AMERICAN ASSOCIATION OF WINE ECONOMISTS

Transcription

1 AMERICAN ASSOCIATION OF WINE ECONOMISTS AAWE WORKING PAPER No. 22 ECONOMIC GEOGRAPHY OF THE U.S. WINE INDUSTRY Patick Canning and Agnes Peez Septembe

2 ECONOMIC GEOGRAPHY OF THE U.S. WINE INDUSTRY 1 Patick Canning (PCANNING@es.usda.gov) and Agnes Peez (ACPEREZ@es.usda.gov) U.S. Depatment of Agicultue, Economic Reseach Sevice Abstact This study examines wine tade in the United States to assess the impact of highe enegy costs on the aveage distance of wold and U.S. egional wine shipments, o wine miles, to U.S. makets. To examine this issue we calibate a spatial equilibium model of the U.S. wine industy. The model accounts fo (i) consume pefeences fo vaiety, (ii) monopolisticcompetition/inceasing-etuns in the poduction of diffeentiated wine poducts, and (iii) tanspotation costs. Wine poduction aeas ae gouped into nine U.S. and seven wold poducing egions. U.S. makets ae gouped into the 50 States plus the Distict of Columbia. Results indicate that U.S. consumes ae willing to pay substantial tanspotation costs in ode to consume a wide vaiety of wines fom pemie U.S. and wold wine gowing egions. As inceasing enegy costs dive up the pice of feight sevices, wine mile impacts ae limited by the degee of egional poduct diffeentiation in U.S. and wold poducing egions. Intoduction Food and beveage elated enegy consumption epesents a lage and appaently gowing shae of the total U.S. annual enegy budget (Pimental et al., 2007; Hist, 1974). Seveal studies have examined potential benefits, including enegy savings, of an inceased eliance on local food systems to accommodate local food demand (e.g., Hinichs, 2003; Feensta, 1997) and the esulting food mile eductions ealized by this inceased eliance (e.g., Piog et al., 2001; Webe 1 The views expessed in this pape ae those of the authos and do not epesent the opinions of the U.S. Depatment of Agicultue.

3 and Matthews, 2008). This pape examines the U.S. wine industy as a case study to conside the food miles issue. A wine industy case study highlights consume issues concening the viability of ealizing substantial eductions in food miles in the U.S. food system. Moe than most industies, the wine industy is defined by its pemie gowing egions. While it is feasible to gow wine gapes in many aeas thoughout the wold, the gowing egions that possess the ideal combinations of climate, pecipitation, soil attibutes and topogaphy suitable fo consistently poducing high quality wine gapes is a consideably smalle aea. Even so, wine is consumed thoughout the wold and the pemie wine gowing egions ship thei poducts to all majo makets woldwide. The United States is the wold s fouth lagest wine poduce and U.S. wine poduction has been inceasing. Although the industy has also seen its expots gow, a vast majoity of U.S. wine is still consumed in the county and the United States emains a net impote of wine. Califonia is home to almost half of all the U.S. wineies and the egion that supplies about 95 pecent of all domestically-gown gapes cushed fo wine. Washington, New Yok, and Oegon togethe account fo appoximately 20 pecent of the wineies and about 4 pecent of the total gapes cushed fo wine each yea. Seveal new wine gowing egions in the United States have emeged ove the past yeas and have posted substantial gains in wineies and in gape aceage, but still epesent a small shae of the domestic supply. To achieve substantial eductions in wine miles though inceases in puchases fom local souces, all egions east of the pacific coast States would need to geatly expand thei existing wine industy capacity. How eceptive ae consumes to this outcome? To examine this issue we calibate a spatial equilibium model of the U.S. wine industy. Using published and estimated wine industy data fom 1997 and 2002 and wine shipment data fom the Depatment of Tanspotation, we estimate maket cleaing tade flows. Technology and 2

4 behavioal paametes ae obtained by econciling industy data to ou hypothesized model of wine maket stuctue. We then e-estimate spatial equilibium unde altenative enegy maket assumptions and examine the outcomes with defeence to the aveage wine mile shipments of wold and U.S. egional wines to U.S. wine makets. The pape is oganized as follows. Section I pesents an oveview of the U.S. wine industy and wine tade in the United States to assess the capacity of accommodating a eduction in wine miles. This is followed in section II by a bief discussion of the salient eseach explaining intaindusty tade ovelapping tade of simila goods between counties o between sub-national egions and pesentation of a famewok fo a study of the U.S. wine industy. Section III pesents the empiical model and the appoach fo a numeical calibation. In section IV, the baseline 1997 and 2002 equilibium tade flow esults and model paamete estimates ae pesented along with altenative estimates based on moe pice sensitive behavioal assumptions. Next, an enegy induced tade taiff is examined and a new spatial equilibium is computed. Results ae compaed to the baseline outcome and distibutional impacts acoss wold and U.S. wine poducing egions ae consideed. The pape concludes with discussion of implications fo U.S. egional wine poducing egions and fo U.S. wine consumes. An appendix descibes data souces and model calibation. I. U.S. Wine Industy Oveview The U.S. wine industy is the leade among New Wold wine poduces. 2 Mostly concentated in Califonia, the wine industy is evolving, expeiencing apid poduction gowth and the polifeation of many new wineies in ecent yeas. As ecently as 2007, thee wee ove 4700 poducing wineies in the county, moe than double the numbe that existed in 1995, based on 2 Poduces of wine outside the taditional wine-gowing aeas of Euope, in paticula compised of Agentina, Austalia, Canada, Chile, New Zealand, South Afica, Mexico, and the United States. 3

