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The law of diminishing returns and wine production
Tue, 02/16/2016 - 09:09

Karelys Abarca

Los controles de precios, miles de años de desatinos
Karelys Abarca

Karelys Abarca es Economista, egresada de la Universidad Central de Venezuela, y Profesora-Investigadora en la Facultad de Economía de esta casa de estudios. Ha sido dos veces Premio Nacional Alberto Adriani, galardón otorgado por el Banco Central de Venezuela y la Fundación Alberto Adriani. Twitter: @karelitabarca

There is a close relationship between economic theory and vineyards, since the origin of economic science. It turns out that a French author of the 18th century, a pre-scientific physiocrat, named Turgot, related the earth factor, which is a factor that is difficult to access in France, with a phenomenon that he baptized with the name "law of diminishing returns."

The law of diminishing returns refers to an economic law of production that says that if we add many additional units to a fixed factor, in the example of the vineyard it would be land, the fixed factor will be depleted due to overuse, generating a production that grows every time. less and less, until it begins to decrease.

It turns out that the French physiocrats were inspired to understand this principle by a phenomenon that occurs in the vineyards in France, especially in the Bordeaux area, which, being spatially limited territories, impose natural borders on the expansion of the production of grapes for wine. For this reason, the French focus on the quality of the creation and aging of their wines, rather than the quantity of production, a reason that would explain why their wines are among the most expensive in the world.

In Bordeaux, crus represent classifications of terroir quality that have remained unchanged since 1855, with the exception of the lands corresponding to Chatêau Mouton Rothschild, promoted from deuxième cru to prémier cru in 1973. The scale of the crus was established during the exhibition universal of 1855, where they were defined as the first crus : Chatêau Lafite-Rotschild, Chatêau Latour, Chatêau Margaux and Chatêau Haut-Brion. Within this classification, the quality of the terroir ranges from prémiè cru to cinquième cru . A cru simply refers to a limited amount of land that possesses the ideal characteristics for the production of wine grapes.

However, there are places in the world where there are no such pronounced limitations of the land factor for vines, as is the case of Chile, where significant volumes are produced for export, without sacrificing quality and with an excellent price-value relationship. In fact, the first largest exporting vineyard in Latin America and among the ten largest in the world is located in Chile, Concha y Toro, a place where excellent Merlot, Carmenère and Cabernet Sauvignon grapes, among others, are grown. Chile has excellent viticulture sites, of which my favorite is the Colchagua Valley, a region of premium grapes, whose quality reminds us of the grapes grown in France. Chilean wines are excellent products, with a unique price-value relationship, because the Chilean economy gives special incentives to the export of quality wines, to compete in quality and price in foreign markets with knowledgeable and demanding consumers.

France as an average trend has small vineyards, but it is one of the largest producers in the world, between first and second place with Italy. Many small producers producing large quantities of wine together.

On the other hand, in the United States there are no space limitations as is the case in France for growing grapes for wine, so production is high in quantity and quality. The wines are so prestigious that they have market prices as high as the most competitive ones in France. Americans proudly say that wine is produced all over the country, but the truth is that more than 85% of the precious liquid comes from California, home to the extraordinary Napa Valley.

The prestige of Napa Valley was the result of an event held in France in 1976, known as the "Paris Tasting." There, chardonnay and cabernet sauvignon were awarded over French wines in a blind tasting. Since then, the wines from the Napa Valley are as recognized as the most famous Bordeaux wines.

Economic theory teaches us once again that diminishing returns have a strong impact on the limited production quantity and high prices of a cru , but the quality of production is the element that is determining the value of a wine anywhere, either in a terroir where diminishing returns are more intense or another in which they are not so obvious.

In almost all markets except inflationary economies, price is a likely signal of wine quality, but it is definitely not the only or definitive one. In the global competitive market, the quality of wine production prevails over terroir and its extension.