Allegrini 2018

Wine and expensive energy. Which weighs more indirectly, but also on farm bills

Higher electricity prices (averaging +300%) affect bottles and labels the most. And on purchasing power, which means less consumption …
Bottles in the cellar (Ph: LuismiSanchez via Unsplash)

Among Italian producers, energy, at least until now, has never been a cost item to pay too much attention to. Substantially stable in prices in recent years, electricity (above all) and gas (to a decidedly marginal extent) account for between 5% and 10% of the total costs faced by wineries, many of which, especially if they are large, have long since focused on photovoltaics, producing at least part (but in some cases even 100%) of their energy needs, further lowering this percentage (which for the agricultural part alone, in many cases, is around, on average, 2-3% of the company’s costs). The energy emergency, thus, in the wine sector, at least in a direct way, is being felt less than in other production sectors, which are decidedly more energy-intensive, although the doubling, if not tripling, of bills is beginning to cause concern even among wine entrepreneurs, who are expecting a last effort on the part of the government, perhaps by decoupling the price of gas from that of renewables, and providing for a cap on the price of energy as already announced in other European countries. The real problems, looking at the long term, will concern the erosion of consumer purchasing power: if the recovery of tourism, domestic and international, has supported consumption so far, the end of summer will be the real test. Restaurants, bars and hotels are already facing unprecedented increases in operating costs, with price increases on menus effectively inevitable. At the same time, between bills and inflation, Italian families are facing months of renunciation, with cuts expected both in the shopping cart and in eating out. The effects of which, evidently, will also fall on the wine supply chain, which, until now, has managed to contain price increases in raw materials and energy itself with price increases well below the level of inflation. Thus, at WineNews, the analysis of some of the most important entrepreneurs in Italian wine.
“Energy”, Ernesto Abbona, at the helm of Marchesi di Barolo, in the heart of Barolo, tells WineNews, “until now has not been a cost item to pay too much attention to, we have always used it sparingly, wasting is not in the nature of farmers. Yet, now the costs have exploded, and they continue to rise almost week by week, making a constant comparison with 2021 essential, which has caused us to do some important thinking. The only solution we have, at the moment, is photovoltaics, and once we have replaced all the light bulbs with LEDs, and in air conditioners with heat pump ones, the only two things you can’t control are heating and cooling, the biggest items of expenditure in terms of energy. All this has a cost, and we have to take it into account, although until now it has been a secondary variable whose price was stable. Costs that affect every other supply chain, spilling over into the prices of materials such as glass and cardboard, which increase from month to month. More than procurement at the beginning of the year, there was little we could do”.
“All these price increases”, Ernesto Abbona continues, “we cannot always to pass them on to our customers. Moreover, for companies like ours, which revolve around aged wines, which we are going to sell in a few years, the erosion of marginality is higher, and it erodes liquidity, if you have not been good at setting aside savings and raw materials. The scenario is not rosy, but the hopeful thing is that the market, at the moment, seems healthy, as does tourism in the territories. Difficult also to make predictions, we hope for state intervention to calm prices, starting with industry, otherwise we risk losing competitiveness with foreign countries and dumping increases on the shopping cart. The price problem will have to be addressed with suppliers in the coming months: as Marchesi di Barolo we have very marginal Gdo sales, but those who work in that channel will find it more difficult. Working with the horeca is different; it is easier to find a compromise. Difficult, in the short term, to change the way of working from one day to the next: at the technological level it would involve new investments and would be solutions for which it would take months”, Ernesto Abbona concludes.
From one end of the Peninsula to the other, Alessio Planeta, the soul with his cousin Francesca and brother Santi of one of the symbolic wineries of the Sicilian wine renaissance, condenses in a few words all the complexity of the moment. “The contract with our supplier is blocked until the end of 2022, and in the meantime we have been running for cover by reinforcing alternative energies, such as solar panels. Ours is quite an energy-intensive business, especially in the summer, because we need electricity to cool the cellar and grapes during harvest. The numbers are fluctuating, but there is no doubt that these increases eat up several percentage points of our profitability. We are trying to prevent future setbacks by bargaining prices for 2023: the increase in energy costs, primarily the result of speculation, will have to stop at some point, or companies will go out of business. In the end, we are perhaps one of the few sectors that can still afford to pay these price increases; the problems are quite different if we think, for example, of the restaurant industry, which is often in danger of raising the white flag. We hope that a balance will be found”, says Alessio Planeta again, “but this is not a dynamic that the state can manage, it is a bubble that must necessarily deflate, because then it erodes the marginality built, with some effort, elsewhere, leading to inevitable price increases on price lists. I hope the shock will lead us farmers to work in a different way, focusing on energy autonomy, which is absolutely feasible, especially with the Pnrr calls and funds. There is optimism, however, because consumption is fine, but the real test will be the winter, with cost increases in sectors and countries that are far more energy intensive than we are. There are pockets of important savings, starting with lowering thermostats, provided Italians, responsibly, agree to do so”, concludes Alessio Planeta.
