John Duarte discusses the low winegrape prices in California's San Joaquin Valley and examines whether duty drawback of federal excise taxes contributes to the problem. Duty drawback allows wine companies to recover excise taxes paid on imported wine when they export wine. While duty drawback was historically beneficial for winegrowers, the policy has led to excess bulk wine imports and buyer consolidation in recent years, exacerbating price cycles for grape growers. To address low prices, grape growers may need to plant alternative crops or negotiate longer-term contracts with buyers that provide inflation adjustments.

1. Duty Drawback of Federal Excise
Taxes and its’ Effect on SSJV
Winegrape Growers
Why are SSJV Winegrape prices so low and what can we do about it?
John Duarte
Winegrower
President, Duarte Nursery, Inc.
CAWG Board Member – Past Federal Issues Chair.
Friends Day, May 1st, 2015

2. Why are SSJV Winegrape
prices so low and what can
we do about it?
Duty Drawback of Federal Excise Taxes and its’ Effect on SSJV Winegrape Growers
John Duarte
Winegrower
President, Duarte Nursery, Inc.
CAWG Board Member – Past Federal Issues Chair.
Friends Day, May 1st, 2015

3. Spot prices on SSJV grapes:
• Low.
• Not sustainable.
• Motivating removals.
• Not connected to winery trends.
• Few vineyards planted w/o contracts.
Is it because of DDB of
Excise Taxes?
Friends Day, May 1st, 2015

4. What is Duty Drawback?
Duty Drawback n. def. –
Tax paid on imported goods or products that is paid back when goods or
products made with those products or highly similar products are
exported again.
Example:
An auto manufacturer imports wheels from a country that actually still
pays tariffs when exporting into the U.S. The imported wheels are
assembled onto a vehicle that is exported. The Auto manufacturer can
drawback 99% of the tariffs or duty that it paid.
Friends Day, May 1st, 2015

5. What is Excise tax?
Excise taxes n. def. –
An excise or excise tax (sometimes called a duty of excise special tax) is
an inland tax on the sale, or production for sale, of specific goods or a tax
on a good produced for sale, or sold, within a country or licenses for
specific activities. Excises are distinguished from customs duties, which
are taxes on importation.
Excises are inland taxes, whereas customs duties are border taxes.
Example:
In the U.S. we pay excise taxes on alcohol, tobacco, firearms, archery and
fishing products, gasoline, tanning booths and wagering.
Friends Day, May 1st, 2015

6. DDB and Excise taxes should be
separate issues.
DDB is about imports and trade – border
taxes.
Excise taxes are about specific goods –
inland taxes.
Friends Day, May 1st, 2015

7. The Issue: DDB with Excise Tax
• Tariffs are very low.
• Excise taxes are high.
• When a company's exports are greater than
its imports (2000-2006) DDB of tariffs and
excise taxes can motivate wineries to import
wine into the U.S.
– The incentive to buy abroad amounted to over $1
per gallon or $175 per ton of winegrapes. Excise
taxes make up at least 6/7 of the incentives.
Friends Day, May 1st, 2015

8. Impact of DDB of Excise taxes:
• $.28 per liter
• $1.06 per gallon
• $2.54 per case
• $185 per ton (?????)
• Has always been a benefit on packaged wine.
• Was bad for growers 2003-2009.
• Should be good for growers since 2010 and until
exports exceed imports.
Friends Day, May 1st, 2015

9. Why are we here?
There is a 2003 IRS letter ruling that allows wine excise taxes that are
paid upon import to be treated as a common duty.
This was clarified in a subsequent Farm Bill.
TTB questioned the policy by opening a public review process in 2009.
Ten U.S. Senators including Feinstein and Boxer and eighteen US
Congressmen have backed the IRS position in stern letters to the TTB.
TTB withdrew the review.
A CAWG delegation first learned of the issue from TTB in 2010.
Friends Day, May 1st, 2015

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Daniel A. Sumner and Georgi T. Gabrielyan
University of California Agricultural Issues Center and
Agricultural and Resource Economics, UC, Davis

11. Traded Bottled Table Wine Quantity and Prices

12. Traded Bulk Table Wine Quantity and Prices

13. Accumulation of Potential Excess Bulk Table
Wine Imports Eligible for Drawback

14. Traded Bulk Table Wine Quantity and Prices
Sumner slide edited by John Duarte

15. Is it DDB in 2014?
• Imports are greater than Exports.
– DDB subsidizes exports
• In the most basic analysis DDB
should be good for growers.
Friends Day, May 1st, 2015

16. 2nd Order concerns of DDB of ET
• Can cause further buyer consolidation.
• Has probably exacerbated cyclicality.
• May create winners and losers among
growers.
• Bulk wine imports are a significant supply
source and may be opaque as to varietal.
Friends Day, May 1st, 2015

17. Why the low winegrape prices?
• Foreign competition:
– Global Production
– Global Recession
– US market size &
strength
• Market Changes
– Trading up
– Varietal
– JIT supply chain
• Industry Structure:
– Few buyers.
– More Public Companies
– Retailer pressures
– Winery Capacity
• Crush
• Storage
Friends Day, May 1st, 2015

18. What can growers do?
• Plant other crops.
– Almonds
– Walnuts
– Pistachios
– Raisin
– Citrus
• Sell high.
• Demand longer term
contracts
– 20-25 years to match life
of vyd.
– Allows longer term
financing.
– Need a partial inflation
adjustment.
• Capital investment
remains constant
• Operating costs increase.
Friends Day, May 1st, 2015

19. Thank you.
Thank you.
Friends Day, May 1st, 2015