The complex topic of LAW OF THIRDS

[Roy Hersh]

This is not a new topic, it has been touched on before, but the Lei do Terço, an IVDP regulation, is not one that is easily understood. The ramifications of this regulation affect so many facets of what takes place in the Port wine business and hampers the Port trade in so many ways.

Here is some information which hopefully will help start a healthy discussion and it would be great if those in the Port trade who are reading this, would chime in to provide their impressions, corrections and insight into the deeply rooted Lei do Terço.

http://fortheloveofport.com/roys-blog/l ... -of-thirds

[Derek T.]

I understand the basic principle, but have never before seen the detail of how the one third is calculated. Although I haven't studied the calculation in detail, it appears that the thrust of it is to ensure that the overall objective of sustaining stocks of aged port is achieved.

What is a complete unknown to me is how this hampers the port trade.

[Derek T.]

This thread doesn't strike me as something that fits with the general newbie theme of the Port Basics area. Perhaps it would get more attention in the main forum?

[Andy Velebil]

Could they make it any more difficult...oh wait, we're talking Port production. Anyone else read that and need a drink

[Roy Hersh]

Derek,

Your suggestion to move this from Port Basics was a good one. You are right that this is actually a fairly complex topic and rightfully deserves to be here.

What is a complete unknown to me is how this hampers the port trade.

There are a number of sticky wickets when it comes to this particular connundrum. As this is such a deeply layered onion, let's begin by just examining one facet of the law and then we can always get to some of the others. As you will likely agree, along with our long term discussions on beneficio here over the years, this particular topic gets very intense, very quickly. It may just be best discussed over a bottle of Port.

The opening volley:

In order for an exporter to be created, it must have a minimum stock of 500 barrels.

By setting a minimum quota of 500 barrels, the regulation nearly negates any chance for a new start-up company to get into the Port business as a shipper. They can buy vineyards, buy a Quinta and even make DOC wine, but not enter the world of Port shipping. The requirement to have 275,000 liters of Port already in pipe in order to become an exporter is, at best, restrictive. Not what you could possibly call "laissez-faire" in the scheme of things.

Not only does this create a serious impediment for a new company to get started; but it's also a significant obstacle for a small family-owned long time grower in possession of highly rated vineyards that has sold to the larger Port firms but now wants to create their own Port brand. There are likely a few, if not many in the Douro, who look with pride, (some w/ jealousy) at the success story example set by a relatively new player like Quinta do Portal, but lack the resources to dive right in due to the 500 barrel limitation. What if that number were dropped to just 100 barrels instead? Or in another scenario: what if that particular hurdle was removed altogether?

Consider the numerous possible reasons why that specific quota/regulation has been set in place and still exists today.

[Eric Menchen]

275,000 liters is a huge barrier to entry. Let's just assume it is plonk worth $10/bottle. That still comes to over $3.6 million in inventory. Their cost won't be the same as retail value, but it won't be 0; and there are a lot of other costs to maintain that.

[Rob C.]

it's also a significant obstacle for a small family-owned long time grower in possession of highly rated vineyards that has sold to the larger Port firms but now wants to create their own Port brand. There are likely a few, if not many in the Douro, who look with pride, (some w/ jealousy) at the success story example set by a relatively new player like Quinta do Portal, but lack the resources to dive right in due to the 500 barrel limitation. What if that number were dropped to just 100 barrels instead? Or in another scenario: what if that particular hurdle was removed altogether?

Looking at the legislation, it seems to suggest that this minimum stock threshold does not apply to producers looking to export port made from grapes that are exclusively harvested on their own property, but i might be wrong as my portuguese is non-existent.

The requirement to have 275,000 liters of Port already in pipe in order to become an exporter is, at best, restrictive.

275,000litres? or 150,000litres? I can see 150,000 in the legislation, but perhaps i have an old copy and it has since been amended. Or i am hampered by my non-existent portuguese again!

