U.S. Demand for Wines, Red and White:  Does Exporting Source Matter?

by

James L. Seale, Jr.

Lisha Zhang

Food and Resource Economics, University of Florida

AAWE 9th Annual Conference, Mendoza, Argentina. 2015

Introduction

• Rapid growth in U.S. wine imports has occurred over 1989-2014: Total wine imports have increased 485% in term of value and

295% in term of quantity. Red wine imports have increased 670% in term of value and

346% in term of quantity. White wine imports have increased 427% in term of value and

135% in term of quantity.

U.S Wine Import Share by Country of Origin, 2014

Italy, 32%

France; 27%

Aus-tralia; 11%

Ar-gentina;

10%

Chile; 7%

Rest of the

World ; 13%

red Wine

Italy; 42%

France; 17%

Australia; 8%

New Zea-land; 15%

Germany; 7%

Rest of the World ; 11%

White WINE

Purposes

• Few studies estimate the demands for red and white wine by place of origin.

• To do so, we fit a two stage-differential import demand system to data of total, red and white wines.

• Parameter estimates are used to calculate expenditure and price elasticities.

• We evaluate substitute or complement relationships among wines from different countries.

Literature Review

• Barten (1993) made a systematic comparison of four versions of differential demand systems : – Rotterdam system (Theil, 1965); – the Almost Ideal Demand system (AIDS) ( Deaton and Muellbauer,

1980);– the Central Bureau of Statistics (CBS) system (Keller and van

Driel, 1985);– and the National Bureau of Research (NBR) system (Neves, 1987)

• CBS and NBR models are income-response variants of Rotterdam and AIDS, respectively ( Lee, Brown, and Seale, 1994)

Literature Review

• Studies for U.S import demand elasticities by country of origin for wine are limited.

• Seale, Marchant, and Basso (2003) analyze the demand for import versus domestic production for the U.S red wine market.

• Carew, Florkowski and He (2005) analyze demand for imported and domestic table wine in British Columbia, Canada with the AIDS model.

• Lee, Kennedy, and Hibun (2008) analyze an import demand system of the South Korean wine market using the source-differentiated AIDS model.

Two Stage-Method

All Wine

Other Wine

Red Wine

Italy

France

Australia

Argentina

Chile

Rest of the World

White Wine

Italy

France

Australia

New Zealand

Germany

Rest of the World

Two-Stage Demand Model

The First Stage:

The Second Stage:

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ghggg pdQdQdW logloglog

jSj

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logloglog ***

• The coefficients of the Rotterdam Demand Model obey the basic properties: adding-up; homogeneity; and symmetry.

Data

• The dataset was obtained from the Foreign Agricultural Service (FAS), the United States Department of Agriculture (USDA).

• The import expenditure data contain the volume and the price of wine, red and white.

• Unit value prices are computed by dividing the import values by the import quantities

• The time period ranges from 1989-2014

Choice of Models

Based on Barten’s model-choice method, we choose• All Wine: CBS model

Log-Likelihood Ratio Test Statistics: 0.41

• Red Wine: CBS model

Log-Likelihood Ratio Test Statistics: 4.52

• White Wine: AIDS model

Log-Likelihood Ratio Test Statistics: 3.54.

Expenditure Elasticities

Red Wine 1.04 White Wine 0.86

Country Source   Country Source  

Italy 0.83 Italy 1.02

France 0.95 France 0.65

Australia 1.68 Australia 0.80

Chile 1.13 New Zealand 1.36

Argentina 0.78 Germany 0.98

Rest of the world 1.07 Rest of the world 0.73

Cournot Own Price Elasticity

Red Wine -0.70 White Wine -0.44

Source   Source  

Italy -0.43 Italy -0.31

France -0.25 France -0.58

Australia -0.68 Australia -0.82

Chile -0.81 New Zealand -1.14

Argentina -0.15 Germany -0.58

Rest of the world -0.71 Rest of the world -0.71

Substitute or Complement?

 Red Wine Italy France Australia R.O.W

Italy Substitute

France Substitute  

Australia Substitute  

R.O.W Substitute      

White Wine France Australia New Zealand R.O.W

France Substitute Substitute

Australia Substitute

New Zealand Substitute

Germany       Substitute

Conclusions

• Countries that export wines to the U.S are few in numbers

(e.g: Italy and France are major exporters for both red and white wine).

• The relationships between wine imported from different countries, if any, are substitutes.

• Most of conditional expenditure elasticities are close to one, except for Australian red wine (1.68) and Frence white wine (0.65)

Further Research

• Test whether red and white wines from major exporting countries to U.S. market are uniform substitutes.

• Simulate projected paths for red and white wines from different countries over next 10 years.

• Incorporate U.S. domestic wines into the analysis (Data Willing!)