5 U.S. Depatment of Teasuy s Alcohol and Tobacco Tax and Tade Bueau (TTB) data pesented in the Wine Ameica website. Heightened positive publicity duing the 1990s suounding the health benefits of modeate ed wine consumption, along with gains in pemium quality domestic wines, has fueled the gowth in demand fo U.S. wines hee and aboad. While this gowth in demand has led to expanding domestic poduction, the United States continues to gain pesence in the wold impot maket fo wine. Poducing about 8 pecent of the wold s wine, the United States is the wold s fouth lagest wine poduce, next to Old Wold wine leades Fance, Italy, and Spain (FAOSTAT). Even with a lage poduction base, the United States emains a net impote of wine, soucing about half the volume of foeign wines fom the top thee Old Wold poduces and also a substantial shae fom New Wold poduces. U.S. impots gew at an aveage annual ate of 8 pecent since the 1990s, tipling in volume to million gallons in 2007 (based on data fom U.S. Depatment of Commece, U.S. Census Bueau). Viewed fom a global pespective, the United States has evolved as the thid lagest maket fo wine, impoting 9 pecent of the wold s wines and supassing impot volumes in Fance, Russia, and Gemany, once bigge makets fo foeign wines and counties that ae mostly heavie consumes of wine. With wine impots gowing in the United States, soucing of poduct is shifting fom Old Wold Euopean poduces to New Wold poduces. Combined impots fom Austalia, Agentina, Chile, New Zealand, the Republic of South Afica, and Canada now account fo ove 40 pecent of all the foeign wines maketed in the United States, up fom only 6 pecent in This shift in impot maket shae indicates a gowing pefeence in the United States fo New Wold wines which offe affodable high-quality table wines that ae often vaiety specific and pesent consistent taste acoss diffeent vintages. Old Wold wines pesent moe mystey to Ameican consumes because the wines ae often blends of diffeent vaieties of gapes, equie aging to 4

6 each full potential, and sold with a geogaphic indicato (Goodhue, Geen, Heien, and Matin). U.S. wine impots fom Old Wold Euopean counties continue to incease and hold a majo shae of total impot volume. Howeve, the competitive position of Euopean-poduced wines in the U.S. maket has diminished with Euopean shipments accounting fo 56 pecent of total impots in 2007, down fom 90 pecent. Although small elative to impots, U.S. wine expots have also shown emakable gowth since the ealy 1990s. The move towad moe use of high-end wine vaieties enabled the domestic wine industy, especially in Califonia, to offe moe pemium quality wine, and this has helped U.S. wines ean moe intenational ecognition. U.S. wine expots has inceased in volume by almost five folds between 1990 and 2007, setting a ecod of million gallons and valued at $872 million, also at an all-time high. U.S. wine expots is seventh lagest in the wold tailing intenational shipments fom Italy, Fance, Spain, Austalia, Chile, and South Afica in 2005 (FAOSTAT). The U.S. wine industy is slowly gaining shae of the intenational maket with expot volume epesenting between 4 and 5 pecent of wold total, up fom 2 pecent in the ealy 1990s. Moe than thee fouths the volume of U.S. wine expots ae sold in the United Kingdom, Canada, Italy, Gemany, and Japan. Despite stong intenational demand, a vast majoity of the wines poduced in the United States ae consumed domestically. Wine is a high-value by-poduct of gapes, the highest valued fuit cop in the United States. Due to high tanspot cost fo gapes, wine poduction in the United States geneally occus whee gapes ae poduced. Most wine poduces in the United States gow thei own gapes, but the vey lage wineies typically would have a contact with gowes to buy thei gapes. 5

7 Califonia holds a distant lead in U.S. wine poduction. Wine gape aceage in Califonia gew ove 40 pecent since 1990 to 471,887 aces in Of that total, an estimated pecent was poductive. The top vaieties of wine gapes in 2007, based on cush figues epoted by the Califonia Depatment of Food and Agicultue, include Cabenet Sauvignon, Zinfandel, Melot, Syah, and Pinot Noi fo ed vaieties, and Chadonnay, Fench Colombad, Sauvignon Blanc, and Chenin Blanc among the white vaieties. The total cush fo these top nine vaieties statewide inceased fom 1.5 million tons in 1990 to 2.5 million tons in Chadonnay, by fa, continue to be the most poduced wine gape in Califonia, accounting fo 20 pecent of wine gape beaing aceage and 16 pecent of total cushed volume in Howeve, as demand fo ed wines has gown, thee has been moe apid aceage expansion fo the top ed vaieties, especially fo Cabenet Sauvignon and Melot since the ealy-1990s. Aceage fo Fench Colombad and Chenin Blanc has declined thoughout the 1990s and into the new centuy as poduction egions in Califonia s Noth and Cental Coast shifted moe aceage to pemium ed vaieties. Fench Colombad and Chenin Blanc ae now mostly poduced in the inland egions and ae typically used fo making low-piced jug wines (Volpe, Geen, Heien, and Howitt). A compilation of TTB monthly state-level poduction data shows that Califonia s poduction of bottled wines (includes still wines and effevescent wines) ose 36 pecent fom 1997 to million gallons in 2006, accounting fo 87 pecent of the U.S. total. Cuent poduction levels ae met by appoximately 2,025 poducing wineies in the State of Califonia, moe than double the numbe that existed in Industy expansion is also occuing in othe pats of the county. The numbe of States with epoted wineies has inceased fom 34 in 1975 to 47 in Today, wineies may be found in 50 States acoss the county and nealy 60 pecent of these wineies ae established outside of 6

