House of Lords - European Union

Select Committee on European Union Thirtieth Report

EUROPEAN WINE: A BETTER DEAL FOR ALL

CHAPTER 1: THE EXISTING REGIME

1. The European Union produces 60 per cent of the world's wine, more than four fifths of it being produced in three Member States—France, Italy and Spain. The EU is also the world's largest exporter of wine, with over €15 billion worth of exports annually. Across the Community, the wine sector provides employment for around one and a half million people—some 15 per cent of the agricultural workforce. This overall figure, however, masks significant national and regional variations. For example, half of all those employed in wine-growing are to be found in two Member States—Italy and Portugal; while in the French region of Languedoc/Roussillon nearly half of the agricultural workforce is engaged in wine-growing. At the other end of the scale, the UK wine industry employs no more than about 1,000 people, though wine-growing is a thriving industry in Britain.

2. Wine consumption is on the increase in some parts of the EU, including Britain. Within the Community as a whole, however, and especially in those Member States where most EU wine is produced, demand has fallen. Moreover, while exports of wine to non-Member States have been steadily rising and are generally healthy, imports to the Community from so-called New World countries (in particular, the United States, Australia, South Africa and Chile) have been rising more sharply in recent years and are now almost on a level with exports. This, together with a succession of good wine harvests, has resulted, in four out of the last six years, in a significant surplus of wine produced in the EU. These trends are illustrated in the chart at Figure 1:

FIGURE 1

Wine—Supply/Demand and Import/Exports

As a result market intervention measures have been activated under the terms of the Community's Common Market Organisation in Wine (the Wine CMO). These intervention measures, the rules for which were last revised in 1999, were designed to ensure market stability between years of good and poor harvests. It is now becoming clear, however, that the recurrent surpluses have deeper structural causes and it is argued in some quarters that the Wine CMO itself, with its system of subsidies and regulations, is a major factor of the current malaise.

3. In 2006, therefore, the European Commission launched a consultative process leading to the issue, in June of that year, of a Communication[1] entitled "Towards a Sustainable European Wine Sector". This set out a number of options for reform and commended one of them (described as "profound reform") for consideration. The Commission's Communication provided the starting point for our inquiry, in the course of which we have taken evidence from the Government, the European Parliament and Commission, a number of Member States and EU-wide organisations representing wine producers and traders. We have also received an external perspective of the EU wine regime from the Australian and New Zealand wine industries and a commercial assessment from two leading British supermarkets. Finally, we have visited two major wine-producing regions—Languedoc/Roussillon and Bordeaux—in order to see at first hand the challenges and opportunities of wine production in the EU and to hear the views of local wine-growers and regional development bodies. All the evidence collected in the course of our inquiry can be seen in Volume II.

4. In July 2007 the Commission published a Legislative Proposal[2] containing specific measures for reform. This Proposal is the main focus of our report. But, before we can come to consider it, it is necessary to explore what the current wine regime is and how it operates. That is the purpose of this Chapter.

The Existing Regime in Outline

5. The Common Agricultural Policy (CAP) contains a number of Common Market Organisations (CMOs) which set out the rules for the operation of particular sectors of the agriculture industry. Wine growing, production and marketing is just one of these. The first Wine CMO was established in 1962 and was geared to reconciling different oenological practices and wine-producing strategies among the six Member States of the then European Economic Community. The CMO has been revised on a number of occasions since then, most recently in 1999, when it was reconstituted under Council Regulation (EC) No 1493/1999. It is important to note that the Wine CMO was not included in the CAP reforms introduced in 2003 and, therefore, the rules governing the EU wine industry remain essentially as set out in the 1999 Regulation.

6. The Regulation itself recognises that "the rules governing the common organisation of the market in wine are extremely complex"[3]. Broadly speaking, however, it may be said that the existing regime consists, on the one hand, of a range of subsidies to support the EU wine industry and, on the other, of a series of regulations to control the ways in which wine is produced and marketed. The 1999 Regulation contains detailed rules covering both the administration of the subsidies and a number of other aspects of the wine industry, including the planting of vineyards, wine-making practices and wine classification.