From the Marche region, Michele Bernetti, head of Umani Ronchi and president of Imt - Istituto Marchigiano Tutela Vini, gives a decidedly more cautious reading of the energy problem. “The incidence of the cost of energy is not so revealing, and with photovoltaics, on which we have focused since 2011, we cover more than a third of our needs, significantly lowering this expense item. What is certain is that the latest bill, compared to a year ago, has more than doubled: an increase that is worth the salary of a few workers, and is bound to become a major item of expenditure. It all depends on how long this will last: in 2021 and 2020 the cost of energy was particularly low, and my guess is that we will be halfway there, but there is the question of how long it will take. To the cost of utility bills, then, must be added the growth in the prices of materials, from glass to cardboard, as well as agricultural diesel, which also can count on many concessions. Unfortunately, these are all increases that spill over into price lists, think of restaurant and wine shop bills, which spill everything over into final prices, sometimes losing sight of the real appreciation of wine, which in any case has seen price growth below average inflation. There needs to be balance, even in this, because by passing costs on to customers, the restaurateur risks working less and closing down”, says Michele Bernetti.
“Looking to the future, the things that need to be done are undoubtedly on optimizing consumption, but until we get to an accurate calculation of the carbon footprint, it cannot be done. Another front is alternative energies and practices, with systems that consume less. At the policy level, it is a complex situation, on which I hope we can intervene with new forms of support, but there are no resources for everyone. The priority has to be for businesses, so as to contain production costs and thus inflation, which would end up paying for households. The wine sector, however, is less energy-intensive than many other sectors, and I believe it will be able to absorb the increases in bills: we must not get scared, but keep calm”, Michele Bernetti concludes.
In what is one of the reference wineries in the Meridione region, Feudi di San Gregorio, as president Antonio Capaldo recalls, “the cost of energy weighs in at 6-10% of total operating costs. What I find particularly serious, in a context like this, is that the price of renewables is aligned with the price of energy (itself pegged to gas, ed.). Beyond that, we produce with photovoltaics 50% of our needs, and like almost all the wineries in the Belpaese, using all the spaces, and therefore the roofs, available on the farm, we would not be far from a level of 100% self-production. The problem at this juncture is that we had moved early on the first 50%, but today it becomes impossible to find panels and plants, which come from China and currently cost three times as much as before. We have to wait for this bubble to deflate. It is difficult to make an accurate reading of the situation, but if Europe manages to impose a cap on the cost of energy and, above all, untie the price of alternative energies from the rest, there could be some positive effects, so that everything is brought back to somewhat more normal conditions”. As for the impact of the cost of the electricity bill on the rest of the supply chain,”it has not yet been felt in a tangible way, but from the end of the summer it will be felt in spades, on the pockets of consumers as well as restaurateurs, who until now have been able to cope with price increases thanks to a decidedly sustained level of consumption. Once the vacations are over, families will have to cope with reduced purchasing power, and consequently demand will suffer”.