8 Califonia. Many of these wineies ae small, family owned entepises that maket locally and pomote ual touism by offeing wine tous and wine tasting. Even with the exclusion of Califonia, the westen egion of the county leads in U.S. wine poduction, making up about 3 pecent of total bottled wine poduction and 20 pecent of the wineies. The apid gowth in this egion, excluding Califonia, may be eflected by the incease in the numbe of wineies by moe than thee folds fom 1995 to 2007 and the doubling of bottled wine volume fom Winey numbes gew vey stong acoss the egion but emain small fo seveal of the States in the egion. Washington and Oegon togethe poduce 4 pecent of all the U.S. gapes cushed fo wine and fom within the westen egion, excluding Califonia, the two States account fo 75 pecent of the winey establishments and ove 90 pecent of poduction volume. Winey numbes moe than doubled in Oegon and inceased almost five fold in Washington. Both these States have substantial gains in gape beaing aceage, with emphasis on pemium wine gape vaieties. Washington anks thid in U.S. bottled wine poduction accounting fo about 3 pecent of total volume while Oegon stands in as fouth, poducing less than 1 pecent. The Notheast is the second biggest egion in the county fo bottled wine poduction, poducing about 7 pecent of total volume and housing 11 pecent of all the wineies. The industy is heavily concentated in the State of New Yok with about 95 pecent of the egion s poduction and almost half the numbe of wineies in the egion. New Yok has ove 30,000 aces of gapes yielding ove 150,000 tons a yea. Ove 20 pecent of the State s annual gape cop is cushed fo wine poduction while the bulk of the havest is destined fo the juice pocessing secto. New Yok anks second in U.S. wine poduction, accounting fo about 7 pecent of total volume of bottled wine poduced annually. Poduction within the State only gew 2 pecent fom 1997 to 2006 but gains in the numbe of wineies wee moe significant. New Yok accounts fo nealy 7

9 half the numbe of all the wineies in the Notheast egion. Simila to the Westen egion, the numbe of wineies ose moe shaply in most othe pats of the egion that have fa less of these establishments. Wine poduction in the Midwest and South egions each account fo one pecent of U.S. bottled wine poduction. Wine poduction in the South egion gew about 70 pecent between 1997 and 2006 and in the Midwest, poduction ose about 40 pecent. Thee ae now ove 600 poducing wineies in each of these egions, exceeding those in the Notheast. Back in 1995, the Notheast had 65 moe wineies than the South and 55 moe wineies than the Midwest. Wineies ae epoted in 12 of the Midwest States and 16 of the southen U.S. states. The numbe of wineies in these States, except one (Mississippi in the South egion) gew substantially since Michigan and Ohio togethe account fo ove 35 pecent each of the midwest egion s wine poduction and wineies. In the South, Viginia has the most numbe of wineies and the lagest poduction of gapes cushed fo wine. Howeve, wine poduction data fom TTB indicate Floida and Texas as lage poduces. As with the othe egions, many of the wineies ae small poduces who concentate on ual touism fo the majoity of thei sales. II. A Famewok to Examine the U.S. Wine Industy Inta-industy tade ovelapping tade of the same o vey simila goods between counties o between sub-national egions is widely obseved in the tade statistics of numeous industies, fom auto s to wine, to home funishings, to name a few. Theoetical models that explain intaindusty tade ae well established. Helpman (1999) eviews this liteatue petaining to intenational tade, and Kugman (1998) eviews the economic geogaphy liteatue. Thee has been little application of these models in empiical eseach. The empiical model most often employed to explain pattens of inta-industy tade has been the gavity equation (Isad, 1998). 8

10 Many vaiants of the gavity equation exist, but the coe paametes chaacteizing these vaiants ae the elative sizes of the supply and demand makets in the tading egions (e.g., income, population, industy output, pesonal consumption), and the distance poducts must tavel between buye and selle. A gavity equation is used to assign unobseved tade flows consistent with known contol totals, such as egional poduction and egional consumption, o to explain obseved tade flows in tems of the gavity paametes. In eithe case, once paametes ae assigned, the gavity model pedicts that a spatial equilibium in the tade of industy poducts is achieved by the minimum impedance in the tanspot of poduct, whee impedance is defined by the size and distance paametes. Seveal economic explanations of the gavity equation have been poposed. Andeson (1979) deives the gavity equation fom the popeties of an expenditue system with a hypothesis that poducts ae diffeentiated by place of oigin. Begstand (1989) shows how the gavity equation fits in with the inceasing etuns, monopolistic competition models of inta-industy tade poposed by Kugman (1991) and Helpman (1987). Economic popeties of these appoaches have been tested at the maco level. Begstand examines secto level tade data to test facto intensity popeties of intenational tading patnes. Hummels and Levinsohn (1995) examine volume of total tade and the shae of inta-industy tade between counties to test economic popeties of the monopolistic competition model fo intenational tade. Noting that the educed fom empiical equations of this model esembles a gavity equation; thei eseach findings wee inconclusive, noting that seveal unelated models of tade wee effective in explaining bilateal tade flows. At the industy level, gavity equation studies of inteegional tade have not been closely linked to economic foundations such as deived demand and industy supply expessions. Fo example, Lindall, et. al. (2006) estimate NAICS based inteegional industy tade between U.S. States 9

11 using industy specific maket size paametes and an index of tanspotation impedances between all potential inteegional bilateal tansactions. By constaining the calibation with a set of egional out-flow and in-flow contol totals that ae exogenously estimated (the doubly constained gavity equation), a unique set of log-linea coefficients to the size and distance paametes ae calibated. Although this appoach poduces a complete system of inteegional tade, it is neithe infomed by, no diectly infoms the measuement of behavioal supply and demand paametes which limit the ability to conduct policy expeiments. Ou appoach fo the study of the U.S. wine industy is to deive a system of supply, demand, and maket cleaing equations that ae calibated to detailed industy statistics of the wine industy. Tade flows ae estimated by a gavity type equation deived fom a monopolisticcompetition/inceasing-etuns model with shipping costs fo facilitating inteegional tade. By deiving an explicit equilibium system of equations, this data intensive appoach allows fo extensive use of wine industy data to infom the calibation model paametes. To stat, conside a national economy that is compised of R distinct egions. Following the monopolistic competition famewok of Dixit and Stiglitz (1979), let each egional household, Є R, deive utility, u, fom consumption of a numeaie good, x 0,, epesenting the aggegation of all non-wine commodities available fo consumption, and fom consumption of a vaiety of wines. Households maximize utility subject to an expenditue budget, I : 1 ) u = U ( x 0,, y ) 2 ) 0, x + q y = I 3) y = ( α e E 1 / σ e, x ( σ 1) / σ e, ) σ /( σ 1) whee α e e, = 1 4) q = ( α e E e, p ) ( 1 σ ) 1/( 1 σ ) e, 10

