDP hands out Beneficio using a behind-closed-doors process
2. Shippers rely on Beneficio to make money
3. Shippers rarely talk about Beneficio in public
4. Go back to step 1.

[Frederick Blais]

one of the most important regulations yet is almost never talked about for some reason.

3. Shippers rarely talk about Beneficio in public

That's because shippers(not all of them of course) buy the Beneficio paper for the juice volume they produce, the grapes of the vineyard from who they buy the beneficio often turns into dry wines....

If my memory serves me well, I think it's 7 years, if a land owner did not use its grape for Port production, it will lose its beneficio rights.

[Roy Hersh]

IVDP hands out Beneficio using a behind-closed-doors process

That's not my understanding of the process, so I would very much appreciate if you would elaborate and educate us. Thanks Derek.

[Derek T.]

IVDP hands out Beneficio using a behind-closed-doors process

That's not my understanding of the process, so I would very much appreciate if you would elaborate and educate us. Thanks Derek.

Roy,

I am sure you have known me long enough now to have detected that my tongue was very firmly in my cheek when I typed my repsonse to your question

I do not know the details of the process by which Beneficio is allocated but I would be absolutely astounded if it was a fully open and transparent process. All regulatory bodies, where dealing with wine, finance, building control or anything else you care to think of have an element of decision making that seems to be a bit of a black art that is unfathomable to mere mortals like us. I would be very surprised if the IVDP were not the same as their peers in other industries.

The message my post was trying to convey was simply that the shippers are in a difficult position when dealing with a system they do not like where the only body they can lobby to change it is the body that holds all the cards.

Derek

[Roy Hersh]

Actually, yet again, your subtle and sometimes dry Scots wit has bested my ability to decipher it.

The Beneficio is probably less transparent than we are aware of, but I don't know that it is all that secretive either. It begins with the rating of the vineyard at hand, A-F using many terroir-based factors and influences and an overall score is determined. From there it also depends on how many hectares are at stake.

Beyond that, I don't know that there is a lot that comes into play.

The good news is that David Fonseca Guimaraens will be here in about two weeks and I think we may all have a better understanding after that.

[Derek T.]

Actually, yet again, your subtle and sometimes dry Scots wit has bested my ability to decipher it.

More training is required to allow you to perfect your skills. Perhaps we need to spend more time drinking port together?

[Glenn E.]

Scots wit

Isn't that an oxymoron?

[Andy Velebil]

Actually, yet again, your subtle and sometimes dry Scots wit has bested my ability to decipher it.

More training is required to allow you to perfect your skills. Perhaps we need to spend more time drinking port together?

Yeah, when you coming to THIS side of the Pond for some

[Andy Velebil]

Scots wit

Isn't that an oxymoron?

Careful or he'll put on his dress

[Andy Velebil]

Sorry for some drift,

The Beneficio is quite interesting. It does depend on vineyard rating and size. But what people often forget, it depends on what the IVDP sets as a max amount of Port (all types) to be produced in a particular year. So even though a producer may own a large "A" grade vineyard the amount he is able to make into Port varies each year based on what the IVDP determines is the max amount of wine that is able to be fortified for that year.

The grading of vineyards used to be done by the Casa do Douro, an organization that is all but bankrupt and has no real influence anymore, at least from what I've gathered. Now the IVDP determines the grade for vineyards. So I am interested in asking David G. some related questions when he gets here....I hope he isn't scared off before he even shows

[Derek T.]

Scots wit

Isn't that an oxymoron?

That really hurts coming from an American.

Careful or he'll put on his dress

How many times do I have to tell you? It's a skirt, not a dress

[Derek T.]

I am interested in asking David G. some related questions when he gets here....I hope he isn't scared off before he even shows

Who could be scared of us?



On second thoughts.....

[Derek T.]

Back on topic...

From what Andy describes there seems to be at least some opportunity for subjectivity to come into the allocation process. With the current trend for consolidation of both vineyards and shippers, both of which usually result in significant investment in reconstructing and re-planting vineyards, the grading of specific parcels must surely be a constant process?

I would love to know how the IVDP arrive at their decision on the total allowable production for any given vintage. History has shown that the proof of the pudding is certainly in the eating (drinking) in terms of which vintages produce the best Ports but they must be using some sort of crystal ball to to make this judgement each year before the wines have a chance to show their potential.

OK, Andy, you've now got me hooked on this subject

Derek

[Michael Hann]

I remember reading a passage in Richard Mayson's "Port and the Douro" second edition about the beneficio that may be of interest in this discussion. I just happen to have the book at my side. In his discussion of the 2003 vintage, Mayson writes "Quality and quantity went hand-in-hand in 2003, with yields up by between twenty and thirty per cent on 2002. But the beneficio was nonetheless reduced by twenty-one per cent, supposedly due to the large amounts of port remaining unsold from the previous year's damp harvest. The cut in beneficio angered many shippers who saw 2003 as the perfect year to build stocks of premium-quality port (particularly reserve and LBV). Some shippers hinted that the authorities had other motives and that the reduction in beneficio was part of a wider plan to absorb stocks from the troubled Casa do Douro."

