Download From Paul Symington, Joint Managing Director, Symington Family

From Paul Symington, Joint Managing Director, Symington Family Estates:
I would reform the Beneficio system (the method by which vineyards are rated by quality and
the subsequent licenses issued every year to make Port).
The current Beneficio system dates back well over half a century and is past its reform date. I
am not a revolutionary with regard to the Beneficio and am certainly not a supporter of the
‘nuclear option’, which suggests the total abolition of the Beneficio. Any person with the
minimum of knowledge of the Douro and its history and its people would know that the
outright abolition of the Beneficio would be socially catastrophic for many tens of thousands
of people, in fact for over 100,000 people if families and dependents are included. Certainly
a few prestigious estates and brands would survive such a move, but the image and value of
Port would be severely damaged and the Douro and its social fabric would be destroyed. This
is an irresponsible suggestion and one that is made by people who do not understand the
Douro very well.
But I am a strong supporter of a fundamental reform of the Beneficio system and my family
made detailed proposals for reforming the system in 2009. Our proposals were based on the
clear evidence that many of the smaller farmers (with under 1 hectare of vineyard) are finding
it increasingly difficult to maintain their vineyards and would welcome an honorable and
financially interesting way of giving up their vineyards. This desire could be matched with
the interest of larger farmers to consolidate the financial viability of their vineyards.
An additional factor that needs to be taken into account is the clear distortion that exists
whereby the Beneficio system results in Port subsidizing Douro DOC production to a very
great extent. This is not sustainable or correct and must be amended in the future. There are
several DOC producers that support their Douro DOC sales by using their Port licenses to
increase their cash flow, but who in reality have a limited interest in Port.
Another factor is the Moreira de Fonseca system of grading vineyards, on which the
Beneficio system is based. This again dates back over half a century and while it was
brilliantly conceived at the time, the world has moved on. Factors such as varietal planting
simply did not exist when this grading method was being conceived and introduced. Global
warming has added the altitude issue to the agenda, so again a points system that penalizes
higher lying vineyards begins rapidly to make no sense.
I and my family own and manage over 940 hectares (2,300 acres) of vineyard in the Douro,
this is significantly more than any other producer. Within this total I personally farm my own
17 ha (42 acre) vineyard in the Pinhão valley. My three cousins and my brother, all of whom
work with me, all own their own vineyards, as does my father and my retired uncles. We
know better than most, the reality of farming in the Douro and have shown more commitment
to the region than any other for many, many decades; it is for this reason that we are strong
supporters of a fundamental reform of the Beneficio system.
But such a reform needs courage and vision on behalf of the authorities. Sadly such courage
and vision is not always compatible with politics and there is too much of the latter involved
in Port and the Douro and in the officials who rule over us. In the end it is the farmer and Port
in general that ends up paying the price
From Adrian Bridge, CEO, The Fladgate Partnership
The Beneficio system is the biggest single block to the development of the Douro valley. It
distorts the economic model of the valley, remunerates farmers for volume and not quality,
depresses the prices of top grapes, it has failed to stabilise the market and is the sole source of
the problems of the Casa do Douro that over shadows the Port industry.
On paper the Beneficio is a good system for the Port shippers and growers as it limits the
quantity of Port that is produced each year which is supposed to mean that prices to retailers
remain high to the benefit of all players involved in the industry (except, perhaps the
consumer). In reality, it is a system that has been shown to only work in a market when Port
is growing – the volume declines of the last decade in the commodity markets have exposed
the negative spiral effect of declining prices and farmers incomes.
The reason it distorts the industry is clear. Farmers plant vines to produce grapes. This is an
economic decision and is based on what they expect to sell the grapes for in the future. The
average economic life of a vine is 35 years yet the amount of Port that can be made is set
annually. If grapes sold for the same price to Port producers or table wine producers then this
would not matter. The problem is that a bunch of grapes with a licence to make Port
(Beneficio) is worth about four to five times the value of the same bunch without the
licence. Farmers are remunerated more by a piece of paper than by growing grapes. Poor
economics.
The reason it leads to bad business models is that the Port industry is subsidizing the table
wine industry. Many of the new table wine projects are based on receiving money for selling
their licence to make Port whilst focusing on making table wine. This is damaging for both
Port producers and table wine producers. Take my company, we have extensive vineyards,
many of which are world class, yet we can only make half of the grapes into Port. We
annually buy unwanted grapes just to get licence – a transfer of over Euro 1 million a year to
subsidize table wine. This money would be better spent supporting our Port brands,
expanding our sales and the Port market. For the table wine producer (who will defend this
subsidy as it covers most of the fixed costs of running a vineyard) they are supporting their
business model on a subsidy that has been shown to decline annually for the last decade and
is likely to decline further. Worse still, the Beneficio has encouraged additional planting (to
get the subsidy) leading to an increase of 25% of vineyard in the Douro in the last decade
when Port volume has declined by 10%. The maths are simple, less volume spread over a
bigger area means double declines – the farmers income per hectare in 2010 was half
what they got in 2002.
It limits prices because the most important factor is the licence – so Grade A grapes are worth
broadly the same regardless of how well they are grown. Without the Beneficio system we
would have a free market that cleared based on quality – farmers with the best grapes will get
paid more, just as a Port producer with a quality Port will achieve a higher retail sales
price. The Beneficio system means more shippers worry about the volume of their sales than
the profit that they make from them.
Why the Casa do Douro? Well, the old function of the Casa do Douro was as a clearing
market of last resort. The authorities dictated how much Port to make each year and if the
shippers did not buy the volume then the Casa do Douro picked up what was left on the
market to sell later. The problem is that they made little effort to sell as they observed that
prices of made Port were rising – firstly in the inflation years of the 70s and 80s and in the
growth years of the 90s. This idea that the stock always became more valuable the older it
was, created a mindset that led to the disastrous speculation of the 1999 and 2000 when the
Casa do Douro borrowed massive amounts of money to try to corner the market. Prices did
move up about 15% but this has just led the Casa do Douro to have warehouses full of
expensive Ports that have no market until it is re-valued to today’s clearing price.
There are few examples in the world where distorting free market economics ends up with
better economic models. The problem is that markets that are ‘fixed’ by quotas (and here one
must think of the very successful OPEC cartel) invariably reach for the rule book when the
systems begin to unravel. New rules heap on old and more investors are drawn into business
decisions that they would not make in a free market. Soon half the energy is spent in trying
to sustain the broken system whilst the other half in finding ways round the regulations. In
the Douro it makes no sense that Port and table wine co-exist, and compete as business
models, without the same regulations for each. If the Beneficio system is removed, farmers
and shippers will decide what business they are in and I hope that they remember that it is
making great, original wines (fortified or still) for consumers.