12 whee x e, denotes egion demand fo wines fom establishment e. Assume U is homothetic in its aguments. Maximization of (1) subject to (2) leads to egional wine expenditue budgets: 5 ) q y = I s( q ) = M, whee 0 < s(q ) <1 is a wine budget shae equation with a pice elasticity less than one and potentially negative. Equation (3) specifies a constant elasticity of substitution, σ, between any wine vaiety pais. The α e, expessions measue household capacity to gain utility fom the use of wine vaiety e. Maximization of (3) conditional on (5) leads to egional household demand expessions fo each of the wine vaieties. An inteegional demand expession is obtained though aggegation of the establishment demand expessions 3 : 6 ) x s, = x e s e, = p σ s, n α s s, ( n α s S s M S, p 1 σ s,, ) whee n s denotes the numbe of wine establishments in egion s and p s, is the pice paid in egion fo wines fom egion s. Each establishment sells a diffeentiated wine poduct, X e fo e=1,,e, using the same inceasing etuns technology and with equal access to the same poduction factos: 4 7 β ) le = β 0 + 1X e, whee X e is total establishment output, l e is total wine poduction inputs, β 0 is the fixed input equiement, and β 1 is the vaiable input equiement pe unit of output. The wine industy faces a downwad sloping demand fo thei poducts and fims assume thei decisions do not affect decisions of othe fims. The vaiable facto inputs ae mobile so all establishments pay the same ent pe unit of input. Fee enty of new establishments eliminates excess pofits and optimal establishment output is (see deivation on page in Kugman, 1991): 3 This aggegation is facilitated by the assumption that pefeences ae unifom fo vaieties within a selling egion. 4 Technology and consume pefeences push the wine industy towads a unifom scale of poduction fo each diffeentiated wine establishment. 11

13 8) X * ( σ 1 0 = e β ) β 1 Thee ae S egions selling wine poducts to the R egional households. Wine shipments equie feight sevices at a cost of γ pe ton-hous of sevice between s and : 9 p = p ( 1+ γ h ) whee 0 > d > -1 ) s, s s, III. Spatial Equilibium Model and Empiical Appoach To detemine how well this famewok explains spatial equilibium in the U.S. wine industy, the model is calibated fo 1997 and 2002 maket yeas. To facilitate the calibation of key demand paametes, divide both numeato and denominato in (6) by the total numbe of establishments acoss all selling egions to poduce the shae expessions, η s = n s /N: 10 ) x = η α ps, / P ) P σ ( M, s, s s, P = ( η α p ) s S s s, s, whee, by assumption: 11 ) η α = 1 s s s, To the extent that establishments adopt a unifom scale of poduction acoss egions, η s is appoximated by the egional shae of total wine sales to U.S. households. Regional wine poduction is pedetemined, as ae Regional household wine expenditues. Maket cleaing conditions ae: 12) X s = X e s e = x s, 13) M = p s s, x s, 12

14 Define the standadized unit as the national aveage quantity of wine selling fo $1. Allowing the quantity of a $1 unit of wine to vay by selling egion (contay to the long-un spatial equilibium outcome), the pice equation fo a standadized unit is: 14 ) ps = ρ S ( 1+ γhs,, ), whee ρ s is the selle pice pe unit of wine sales in egion s, which has an expected value of one. The cumulative tanspotation costs fo all bilateal tansactions must add up to the obseved national wine industy feight sevice payments, including intenational shipping chages: 15 ) ( p ρ ) x = T s, s s, s Commodity flow data and wine industy statistics, howeve incomplete they may be, can be incopoated to naow the bounds of feasible solutions to this system. 5 This is done by including the appopiate accounting constaints. Gaps in the available data sets leave this model (equations 10 to 15) unde detemined, such that the α s,, ρ s and γ paametes must be solved numeically. The model descibes a wine industy that tends towads a long-un spatial equilibium whee poduce pices become unifom acoss egions (ρ s = ρ =1) and the accumulation of infomation pushes the consumption paametes towads symmety (α s, = α fo all s,). Theefoe, we seek the value of γ that povides the minimum weighted least squaed deviation fom this long-un outcome and is consistent with the shot-un equilibium descibed in (10) to (15): ( η [ ρ ( γ ) 1] ) + ( η [ α ( ) 1 ) 16 ) Min, γ ] γ s s s s s s 5 Fo example, a 1998 publication of the Texas Wine Institute epots that 95-pecent of Texas wine industy sales in 1997 wee within the State. The 2002 Commodity Flow Suvey epots mean and standad eo estimates fo the aveage distance of wine shipments by State of oigin. 6 Teyz and Bumgadne (2000), afte imposing symmety to eliminate the α tems, apply an objective function simila to this to estimate shot-un equilibium tade flows in Sevices fo the State of Michigan in which ε s and γ detemine a non-pecuniay pice wedge between buying and selling egions. 13

15 Model aggegation of wine poducing egions is depicted in figue 1. Due to the vaiation in poduction scale of wine poducing egions, the Califonia industy is gouped into fou egions, while egions outside of Califonia ae Statewide (Oegon, Washington, New Yok) o multi- State aggegations. Impoted wines ae county totals fo majo wine poducing counties and an aggegation of county data fo all othe counties shipping wine to U.S. maket. Makets fo wine in the U.S. ae epesented by each of the U.S. States plus D.C. Data souces and model calibation pocedues ae pesented in the appendix. IV Results {Data fo a 2002 calibation is cuently being compiled, and those esults ae fothcoming} As a basis fo compaison, we fist cay out a contol model that simply calibates the minimum combined ton/hous of feight sevices necessay to meet all obseved egional consumption fom the obseved sales to the U.S. maket fom the 16 model egions. This model assumes wine is a non-diffeentiated industy that minimizes total distibution costs. Figue 2 summaizes key contol esults fo the U.S. maket and fo two egional makets Califonia and New Jesey. 7 Fo the nation, the contol scenaio indicates that wine shipments aveage 2,500 miles nationally. The Califonia maket is seved entiely by wines fom within the State while the New Jesey maket seved entiely by wine shipments fom Fance. Looking at the destinations of wines fom Califonia and fom Fance, we find that oughly half of Califonia wines ae shipped to the fou lagest makets outside of the notheast egion, while wines of Fance ae shipped exclusively to fou mid-atlantic coastal States. 8 7 The Califonia maket is located in the heat of the majo domestic wine poducing egions while New Jesey is in close poximity to the lagest pot of enty fo intenational wine shipments to the U.S. 8 While wines fom Fance ente though seveal U.S. pots, the model uses a single weighted aveage shipping time acoss all tanspotation modes and pots of enty, as computed fo each U.S. State (see appendix). 14

