Adrian Bridge calls for market reforms in Port industry

By Adrian Bridge

Published: 29 July, 2024

Adrian Bridge (pictured), CEO of The Fladgate Partnership, has his say on a so-called “social catastrophe” for winegrowers in the Douro region.

There are a number of sensationalist reports in the press regarding the setting of the Beneficio (the system used by the IVDP to control Port production) at 90,000 pipes; talks of protests and requests to government to help.

The cut of Benefico to 90,000 is down from 104,000 in 2023 and is being reported as a €14m cut on top of the reduction from 2022 (116,000 pipes). Some are indexing from the 116,000 to say that over two years 40,000 pipes have been cut representing €40m loss to farmers.

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The reduction numbers are real but the idea that it is a loss to the farmers is not.

Recent Beneficio:

2019 – 108,000

2020 – 102,000

2021 – 104,000

2022 – 116,000

2023 – 104,000

2024 – 90,000

Therefore, choosing to index off the highest production in the last six years makes little sense.

The 2022 Beneficio was considered high which is why the suggested level for 2023 was 96,000. For political reasons, it was boosted to 104,000. This extra 8,000 needed to be corrected this year and the drop of 7.1% in overall sales volume of Port that occurred in 2023 included. This is why the Port shippers (Comercio) wanted a maximum harvest of 85,000 pipes in 2024 but they were outvoted by production and the president of IVDP.

Why was Comercio looking for a bigger cut?

The idea behind the Beneficio is to balance stocks to sales. Hence, excess production happening when sales are falling has a big impact. However, this is magnified by the 3 to 1 sales ratio of Port (Lei do Terço).

At the end of 2023, the industry stock was at 553,004 pipes, the highest level since 2011. This stock gives a shipping capacity under the Lei do Terço of 176,809 pipes when the expected sales are at 119,000 pipes. This is an ‘excess’ shipping capacity of 57,629 pipes or 48.35% – a record excess for the industry.

With the shift to more special category Ports the Lei do Terço is now only a guide – the average age of wines sold at Taylor’s is over six years rather than the three years implied by a Lei do Terço.

The point is that the Comercio looks at what they expect to need and this combines to give the production total. With companies cutting stocks, there is likely to be unsold Port at the end of the harvest which will then be used to put pressure on the government by the growers – Avadouriense (the Association of Winegrowers and Douro Family Farming).

Why is this false?

In theory, the idea behind Beneficio is that the restricted volume means that the price of a pipe of Port will be maintained. If an excess of Port is made the logic of the market is that the price to Port will reduce until market demand and supply are aligned. Therefore, more production does not mean more money. It is perfectly possible that production at 104,000 pipes this year might have caused a 13.5% decline in price so that the total income from making Port would be the same.

Why do Farmers care about Beneficio? It's only a piece of paper.

This is because the only grapes that they grow that make money are the ones transferred into Port. In 2023, the average price of a pipe of Port was €1,006 whereas table wine was €496. In 2022, the price of a pipe of Port was €1,003 whereas table wine was €526. So Port was up and table wine down.

The real issue is that it can cost around €700 to produce a pipe of grapes. If you make as much Port volume as table wine you will, in theory, break even. In a year of low production, this may not be the case and in a year like 2024 which is likely to be high production, you may still make money because your cost per kilo of grapes will be lower.

However, a cross-subsidy from Port to table wine is a reality and it has helped to stimulate the table wine industry growth as well as allowed for cheap table wine to be made and sold, undermining the entire region.

But these are fine margins and only work if there is demand for all of the production. The amount of Port is likely to all be purchased (maybe 4,000 pipes will not) but the amount of table wine is unlikely to be purchased. In 2023 some farmers could not sell their grapes which meant that they did not pick them. It costs around €100 per pipe to harvest grapes – money wasted if you cannot sell.

How much is made?

The maximum permitted production for red grapes is 45 hl/ha. However, in the Douro, most vineyards will rarely make more than 35 hl/ha. In 2024, we will see bigger production that could get to 40 hl/ha. The Beneficio is 16 hl/ha – about 40% of this year's production.

The issue is also that Beneficio is spread across all vineyards in the region regardless of quality. Imagine a first-growth Chateaux being asked to only make 40% of their crop into wine so that a non-classed growth could make some wine.

Underlying assumptions

The underlying assumption is that Port shippers are rich and that Port is easy to sell. Given that the industry has lost 33% of its volume in the last 20 years the market evidence is different. Further, the four largest shippers have seen their margins drop by over 50%, caused by increased costs of energy, dry goods and labour – since 2019 the legal minimum salary in Portugal has risen by 37% and the Douro is probably the most labour-intensive wine region in the world. Margins are down to single digits and, for one major shipper, reported to be below the cost of money.

The price of money is also up. Using the €1,000 per pipe, the industry is holding €550m of stock. A shift in European interest rates since 2022 from 0.5% to 4.5% means that the annual financing cost of the stock has risen by €22m or €40 per pipe.

In 2023 the average selling price of a litre of Port was €5.59 – this would need to increase by 33.5 cents to cover the extra cost of financing the total stock – a 6% increase.

Given margins were already tight the question for many Port shippers is about their survival as businesses. Cutting stock levels is part of the overall drive to cut costs. And when you have excess stocks it is an obvious place to start.

Way forward

The Beneficio has been around for nearly 100 years and needs reform.

The idea that Port can cross-subsidise table wine – an outcome of Beneficio – is not sustainable.

If table wine grapes are to be purchased at no less than the cost to produce them then prices for made table wine will need to rise.

The Douro is an area with the capacity to produce some of the highest quality wines in the world but it is also one of the most expensive places to produce.

The use of subsidies on an annual basis, and regulations to try to create outcomes, is not working. A free market would solve many of the problems. It might cause pain in the adjustment but it would leave the industry stronger to face the future.

It does require honesty, courage and long-term thinking, all commodities in short supply.

Adrian Bridge is the CEO of The Fladgate Partnership, overseeing global brands like Taylor’s Port, Fonseca Port and Croft Port, sold in over 103 countries. In 2010, Bridge launched The Yeatman, a luxury wine hotel with a Michelin two-star restaurant. He also developed the World of Wine, a cultural district with museums, restaurants and a wine school. The group expanded by acquiring IDEAL Drinks in 2023 and Quinta do Portal in 2024. Bridge is also the founder of the climate action initiative The Porto Protocol.

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