Along the same lines is the reflection of Marco Caprai, at the helm of Arnaldo Caprai, which has relaunched Montefalco and Sagrantino, and a winery that has always been a pioneer on the sustainability front. “For a reality like ours, the cost of electricity alone has tripled, then there are the costs of other sources such as diesel fuel, which likewise have had very high price increases. The impact of energy cost on total costs for us has gone from 1-1.5%last year to 5% today, and unless something changes, this figure will get worse. In the immediate term, individual companies can do little. We need a government measure to sterilize VAT on bills, system charges, but it is not easy. This is an issue that touches businesses and households across the board all over Europe, and if for agricultural companies it is a delicate situation, for the energy-intensive ones in the agribusiness supply chain it is a devastation. Here in our area, a major paper mill has laid off everyone because keeping open means producing at a loss. The price of bottles has increased by 30%, and net of that there is no guarantee that we will have enough to bottle the wine we are going to produce with the harvest coming up. And then, above all, the increase in bills that will not be followed by an increase in wages and household income will lead to a reduction in consumption and thus, unless something changes, to a market crisis. But structural solutions are needed: it is fine, for example, to think about ponds for irrigation, but above all we need to think about dams and reservoirs that allow not only not to waste water, but also to produce energy. Something, as individual companies”, Caprai adds, “can be done, we have already done it, installing heat pumps, inverters, films on the windows to reduce heat in the spaces where cooler is needed. But certainly none of this is enough to counteract such a situation. We are preparing for the agri-solar call, but you cannot think that a few more photovoltaic panels will solve the situation. Also, now there will be funding, but there are also a lot of question marks. Everything is produced in China, demand will increase, so costs will also increase. And then, when the panels in 10 or 20 years are at the end of their life, who will bear the cost of disposal? And will it also be environmentally sustainable?” The situation is really difficult, in short. Moreover, Caprai adds, “beyond a few top companies that have very high margins, most wine companies have margins between 5 and 7%, and the increase in production costs, which, until now, was estimated at +30%, but will increase, risks sending some products out of the market. And then there is the Pnrr issue, where projects, including for infrastructure, were put in place with the costs of a year ago, but now everything has changed”.
“We are dealing with increases that are completely out of the worst forecasts of a year ago”,adds Francesco Giovannini, general manager of the Mezzacorona Group, from Trentino.“We are defending ourselves to date because we have always invested in sustainability, we have a good part of our electricity production guaranteed by photovoltaics, a part that we buy at tariffs fixed on 2021 values, at least through 2022. But the increase in direct costs as a percentage is huge, if we had not adopted these solutions we would be at +300%. Although, in fact, it weighs much more the increase in indirect costs on products like glass, paper and so on, which until May we estimated at +28%, but it is a figure that as things stand will definitely have to be seen upward. Up until now, we have also always had bottle availability, but it is increasingly difficult to have guarantees. At the company level, in order to keep costs down, something can be rationalized further, but we cannot expect to do much more than what we have already done. And what is most worrying is the contraction of purchasing power on the part of families, which will obviously be felt on consumption”.
That electricity and gas increases weigh directly on the bill, but even more so indirectly, is also confirmed by Benedetto Marescotti, marketing director of Caviro, one of the giants of Italian cooperation.
“The price increases in the bill do weigh, but they are spread over the whole production and so they are amortized in some way, even if looking at the winter we should reckon with what is coming, thinking also about office management and so on. But we in the wine business don’t have a particularly energy-intensive production, as glass producers, paper producers and so on have, and that weighs much more. On bottles, in just a few months, we’ve had two +15-20% price increases each time, and that directly impacts the individual cost of each piece. Plus it’s hard to find them, even standard products like classic Bordeaux, which covers almost 70% of the supply in large-scale distribution, and you can no longer work in a scheduled manner as you used to, because confirmation of the availability of an order comes 2-3 days before when the material is actually needed. And of course there is concern about declining purchasing power. If shock absorbers or solutions are not found at the institutional level, that is a problem. Plus, let’s hope that the production campaign does not also lead to the need for wine price increases, otherwise finding a balance that will ensure some profitability, which is already at the limit, will be really difficult”.
And the future, barring hoped-for and expected news, is not the rosiest, as Lamberto Frescobaldi, at the helm of one of the most historic and important wine companies in Tuscany and Italy, explains.
“In the not too distant past, we locked in the 2022 cost of electricity at 2021 prices, but our manager has been clear: if something doesn’t change in 2023 the increase will be as much as 600%. Fortunately, long ago, when it might have even seemed like an excess, we invested in photovoltaics, biomass power plants, water reclamation, and all this helps in the work of wineries that between temperature stabilizations and so on, now require more energy than those in which our predecessors worked. But, as farmers and winemakers, we are also and especially indirectly affected by the rising prices of bottles, which are increasingly difficult to find, or shipping containers. We will certainly have major increases in production costs, today estimates average +30%, and it will be difficult to pass everything on to the market, especially for lower-end wines where even a few cents increase risks making you lose market. The next few months, between fall and winter, will be crucial: either large-scale interventions are put in place that bring things back to normal, or in many cases the bank will break the bank”.