16 Next, the monopolistic completion model was estimated unde two scenaios. Scenaio I (base) uses a egional pice elasticity of 1.81, as deived fom the U.S. wine industy data and equations (7) and (8). Scenaio II (pice sensitive) inceases the pice elasticity paamete to Figue 3 povides the same details pesented in figue 2 when the contol model is eplaced by the monopolistic competition model unde the base scenaio. Instead of soucing thei wines exclusively fom one o a few least cost souces, figue 3 shows how egional consumption daws fom a wide vaiety of souces. Thee quates of the wine maketed in Califonia come fom within the State, with an additional 15-pecent souced fom Fance and Italy. A non-negligible shae is also souced fom Washington State. New Jesey souces a slightly lowe shae of its wines fom Califonia (68 pecent) and a slightly highe shae of its wines fom thei 3 d and 4 th lagest souces U.S. east and Italy. Figue 3 also depicts the e-estimation of U.S. shipping destinations fo wines fom Califonia and Fance. In contast to the contol model solution (figue 2), estimates of destinations fo wines of both egions ae fa moe divese, with the top fou destinations eceiving 42 and 38 pecent to total shipments fom these top two poducing egions. Oveall, the national aveage wine miles ae nealy 15-pecent highe in compaison to the undiffeentiated (least cost) contol model. With an estimated 8.6 million tons of wine taveling on the U.S. feight system in 1997, 9 these additional wine miles epesents a substantial cost in feight sevices incued to accommodate household pefeences fo a vaiety of egional wines. The oveall cost in feight sevices to distibute wines to the U.S. makets exceeded $450 million in 1997 (see appendix). A moe detailed summay of key esults concening wine poducing egions ae epoted in table 1, whee the 16 wine poduction egions of the model ae epoted fo 7-egional goupings. Section A of table 1 summaizes the value of shipments to the U.S. maket by wine poduction 9 The 1997 Commodity flow suvey indicates 7.2 million tons of domestically poduced wine was shipped in the U.S. Assuming impoted wines added an additional 20 pecent; the total is about 8.6 million tons. 15

17 egions. The ow epoting shipments to all U.S. destinations epesents the total value of wines shipped to U.S. makets, epoted in 1997 poduce pices. Nealy 70 pecent of this total comes fom Califonia, with an additional 18.3 pecent fom Fance, Italy, and Spain. Oveall, the model pedicts that aound 80 pecent (poduce value) of the wines shipped to U.S. makets go to aeas outside of the State/County of oigin. Howeve, notable among these esults ae the vey small shae of wines fom Othe U.S. States that ae sold outside of thei home makets. Unde the pice sensitive scenaio, a slightly smalle shae of the Califonia wine poduction leaves the State. The top thee destinations fo wines shipped outside of thei home maket ae New Yok, Floida, and Califonia, so afte excluding the Califonia wines shipped within the State, it still anks thid in destinations fo wine shipments to U.S. makets. These thee makets attact about one quate of all wine shipped outside the State/County of poduction. While this one-quate figue is also tue fo wines shipped fom Califonia to it s top thee domestic destinations, the wines fom othe U.S. and wold egions show substantially highe concentations going to thei thee top destinations, anging fom aound one thid fo the thee intenational egions to 38 pecent fo the New Yok/Oegon/Washington egional gouping. Unde the moe pice sensitive scenaio, the diffeence between Califonia and the othe egions is fa less ponounced. Sections B and C of table 1 epot the same analysis as section A, but with the unit of measuement changing to shipping distance (B) and shipping costs (C). Wheeas the total value of shipments and total shipping costs to U.S. makets wee exogenous in the model, total shipping distances wee not. Model estimates of total distance shipped fo wine sold in U.S. makets aveaged 2,861 miles. Unde the pice sensitive scenaio, this estimate deceased by 24 miles, implying oughly 200-million less annual ton-miles shipped fo wine destined to U.S. makets. Shipments fom Agentina, Austalia, and Chile aveaged ove 9,000 miles. Not supisingly, shipping cost magins fom these egions wee highest, aveaging about 10 pecent. Aveage shipping distance and cost magins fo Califonia wines wee lowe than the oveall aveage; 16

18 about 1,800 miles and 3.7 pecent espectively. Wines fom othe U.S. States had consideably lowe distance and cost magin aveages. Wines shipped to the top thee destinations outside of the home makets wee shipped an aveage of ove 4,200 miles accoding to base model foecast. This aveage falls substantially unde the pice sensitive scenaio, to about 3,600 miles. The vaiable in the model estimation that is most esponsible fo econciling a consumes pice sensitivity with thei pefeence fo wine vaiety is the α s, coefficients. In the consume theoy of household poduction (see Stigle and Becke, 1977), this expession descibes the convesion of a standad unit of input (wine) into a measue of output (utility fom wine consumption). As a technology (as opposed to taste) paamete, it can be exogenously changed, fo example with access to moe infomation about the poducts attibutes. In this context, the esults in section D of table 1 epot the aveage household capacity to deive utility fom the puchase of wines fom each of the poducing egions we denote this paamete the household poductivity index (HPI). When the aveages ae epoted acoss all destinations, it is not supising to find the highest value, 1.6, in the Othe U.S. States egion, whee commodity flow accounting constaints keep lage pecentages of wine poduction within the home maket. To econcile this constaint to the model, households of the home egions ae assigned a high HPI, thus keeping the wine poducts lagely in-state. When home maket consumes ae excluded fom this aveage, the HPI in this egion is consideably lowe at 0.4. The two Califonia egions exhibit consistently high HPI, as does the Washington, Oegon, New Yok egion except fo outside maket consumes unde the pice sensitive scenaio. Table 2 summaizes key findings of the wine consuming egions all U.S. States with only the base scenaio epoted. Total value of shipments into each State ae epoted in column 1 and ae computed by the model calibation. They eflect the exogenous total in-shipments at poduce pices and the endogenous tanspotation magins. They do not eflect etail tade magins. The 17