I must admit i found the article you quoted very hard to follow - for instance, are the references to "exporter", "trader" and "operator" in the second paragraph all to the same person/entity? It would also be useful to have a bit more background about how the "current account" system of stock registered with IVDP works. I think it is time for someone to do a comprehensive re-write in a way that is a bit more understandable!! In the first instance, it would be quite nice just to see an accurate English translation of the legislation.

[Glenn E.]

I was curious about this law, so I spent some time and parsed through the text in the link Roy provided.

First, it seems pretty clear to me that this article has been translated from Portuguese or was written by someone who is a native Portuguese speaker. That makes an already complex law just a little bit more difficult to understand. Certain words are used repeatedly in the article to mean different things, so parsing which meaning is being used at any given point is difficult.

Second, it does seem overly complicated to me. After parsing each section I think I was able to figure out why it is included, but some of the sections seem like they're in place to cover some pretty small corner cases.

One caveat - I'm just going to say "produced" when in fact the law says "produced or acquired". I'm lazy and don't want to have to type that over and over.

In plain English, with certain exceptions based on this year's production, as long as you produced this year at least 75% as much Port as you sold 2 years ago, your sales allotment this year is equal to 1/3 of your existing stocks plus 30% of what you produced this year. If you didn't produce enough this year - at least 75% of what you sold 2 years ago - it appears that you don't get a sales allotment at all no matter how much stock you have. So not only do you need a minimum of 500 barrels to start a business, if you ever decide to quit the business you're not allowed to sell your remaining stock to the market - once you stop production you're no longer allowed to sell even though you presumably still have 2/3 of your stock left. (You can sell it to other producers, though.)

Now for the exceptions.

There's a weird restriction on how much you are allowed to have acquired this year to qualify for the 75% minimum, and this is one of those places where words are being used... strangely. The most straightforward way to read the restriction is that no more than 20% of the finished Port that you're using to qualify for the 75% minimum may have been purchased as finished Port. The very last section of the document throws this into doubt, however, because it talks about how the age of the purchased Port affects the amount of capacity it contributes to the sales allotment. If the phrase "wines that only attribute 20% capacity" is being used in the context of the last section, then what it's saying is that the Port you purchased to reach the 75% minimum must be less than 3 years old. In that context there's no restriction on how much purchased Port you may use to qualify for the 75% minimum, and that context seems to be the most reasonable.

The next exception comes into play if you over or underproduced this year. The basic formula assumes that a) this year you produced at least 75% of what you sold 2 years ago, and b) this year you produced between 75% and 125% of what you sold last year. A) is required or you don't get a sales allotment this year. B) has modifications that come into play if your production falls outside the 75%-125% range.

If this year's production exceeds last year's sales by more than 125%, your sales allotment is increased slightly. You still get to sell the basic law of thirds amount (1/3 of stocks + 30% of this year's production) but in addition you are allowed to sell an amount equal to 15% of the volume by which this year's production exceeds 125% of last year's sales. You get to sell 30% of this year's production until it reaches 125% of last year's sales, beyond which you get to sell 15% of this year's production.

On the other end of the scale, if this year's production fails to reach 75% of last year's sales, your sales allotment is reduced. Instead of getting the normal law of thirds amount (1/3 of stocks + 30% of this year's production) the percentage of the second part is reduced. If, for example, you only produced 50% of last year's sales (2/3 of the 75% low end of the range) then your sales allotment would only be 1/3 of stocks + 20% (2/3 of the normal 30%) of this year's production. That ratio adjusts depending on your actual production this year - the less you produce compared to last year's sales, the less you're allowed to sell this year expressed as a percentage of this year's production.

Now we get to the last section of the law, the one that's confusing. This rather confusing section appears to grant additional sales allotment based on stocks of finished Port that you purchase. The amount of sales allotment you gain by purchasing finished Port varies based on the age of the wine purchased – the older the wine, the more it increases your sales allotment.
Wine that is less than 3 years old increases your sales allotment by 20% of the volume purchased.
Wine that is between 3 and 4 years old increases your sales allotment by 40% of the volume purchased.
Wine that is between 4 and 5 years old increases your sales allotment by 60% of the volume purchased.
Wine that is between 5 and 6 years old increases your sales allotment by 80% of the volume purchased.
Wine that is over 6 years old increases your sales allotment by 100% of the volume purchased.
The last clause is the confusing one, but it appears to mean that at least half of the increase in sales allotment provided by this section must come from Ports that contribute no more than 40% of their volume to the formula. That is to say, at least half of the sales allotment increase must come from the purchase of wines that are no more than 4 years old.