[Adrian Bridge]

The Beneficio

You do not hear much about this yet it is the most important factor in the Douro today and it affects the profitiability of vineyards.

The basics go back to the categorization of vineyard the the 1930's whereby each vineyard was graded from A to H. The record of which vineyard had what grading was recorded in the Cadastro which was maintained by the Casa do Douro - and now is run by the IVDP.

The idea is that the IVDP, in consultation with the trade entities, decides how much Port can be made each year. This is then divided between the vineyards with more being given to higher graded vineyards - in 2009 Grade A - 2078 litres per hectare, Grade B 2045, Grade C 1891 .....Grade F 696. In the last seven years the size of the overall Port harvest has been set below the level of annual sales to try to destock the industry and maintain prices.

The way that land is measured is not that clear and the problem with the system is that it is not transparent. A farmer plants a vine that will last 35 years yet has no idea how much beneficio he will be given each year nor how exactly the area planted will be measured.

The reason that this all matters is that a bunch of grapes from a Grade A vineyard which has beneficio (i.e. the right to be made into Port) is worth Euro 1,200 per pipe. The same grapes without the licence will be worth Euro 250 per pipe. In other words the value in Douro vineyard is in the paper licence more than it is in the quality of the fruit - which is why I am against the system.

For a producer who wishes to make table wine most of his fixed running costs will be covered by selling his beneficio with his least good grapes leaving the best grapes to make table wine. This subsidy from Port to table wine has been a main driving force behind the number of new table wine projects - it would be right to question the viability of some of these projects if the subsidy did not exist.

For a Port producer you have the cost of running your vineyards yet you cannot make it all into Port - a major disincentive to investment.

The socio-political element to this is that the Douro has many small farmers - over 15,000 with less that 5,000 sq m (1 Acre). For these people the Beneficio offers a cash subsidy of Euro 500 or so per year on their grapes. It is a very expensive way to deliver a social subsidy but, importantly, this subsidy is paid by Port producers not the Government. Again, the real point is that a small farmer has little incentive to best viticultural techniques when most of the income comes from paper.

Clearly the lack of transparency is an issue given the money involved.

The reason that few people are suggesting that the Beneficio is not eliminated is that there could be over production of new Port which would lead to lower prices for basic Ports and this would undermine the value of the stocks held by shippers. Table wine producers have little incentive becasue they are getting subsidized grapes - it costs more that Euro 250 per pipe to grow grapes in the Douro.

It also limits the production of a single quinta Vintage Port. If a property can make 10,000 cases of single quinta but only has Beneficio to make 5,000 then clearly the maximum that could legaly exist as SQVP is 5,000 cases (hence people making single quinta table wines).

For most consumers the Beneficio has little impact. However, you should care because it removes incentives to invest, is leading to bankruptcy of farmers and does not promote the best viticultural practice. As basic styles of Port decline the Benefico will decline and this will reduce the cross subsidy to table wine. It is a potential time bomb in the Douro.

Yours, Adrian

[Andy Velebil]

Adrian,

Thank you for replying and addressing some of the issues with the Beneficio.

For a Port producer you have the cost of running your vineyards yet you cannot make it all into Port - a major disincentive to investment.

Lets say a medium to large size producer has 100 Hectares of grapes. The producer used his full Beneficio and made the maximum amount of Port in a given year, lets say 50 Ha worth of grapes for this example. What becomes with the other 50 ha of grapes? The producer can't make it into Port. Does it become a cheap "house use only" table wine, sold as bulk grapes to someone else, etc?

In other words the value in Douro vineyard is in the paper licence more than it is in the quality of the fruit - which is why I am against the system.

I agree the Beneficio has some serious problems in this day and age, and although needed at the time it was implemented, I think an overhaul of the system is long overdue. Replacing or overhauling the system would be no easy task. Thousands of farmers would be effected, and some may just throw in the towel and give it up. A good thing for larger financially stable companies who could afford to buy their land from them and make improvements.

But the other side of the coin is right now Douro table wines are getting more and more popular. Something I see as a plus for the long term continued success of the Douro as a whole, both from sales and attracting more tourist to the Douro/Gaia areas. Diversification can be a good thing if done right. And hopefully this translates into more Port sales down the road. But obviously Port is subsidising many of these dry wines.

At this point how would you overhaul, or eliminate, the Beneficio? It's a question I know I've thought a lot about.....

[Glenn E.]

Thanks Adrian, that gives me a very clear picture.

[Derek T.]

Thanks for the explanation and frank opinions, Adrian. This is clearly a system that has long outlived its usefullness, at least in its current form.

Do you think the opinions you hold are shared by the smaller port shippers, or is it simply easier (i.e. less risky) for a heavyweight producer to express their views openly?

I ask this in the context of my original post in this thread, in that it is very often the case that small players in any market take huge risk if they bite the hand that feeds them, whereas the the larger players can put forward open criticism without fear of retribution.

Derek