19 Califonia maket ($1.9 bil.) is moe than double the next lagest maket (New Yok at $868 mil.). Califonia also has the smallest estimated pecentage of it s wine shipments coming fom out-of- State souces, at 26 pecent. Othe than Texas, estimated at 85 pecent, all othe States obtain ove an estimated 90 pecent of thei wine fom out-of-state souces. Aside fom Alaska and Hawaii (both ove 4,000 miles), the top five States in tems of aveage wine in-shipment distances wee all New England States; Maine, New Hampshie, Massachusetts, Vemont, and Rhode Island. Excluding in-state shipments, Califonia had the highest aveage in-shipment distances at 6,275 miles. Aveage feight costs fo in-shipments anged fom a low of 2.6 pecent in Califonia to a high of 6.7 pecent in New Hampshie. It is woth noting that feight costs ae not pefectly coelated with distance. New Hampshie is in the congested New England egion and is moe eliant on expensive modes of tanspotation than, fo example, Hawaii. Aveage HPI s ae geneally unifom acoss State, paticulaly when excluding home egion shipments. An Enegy Induced Tade Taiff Fom the numeical solutions fo the γ, ρ s, and α s, paametes, we now have a fully detemined system of wine maket equations. To facilitate policy expeiments, we implement the following assumptions; (i) a global enegy pice spike doubles the pice pe ton-hou of feight sevices, (ii) the aveage fob pice fo wine changes at the same ate as the pice of the numeaie good (dq=0), (iii) egional nominal incomes emain unchanged, and (iv) shot-un vaiable input supply to the wine industy is at a constant elasticity with two scenaio s consideed a flex scenaio with a 0.4 supply elasticity and a igid scenaio with a 0.04 supply elasticity. Combined with the base and pice sensitive scenaios of the model calibation, we conside a total of fou policy simulations: base/flex, base/igid, pice-sensitive/flex, and pice-sensitive/igid. 18

20 The spatial equilibium system is compised of the egional demand (10) and consume pice (14) equations, calibated altenatively to the base and pice-sensitive paamete values. In addition, the monopolistic competitive supply (X s ) and pice (p s ) equations ae needed: 17) p s σ = β1w σ 1 s 18) X s = p [ L w s 0 s ξ s β ] 0 β, 1 whee w s is the egion s local ental ate, L 0 s is the cuent (pe-policy) egion s vaiable facto input level, and the emaining paametes have aleady been defined. 10 Equilibium is attained at the local ent level in which equations 18 and 10 (summed acoss all States) ae equal. Afte veifying this compiled system eplicates the initial spatial equilibium outcomes, base and pice sensitive, the final step is to esolve this system unde the new enegy induced global tade taiff (τ) egime: 14 t) p s = ps ( 1+ τγhs,, ), whee τ is set to a value of 2.0. Figue 4 evisits the in-shipment outcomes fo Califonia and New Jesey unde to new feight taiff egime. The oveall eduction in the f.o.b. value of shipments to these two egions is due to the assumption that nominal wine budgets ae unchanged while shipping costs have substantially inceased. Even so, we find that thee is a shift in the soucing of wines that favo the egions in close poximity. This esult eflects the extent to which egional consumes ae willing to tade off thei pefeences fo egional vaiety fo cost savings that can be ealized by puchasing fewe wine miles. The bottom panel in the figue epots the oveall dop in wine miles by U.S. wine consumes to offset the inceased feight costs. Wine mile eductions unde the base and pice sensitive scenaios wee 2.5 and 3.1 pecent espectively with implied wine mile pice elasticities 10 This model is compiled by initially setting w s such that p s equals the solution to ρ s fom the peviously estimated pice (equation 15). Then L 0 s is set such that equation 18 eplicates the initial egional supply. 19

21 of and espectively. These figues ae an effective demonstation of the baies to ealizing substantial food mile savings though policies diected to the poducts that ae know to be highly diffeentiated by location of poduction. Table 3 povides geate detail of the impacts fom the feight taiff, whee the 16 egions of the model ae epoted fo 7-egional goupings. Aveage tanspotation magins acoss all shipments to U.S. makets ose 4.5 pecent in all fou scenaios. This incease amounts to slightly less than the tade taiff incease since pe-taiff aveage tanspotation magins aveaged 4.7 pecent. Acoss poduction egions the esults ae uneven. Tade magins inceased by less than the taiff in Califonia, Washington, Oegon, and New Yok, and inceased by equal o geate amounts in all othe egions. Diffeences in these esults ae vey simila acoss all fou scenaios. Fo aveage shipping distances, the scenaio choice did affect the outcome. Oveall, a eduction in aveage shipping distances anged between 63 and 89 miles depending on the scenaio, which helps to explain why the impact of the tade taiff was less than popotional. Somewhat supising is the esult that the geatest aveage eductions occued unde the base scenaios as opposed to the pice sensitive scenaios. The highest eductions occued fo the base/igid scenaio, whee the vaiable input supply was igid, so limited the ability of poduces to lowe pices though wage cost eductions. A possible explanation why a moe pice sensitive consume doesn t shoten the aveage distances as much may be that the initial spatial equilibium in these scenaios aleady eflected shote aveage shipments, so fewe futhe oppotunities existed. Beyond this, it was aleady noted that shipping cost changes ae lagely the same unde all scenaios. We have aleady noted above that distances don t pefectly coelate with shipping costs, so this may also help explain this esult. 20