So basically, you can increase your sales capacity for this year by buying stock from others, but at least half of the increase in your sales allotment must come from Ports that are no more than 4 years old.

Whew!

[Rob C.]

So not only do you need a minimum of 500 barrels to start a business,

Glenn - where did you find this? I am looking here at Articles 20 through to 22, and can't see reference. Am i looking in the wrong place?

[Glenn E.]

I got it out of Roy's link, but Article 20.1.b calls for a producer to have and maintain a stock of at least 150,000 liters. That only works out to ~275 barrels, I guess.

And you're right about the minimum - Article 20.2 plainly states that it doesn't apply if you're only shipping Port produced from grapes grown on your own property.

[Rob C.]

We need to put in a call to Oscar Q. for clarification!

I'd also love to know who actually sat down to dream up those formulae re: age of stocks!

[Glenn E.]

I'd also love to know who actually sat down to dream up those formulae re: age of stocks!

Yeah that's the one that seems rather fiddly to me. I'm not really sure what the point is of that clause.

The rest I can understand or at least rationalize. They seem to serve a purpose, or I can at least understand what someone might have been thinking when they wrote it up.

[Eric Menchen]

I'd also love to know who actually sat down to dream up those formulae re: age of stocks!

Yeah that's the one that seems rather fiddly to me. I'm not really sure what the point is of that clause.

It appears the purpose is to only have wine sold that has been sufficiently aged. The older it is, the more you can sell. It kind of maps back to the keeping stocks thing. If you buy young stuff, you're going to have to keep it.

[Glenn E.]

I'd also love to know who actually sat down to dream up those formulae re: age of stocks!

Yeah that's the one that seems rather fiddly to me. I'm not really sure what the point is of that clause.

It appears the purpose is to only have wine sold that has been sufficiently aged. The older it is, the more you can sell. It kind of maps back to the keeping stocks thing. If you buy young stuff, you're going to have to keep it.

Yeah, except that I don't think that's actually what's going on there. If you buy old Port, you're allowed to sell more Port than if you buy young Port, but nowhere does it say that the extra Port you sell must be the old stuff that you bought. You're really just buying a bonus to your sales allotment. Furthermore, Article 22 §1 clearly indicates that at least half of the "bonus" to your sales allotment must come from Port that is no more than 4 years old (which Roy's translation confusingly phrases as Port that attributes 40% of its capacity). The limit is a minimum purchase of young Port, not old.

So they're encouraging you to buy old port while simultaneously requiring you to buy young Port.

[Lamont Huxley]

Looking at the legislation, it seems to suggest that this minimum stock threshold does not apply to producers looking to export port made from grapes that are exclusively harvested on their own property, but i might be wrong as my portuguese is non-existent.

So does this entire piece of legislation not apply to producers who source all of their grapes from their own property or is it only the regulations on the minimum amounts of stock that they need to have that wouldn't apply?

[Glenn E.]

Looking at the legislation, it seems to suggest that this minimum stock threshold does not apply to producers looking to export port made from grapes that are exclusively harvested on their own property, but i might be wrong as my portuguese is non-existent.

So does this entire piece of legislation not apply to producers who source all of their grapes from their own property or is it only the regulations on the minimum amounts of stock that they need to have that wouldn't apply?

The disqualifier in Article 20 section 2 applies only to Article 20 section 1-b. It only applies to the minimum stock requirement.

[Rob C.]

So does this entire piece of legislation not apply to producers who source all of their grapes from their own property or is it only the regulations on the minimum amounts of stock that they need to have that wouldn't apply?

Just the 150,000L (or 500 barrel?) stock threshold.

But my whole comment needs to be qualified - i made it on the basis of a link to legislation that may be out of date and relying on a Babelfish translation...