7. A recent European Commission Working Paper[4] described the Wine CMO as "one of the largest and most complex common market organisations". Within the compass of this short Chapter we can do no more than highlight its main features. Much of the Council Regulation is technical in nature. We will attempt therefore to explain the operation of the wine regime in layman's language, though we recognise that this may on occasion result in some unavoidable over-simplification. We consider below each of the main features of the CMO under the two principal headings of Subsidies and Regulations.

SUBSIDIES

8. The actual cost of the subsidies in any one year depends on the volume of the harvest and the prevailing market situation. According to the European Commission[5], in 2005 total expenditure on the wine sector came to €1.27 billion, and we were told by Robin Manning, Head of the Cereals and Wine Branch at the Department for Environment, Food and Rural Affairs (Defra) that "the budget for 2007 has now been adjusted down to €1.4 billion" (Q 16). In other words, subsidies to the wine sector are costing EU taxpayers the equivalent of nearly £1 billion a year. We were also told by officials from Defra that the wine sector accounts for between 2.5 per cent and 5.5 per cent of the CAP budget each year (Q 16).

9. The subsidies provided for under the 1999 Regulation fall under three main headings: market intervention measures, including various forms of subsidised distillation to remove wine from the market; financial support for the restructuring of wine production to make it more competitive; and the provision of premiums for the grubbing-up of vineyards in order to reduce production capacity.

Distillation

10. Distillation involves the processing of wine in order to separate out the alcohol. Subsidies for distillation, together with the storage of distilled wine, cost the EU some €630 million a year and account for the major part of spending under the Wine CMO. According to the Commission's 2006 Working Paper, "the objective of wine distillation is to withdraw production surpluses from the market at a guaranteed minimum producer price"[6]. Since 2000 an average of some 10 per cent of wine production has been distilled with the aid of EU subsidies every year.

11. The 1999 Regulation provides for three main categories of subsidised distillation[7]. They are:

(a) Distillation of the by-products of wine (the marc and the lees) in order to protect the quality of wine by preventing the over-pressing of grapes;

(b) "Crisis" distillation, which is designed to remove pockets of surplus from the market in order to protect prices;

(c) Potable alcohol distillation, which supplies the spirits industry and producers of brandy and liqueurs with wine alcohol.

Distillation of by-products ((a) above) is compulsory. Wine growers must surrender for distillation all by-products of wine-making and these must contain a minimum amount of alcohol: if they do not, wine has to be surrendered. According to the Commission, compulsory distillation of by-products costs between €200 million and €230 million a year. "Crisis" distillation (b) and distillation to supply the potable alcohol industry (c) are optional. They cost around €180 million and €250 million a year, respectively. EU subsidies comprise aid to distillers to compensate them for the guaranteed price paid to producers and storage costs. In addition to subsidies for distillation, there is also a substantial subsidy for the use of concentrated grape must in the enrichment of wine (see Paragraph 19 below)

Restructuring

12. The 1999 Regulation refers[8] to "wine-growing areas where production is not aligned to demand but where production could be better aligned through restructuring of vineyards by varietal conversion, relocation of vineyards or improvement of vineyard management techniques". Subsidies are available for this purpose, and in 2005 the funds spent in this way accounted for €446 million (35 per cent of Wine CMO spending). The purpose of the subsidies is to compensate wine growers for loss of earnings during a period of conversion and to make a contribution to the costs of implementing the measures concerned. Whether restructuring has been fully effective in bringing supply and demand into balance is another question—see, for example, Paragraph 68 below.

Grubbing-Up

13. To help bring supply and demand into balance, the 1999 Regulation offers premiums to farmers in certain regions who agree permanently to abandon wine-growing. The management and administration of such "grubbing-up" schemes rests with the Member States concerned. They are able to designate the regions where premiums are offered and to set the level of the compensation. In 2005 expenditure on grubbing-up amounted to €31 million (2 per cent of the wine sector budget). Substantial grubbing-up of EU vineyards took place in the 1980s and early 1990s, but the persistence of surpluses indicates that the process did not go far enough.