Holistic vision, again, that of Pierangelo Tommasi, who with Tommasi Family Estates has estates in Valpolicella, Oltrepò (Tenuta di Caseo), Tuscany (Casisano in Brunello di Montalcino and Poggio al Tufo in Maremma), Puglia (Masseria Surani) and Vulture (Paternoster).
“Energy is also consumed in the wine sector”, recalls Pierangelo Tommasi. “And especially so this year: because of the drought, in many of our estates, where we have irrigation systems, the use of electricity was significantly higher. In the winery, on the other hand, the need mainly concerns the machinery of the bottling lines, which the older they are the more they consume. In our case, moreover, there is to be added the cost, which is anything but secondary, of drying the grapes destined for the production of Amarone. In the first two weeks there is a need for powerful fans to reduce humidity, which remain running almost continuously. It is clear, then, that concerns about increases in the cost of energy are considerable, since between transportation and production costs the bill marks increases of around 250%. We can also count on a share of self-generated energy from photovoltaics, which at the moment, in the different companies of the group, is worth a third of our needs, with the long-term goal of becoming totally self-sufficient. It is not easy, however, to find an answer, partly because it is not in our philosophy to adjust list prices at this point in the year. There has been some rounding up, but barely enough to absorb the increase in raw material costs; it would take more than that to pay back the increases in energy costs. The fear now is for the coming months. From the last “Opera Wine” in Verona came a message, from the entire wine world, of great hope and confidence, with anticipation for a great Vinitaly and enthusiasm for the restart after two years marked by Covid-19. Some clouds, however, were already gathering on the horizon, and I think we will pay the price from September, when families, after the vacations are over, will have to pay bills and the effects of inflation on the shopping cart. On the one hand”, Pierangelo Tommasi concludes, “I am very concerned, because the purchasing power of families will be affected, but on the other hand I am curious to see how the Italian will overcome this objective difficulty to continue going out, drinking and eating out, as he loves to do. Knowing the mentality of foreign markets, on the other hand, I am quite sure that as purchasing power drops, wine consumption will also drop in a specular way”.
Also concerned about price hikes and the scarcity of bottles, labels and so on, more than about rising utility bills, “which have more than doubled anyway”, is Giancarlo Moretti Polegato, at the helm of Villa Sandi, one of the world’s leading Prosecco producers.“The cost of electricity has more than doubled. Companies like us that produce bubbles also have higher average costs than those who make still wines, because for example we need to use fridges to cool the wine during the fermentation phases”. In any case, with industrial energy costs hovering around 2%, “also thanks to strong investments we made at the end of 2021 on photovoltaics, what weighs most”, Polegato confirms, “are glass prices. Glass factories are always on edge, we are constantly warned that there will be other increases related to gas, so we have already been aired other substantial increases in January, hoping that until the end of the year there will be no others. One cannot be comfortable, in short. And there’s also the problem of supply volumes: it’s not like the old days of stock and schedules, you go month to month at best. And the same applies to paper and cardboard as well. We hope that there will be a solution at the European level to this problem that affects everyone, or better yet that this war will end, and we will return to a situation of normality as soon as possible”.
Giving a reading in line with others, but a little different in his conclusions, is Renzo Cotarella, ad of Marchesi Antinori, the No. 1 private company in Italian wine. Who, if on the one hand confirms how the increase in energy costs for wine companies in Italy is mainly felt on the indirect part, that is, on raw materials such as glass, capsules and paper, which originate from decidedly energy-intensive companies, on the other hand he stresses how we must try to transform an economic criticality into an ethical evolution. “It is clear that systemic solutions are needed. But companies can do something. Farms live in the sunlight, you can invest in photovoltaics, you can change old boilers with heat pumps, replace lights with LEDs, modernize the machinery fleet, also thanks to the Industry 4.0 funds, which also still exist. But above all, without making too many unwanted sacrifices, this situation can serve to focus even more on an ethical aspect, which means that, no matter what, one should work without consuming the energy and resources that are not needed, even if one, perhaps, does not have economic problems and even now can afford to spend”.

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