22 Nominal egional incomes wee pegged and the pice of wine assumed to mio pice changes of the numeaie good, so it is not especially inteesting that oveall wine shipments to U.S. makets deceased. What is inteesting is the elative changes acoss poduction egions. Impoted wines ae dispopotionately affected by the tade taiff, with shipment values declining an aveage of 7.5 and 9.9 pecent, depending on the scenaio. Califonia wine shipment values decline by oughly 3-pecent, while shipments fom othe U.S. egions declined by smalle pecentages. This would indicate that Califonia s dominance in both vaiety offeings and stong household poductivity index numbes (the α s, paametes) ae patially offset by the inceasing costs of shipping thei poducts to distant makets. This esult holds even fo the base scenaios, whee the egional pice elasticities ae elatively low. Had egional nominal incomes been assumed to incease slightly, shipments fom these emeging U.S. poduction egions would have gown with declines occuing in shipments to U.S. makets out of Califonia and the impot egions. V Conclusions This study used a model of inta-industy tade with maket stuctue assumptions that ae consistent with obseved featues of the wine industy; egionally diffeentiated poducts maketed to consumes that value vaiety and pay substantial shipping chages to obtained wines fom aound the wold. Using publicly available wine industy data, we wee able to numeically calibate the spatial equilibium system of equations to obtain key behavioal and technology paametes. In doing so, commodity flow statistics whee incopoated into the calibation using an efficient infomation pocessing citeia that helped infom the estimation of these paametes. By deiving ou system of equations fom a fully specified economic model, we wee able to conduct policy expeiments to detemine how the spatial equilibium would adjust to changes in the cost of global feight sevices. 21

23 Both the baseline calibation and the policy scenaio analysis povided useful insights about the wine industy. The dominance of the Califonia wine industy in shipping substantial quantities of thei poducts to all U.S. wine makets is shown to be lagely diven by a vey boad vaiety of wine poducts offeed, and by highe than aveage demand paametes that measue the peceived consumption attibutes of wines by egion of oigin. To a lesse extent, these factos helped make numeous intenational wine egions competitive acoss all U.S. wine makets, even as these wines equied substantially highe feight chages to each these makets. The silve lining in these findings fo the emeging U.S. wine egions is the appaent willingness of U.S. consumes to incease thei shaes of wine puchase fom these emeging egions as shipping costs fom all egions incease paticulaly at the expense of intenational wine impots. While such a finding is intuitive, analysis povided in this study demonstates the extent of this potential shift. Results fom the analysis of an enegy induced global taiff on feight sevices demonstates the potential baies to ealizing substantial food mile savings though policies diected to the poducts that ae know to be highly diffeentiated by location of poduction. Implied wine mile pice elasticities, measued fom the pecentage change in aveage wine miles bought on by a 100-pecent incease in shipping costs, wee found to be between and Consumes may moe eadily seek local food altenatives fo less diffeentiated foods such as fesh fuits and vegetables when the cost of puchasing food miles inceases. But unlike wine, which is fa less peishable, supply seasonality s of fesh poduce is anothe fom of egional poduct diffeentiation that may limit food mile tadeoffs when consumes desie yea-ound supplies of these poducts. An analysis of this issue would equie an extension of ou spatial equilibium model to captue the seasonality of supply. Beyond the analysis of the wine industy, this study demonstates a potentially impotant use fo tanspotation statistics. Histoically, commodity flows data has been viewed as being too limited 22

24 to infom studies of inteegional and inta-industy tade. In this epot, the infomation povided by the commodity flows suvey had an impotant ole in infoming the numeical calibation of the behavioal and technical paametes of the model. In addition, esults fom this type of appoach can be used as a tool to assess the stengths and limitations of the tanspotation data. 23

25 24

26 Figue 2: Spatial equilibium U.S. wine tade: competitive Spatial equilibium (undiffeentiated) U.S. wine tade: model competitive (undiffeentiated) model Connecticut Wine Souces Oegon Wine Souces Califonia Spain Wine Souces 6% New Yok % Califonia 100% New Jesey Wine Souces Oegon Califonia 32% 68% Fance 100% Califonia Wine Destinations Califonia Wine Destinations CA Othe US 28% 49% IL FL 6% CA TX 11% Othe US 28% 6% 49% FL IL TX Fench Wine Destinations Delawae Fench <1% Wine Destinations Mayland New Yok 7% New Delawae Jesey 55% New Yok 55% Mayland 38% New Jesey 38% Aveage distance of wine shipments to U.S. makets: 2,505 miles Aveage distance of wine shipments to U.S. makets: 2,505 miles Figue 3: Spatial equilibium U.S. wine tade: monopolistic competition model Califonia Wine Souces New Jesey Wine Souces FRA 11% WA Othe ITA CA 75% ITA U.S. East FRA 12% Othe CA 68% Califonia Wine Destinations Fench Wine Destinations Othe 58% CA 21% NJ NY FL Othe 62% CA 17% NY TX FL Aveage distance of wine shipments to U.S. makets: 2,861 miles 25

27 Figue 4: Tade Impacts of an Enegy Induced Woldwide Tade Taiff, 1997 Value (f.o.b.) of Califonia wine inshipments* Value (f.o.b.) of New Jesey wine inshipments* pecent change CA FRA ITA WA Othe pecent change CA FRA U.S. East ITA Othe Base Pice Sensative Base Pice Sensative U.S. Aveage wine mile compaisons miles 2, , Base Pice Sensative 2,505 Contol scenaio baseline Monopolistic competition baseline Monopolistic competition with feight taiff * Scenaio: vaiable input supply elasticity: 0.4; egional pice elasticity: 1.81; feight sevice tade taiff ate: 100-pecent 26