REGULATIONS

14. The 1999 Regulation includes a ban until 2010 on the planting of new vines for wine production. This is seen as a logical corollary to the various other market support measures, such as distillation subsidies and subsidised grubbing-up. The ban applies, as do the grubbing-up subsidies, only to wine production in Member States whose total annual production of wine exceeds 25,000 hectolitres. The UK wine industry is currently operating just below this threshold, but at the current rate of growth UK wine growers could find themselves by 2010 within the ambit of this regulation.

15. Undoubtedly the most complex of the regulations under the present regime are those which are concerned with wine classification and labelling. The complexity derives to a large extent from the fact that the regulations divide EU wines into two main groups—quality wines and table wines. This dichotomy is important because the classification of a wine can determine its eligibility for subsidies (most of the intervention measures apply only to table wines) and because it determines what may be written about the wine on the bottle label (for example, table wines may not show the year of vintage or the grape variety).

16. However, while the Wine CMO sets out the broad parameters for identifying quality wines, the responsibility for recognising and controlling wine quality within their borders rests with Member States. They are required to lay down specific rules concerning the regions in which quality wine may be produced, the vine varieties considered suitable, wine-growing and wine-making methods, minimum natural alcoholic strength and the maximum yield permitted per hectare. They are also responsible for recognising Geographical Indications (GIs), such as the French Appellations d'Origine Controllees, which may be used in the marketing of EU wine.

17. In these circumstances it is perhaps not surprising that there is considerable variation within the EU wine market as regards classification. According to the Commission[9], there are now over 10,000 EU wines marketed under a GI of one sort or another, some of which are highly regarded by wine experts while others are judged to be of indifferent quality. The labelling restrictions also pose difficulties for the marketing of some types of wines. The regulations do not apply to New World wine entering the EU. New World producers do not divide their wines into "quality" and "table" wines but tend to classify their wines by grape variety (e.g. Shiraz, Cabernet Sauvignon, Sauvignon Blanc) or brand name (e.g. Jacob's Creek, Turning Leaf) or, in some cases, region (e.g. Napa Valley). The current EU system of classifying wine into "sheep" and "goats" has undoubtedly been a factor of the penetration of New World wines into the Community market place. New World producers have, in effect, exploited a gap in the market by offering wine tailored to customer preferences, informatively labelled, at competitive prices and, in many cases, blended in order to guarantee consistency of taste. The Wine CMO's complex and restrictive regulations, however, make it difficult for EU producers to compete.

18. Yet another area of regulation under the 1999 CMO concerns the way in which wine is produced. The Regulation lays down a list of permitted oenological (wine-making) practices, including the type of grapes which may be used and the extent to which additives may be employed to enrich wine—i.e. to increase its natural alcoholic strength. There is, in fact, an international organisation—Organisation Internationale des Vins (OIV) (See Box 1)—of which most wine-producing countries[10] are members and which, as one of its functions, sets global wine-making standards and assesses and approves wine-making practices. The EU list of approved practices is, however, more restrictive than the OIV list, to which most New World wine producers adhere.

BOX 1
Organisation Internationale des Vins (OIV)

The OIV replaced the former International Vine and Wine Office in 2001. It is an inter-governmental scientific and technical body concerned with the production of wines. Its declared aims are to assist producers, consumers and others with technical information on wine and wine products and to contribute to international harmonisation of wine-making practices and standards. Its General Assembly adopts resolutions, normally by consensus, of a general, scientific, technical, economic or legal nature

19. The detailed EU wine-making regulations are intended to take account of differing production conditions across the Community, in particular climate. Thus, for example, wine-growers in the North and Centre of the Community are permitted to increase alcoholic strength by more than are growers in the Mediterranean region, where the climate is such that little or no enrichment is considered to be required. Enrichment may be carried out by the use of either sucrose (beet or cane sugar) or concentrated grape must. Wine producers in the Mediterranean may use only the latter, but as this is significantly more expensive than sucrose a subsidy is made available from the Wine CMO with the aim of promoting a level economic playing field between growers in different areas. This subsidy currently costs some €156 million annually.

Summary

20. To sum up therefore, under the existing Wine CMO there are subsidies (in round figures) as follows:

Distillation (all forms) €630 million

Grape Must €150 million

Restructuring €450 million

Grubbing-Up €30 million

Total €1,260 million