28 Table 1. Model Results: Spatial Equilibium Wine Tade in the United States by Oigin of Poduction, 1997 Regional Pice Elasticity (σ) CA, Coastal CA, Othe WINE PRODUCING REGION WA OR NY Othe U.S. States Fance Italy Spain Agentina Austalia Chile Rest of Wold Total A. Value of Value of Wine Shipments shipments ($ million) All U.S. Destinations 9,597 3,491 3, , All out-of- State/County ,749 2,759 2, , destinations ,664 2,725 2, Top thee U.S. 1, destinations NY FL 1.81 CA NY FL NJ NY FL NJ CA FL OR DC UT MT CA NY FL CA NY FL CA NY FL outside of home-maket 1, (State abb.) 3.31 B. Distance of Aveage Distance Shipped shipments (Miles) All U.S ,861 1,830 1,830 1, ,430 9,237 6,732 Destinations ,837 1,806 1,797 1, ,402 9,230 6,710 All out-of- State/County ,465 2,256 2,256 1,427 1,555 6,430 9,237 6,732 destinations ,470 2,251 2,256 1,436 1,603 6,402 9, Top outside ,243 2,766 2,766 1,610 1,423 6,622 9,315 6,901 destinations ,597 2,766 2,766 1,567 1,401 6,593 9,282 6,880 C. Cost of Aveage tanspotation magins shipping (pecent of poduce pice) All U.S Destinations All out-of- State/County destinations Top outside destinations D. Household Regional Pefeences Aveage Consume Poductivity Index (α s, ) NY FL NJ NY FL NJ NY FL NJ CA FL OR HI OK UT CA NY FL CA NY FL CA NY FL All U.S Destinations All outside destinations

29 Table 2. Model Results: Spatial Equilibium Wine Tade in the United States by Destination of Use, 1997 In-Shipments Aveage Distance (miles) Aveage Feight Costs (pecent of fob pice) Aveage Household Poductivity Index (α s, ) All Souces ($mil.) Outside Souces (Pecent) All Souces Outside Souces All Souces Outside Souces All Souces Outside Souces Alabama Alaska Aizona Akansas Califonia Coloado Connecticut Delawae Dist. of Columbia Floida Geogia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Mayland Massachusetts Michigan Minnesota Mississippi Missoui Montana Nebaska Nevada New Hampshie New Jesey New Mexico New Yok Noth Caolina Noth Dakota Ohio Oklahoma Oegon Pennsylvania Rhode Island South Caolina South Dakota Tennessee Texas Utah Vemont Viginia Washington West Viginia Wisconsin Wyoming , ,092 4,426 2,197 2,882 1,803 2,535 3,573 3,554 3,520 3,489 3,185 4,036 2,425 2,901 2,984 2,897 2,752 3,170 3,080 3,854 3,401 3,686 3,119 3,085 2,992 2,3 2,632 2,719 1,988 3,799 3,493 2,386 3,590 3,351 2,908 3,122 2,678 2,461 3,376 3,657 3,304 2,784 2,999 2,855 2,191 3,670 3,399 2,682 3,278 2,961 2,444 3,092 4,426 2,301 2,999 6,275 2,713 3,758 3,554 3,520 3,626 3,350 4,036 2,482 3,040 3,148 3,015 2,866 3,170 3,249 4,043 3,588 3,860 3,282 3,283 3,130 3,137 2,632 2,828 1,988 3,799 3,662 2,475 3,670 3,532 2,908 3,292 2,678 2,475 3,556 3,847 3,485 2,868 3,162 3,232 2,191 3,851 3,580 2,893 3,455 3,108 2,

30 Table 3. Model Results: Tade Impacts of an Enegy Induced Woldwide Tade Taiff by Oigin of Poduction, 1997 Input Supply Elasticity (ξ L ) Regional Pice Elasticity (σ) WINE PRODUCING REGION WA OR NY Othe U.S. States Fance Italy Spain Agentina Austalia Chile Total CA, Coastal CA, Othe Rest of Wold Change in Aveage Tanspotation Magins (pecent of poduce pice) Change in Aveage Distance Shipped (miles) Change in Value of Wine Shipments (pecent)

31 Refeences Adams Beveage Goup (and vaious yeas). Adams Wine Handbook: 2005, ( Andeson, J.E "A theoetical foundation fo the gavity equation." Ameican Economic Review 69: Begstand, J.H "The Genealized Gavity Equation, Monopolistic Competition, and the Facto-Popotions Theoy in Intenational Tade," Review of Economics and Statistics, vol. 71(1), pages , Febuay. Califonia Depatment of Food and Agicultue and U.S. Depatment of Agicultue, National Agicultual Statistics Sevice, Califonia Field Office. Califonia Gape Aceage May Califonia Depatment of Food and Agicultue and U.S. Depatment of Agicultue, National Agicultual Statistics Sevice, Califonia Field Office. Califonia Gape Aceage 2007 Cop. Apil Califonia Depatment of Food and Agicultue and U.S. Depatment of Agicultue, National Agicultual Statistics Sevice, Califonia Field Office. Final Gape Cush Repot 1991 Cop. Califonia Depatment of Food and Agicultue and U.S. Depatment of Agicultue, National Agicultual Statistics Sevice, Califonia Field Office. Gape Cush Repot Final 2007 Cop. Mach 10, Canning, P., Z. Wang A Flexible Mathematical Pogamming Model to Estimate Inteegional Input-Output Accounts, Jounal of Regional Science, Vol. 45 (3): pp Dixit, A.K., J.E. Stiglitz Monopolistic Competition and Optimum Poduct Divesity, Ameican Economic Review, Vol. 67 (3): pp Feensta, G Local food systems and sustainable communities, Ameican Jounal of Altenative Agicultue, 12(1): pp Food and Agicultue Oganization of the United Nations. The FAO Statistical Database. Goodhue, Rachael E., Richad D. Geen, Dale M. Heien, and Philip L. Matin. Cuent Economic Tends in the Califonia Wine Industy. Agicultual and Resouce Economics Update. Vol. 11, no. 4. Mach/Apil Giannini Foundation of Agicultual Economics. Univesity of Califonia. Hinichs, C The pactice and politics of food system localization, Jounal of Rual Studies 19: pp Helpman, E The Stuctue of Foeign Tade, Jounal of Economic Pespectives, 13:2, pp