Wine Economics and Policy 10(2): 41-44, 2021 Firenze University Press www.fupress.com/wep ISSN 2212-9774 (online) | ISSN 2213-3968 (print) | DOI: 10.36253/wep-10391 Wine Economics and Policy Citation: Omer Gokcekus (2021) Does belonging to an appellation make a dif- ference? New evidence from Ontario Viticultural Areas. Wine Economics and Policy 10(2): 41-44. doi: 10.36253/wep- 10391 Copyright: © 2021 Omer Gokcekus. This is an open access, peer-reviewed arti- cle published by Firenze University Press (http://www.fupress.com/wep) and distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distri- bution, and reproduction in any medi- um, provided the original author and source are credited. Data Availability Statement: All rel- evant data are within the paper and its Supporting Information files. Competing Interests: The Author(s) declare(s) no conflict of interest. Does belonging to an appellation make a difference? New evidence from Ontario Viticultural Areas Omer Gokcekus Seton Hall University, 400 South Orange Ave,South Orange, NJ 07079, USA, Email: omer.gokcekus@shu.edu Abstract. Assuming that wine markets are efficient, ultimately a bottle of wine’s cost and therefore its price should reflect its vintage, grape variety as well as how it is vini- fied. Yet, being an experiential good, a wine’s price is also closely related to its place of origin. If the designated viticultural area of wine is coming from is not considered, even in a relatively new wine country, wine makers may end up over-estimating the premium attached to vintage, variety as well as how it is vinified. Regression results indicate that, for Ontario wines, the over-estimations vary between 1% points and 18% points. Keywords: appellation, AVA, price. INTRODUCTION Until recently, Canadian wine was almost an oxymoron. Other than its infamous ice wine, even well-informed wine drinkers were not aware of Canadian wines. The reason being that Canada resides out of conventional wine growing zone between 30 and 50 degrees latitude north and south of the equator; Canada was dismissed as a wine country. Yet, Canadians have been making wine for centuries. (Phillips, 2017). Moreover, recently their wine industry is growing at an accelerating rate. For instance, from 2011 to 2018, Canadian wine sales in Canada went up by 41%, from 1.67 to 2.35 bil- lion CAN$; while the imported wine sales were up by 34% during the same time period. (Source: Statistics Canada via Statista.) In particular, wineries in the Ontario region are building a good reputation and market share in Canada. With 6,663 hectares of wine grape area, Ontario region has 60% of the Canadian bearing vineyard area. (VQA Ontario Wine Appellation Authority, 2019.) Since 1999, Canadian wine industry has been heavily regulated. (Carew and Florkowski, 2012.) For instance, Vintners Quality Alliance, or VQA Ontario Wine Appellation Authority is a regulatory agency responsible for “maintaining the integrity of local wine appellations and enforcing win- 42 Omer Gokcekus emaking and labelling standards in Ontario.”1 As is shown in Figure 1, VQA Ontario divides Ontario into three primary Viticultural Areas or appellations of ori- gin: Niagara Peninsula, Lake Erie North Shore, and Prince Edward County. Within the Niagara Penin- sula appellation, ten sub-appellations are identified; four of them on the plains close to Lake Ontario (Four Mile Creek, Niagara Lake Shore, Niagara River, and St. David’s Bench) and three on the bench lands of the Nia- gara Escarpment (Beamsville Bench, Short Hills Bench, Twenty Mile Bench). The other three sub-appellations are Creek Shores, Lincoln Lake Shore, and Vinemount Ridge. Thus, there are effectively four layers of appella- tions within the Ontario wine region. Cross, Plantingab and Stavins (2011) shows the eco- nomic importance of the concept of terroir but not the reality of terroir – as proxied for by locational attributes on the sale prices of vineyards. Similarly, as is argued in Gokcekus and Finnegan (2017, p. 345-346), “… it is well established that terroir can have a demonstrable effect on wine’s worth, but there is no consensus on whether terroir matters as a fundamental reality or solely eco- nomically due to the perceived reputation of a particular area. Nevertheless, the prices at which winemakers can sell their wines vary depending on the wines’ geograph- ic origins.” (Matthews, 2016; Landon and Smith, 1997, Lecocq and Visser, 2006; Patterson and Buechsenstein, 2018). 1 For details, see VQA Ontario Wine Appellation Authority’s web page: https://www.vqaontario.ca/Home. In this study, we ask the following questions: Does it make a price difference whether a wine is coming from a particular Ontario appellation? In particular, is there a regional reputation premium attached to a particu- lar appellation or sub-appellation? Moreover, does the premium for vintage, variety, and vinification change whether the regional differences are taken into account or not? DATA For 4,213 table wines from Ontario wine region, between 2015-2018, we have information regarding their retail price, vintage, size, grape variety(ies), appellation, as well as vinification—whether they are from a name vineyard or estate bottled. Table 1 provides summary statistics for these wines. CALCULATIONS AND FINDINGS To set a benchmark, first, as an ad-hoc regression model, the real price of each bottle of Ontario wine is set as a function of vintage, variety, and vinification2 with- out taking appellations differences into account. 2 The wine must be made from at least 85% of the grape variety named to be considered a single variety. Estate Bottled are variations such as “Estate Grown” or “grown, produced and bottled by” are permitted if the wine qualifies for the estate bottled designation, close variations are not permitted for non-VQA wines. Vineyard (any named vineyard indi- cating origin is not permitted for non-qualifying VQA wines or non- VQA wines, two or more vineyards may not be named but general ref- erences to vineyards or multiple but unnamed vineyards are permitted). Ontario Niagara Peninsula Niagara Escarpment Beamsville Bench Short Hills Bench Twenty Mile Bench Niagara-on- the-Lake Four Mile Creek Niagara Lake Shore Niagara River St. David's Bench Creek Shores Lincoln Lake Shore Vinemount Ridge Lake Erie - North Shore Prince Edwards County Figure 1. Ontario appellations. Table 1. Summary statistics for 4,213 Ontario wines. Variable Average Price $ 23.12 Price (2002)* $ 17.81 Single Variety 86% Named Vineyard 11% Estate Bottled 7% White Wine 53% Chardonnay 16% Riesling 14% Pinot Noir 10% Cabernet Franc 10% *Real, 2002 prices (Canadian consumer price index is used in deriving real prices.) 43Does belonging to an appellation make a difference? New evidence from Ontario Viticultural Areas ln(Pricei) = β0 + β1 Vintagei + β2j ∑7j=1 Varietyj,i + β3k ∑4k=1 Vinificationj,i +εi where, ln is natural logarithm operator; Vintage is the age of the wine; Varietyj is a dummy variable, where j = chardonnay, pinot noir, cabernet sauvignon, cabernet franc, riesling, sauvignon blanc, merlot, or pinot grigio; Vinification is a dummy variable, where k = single vari- ety, estate bottled, named vineyard, or named vineyard and estate bottled; finally εi is a well behaving error term. According to the robust regression results, as is summarized in column (2) of Table 2, there is a statis- tically significant relationship between real price and vintage, variety, and vinification: (1) Vintage matters; (2) there is a premium for red wines—pinot noir, cab- ernet sauvignon, cabernet franc, and merlot as well as a white wine, chardonnay; (3) making wines by using a single variety and estate or/and named vineyard bottling increases the price. Second, the real price of each bottle of Ontario wine is set as a function of vintage, variety, vinification as well as fifteen appellation/sub-appellations: ln(Pricei) = β0 + β1 Vintagei + β2j ∑7j=1 Varietyj,i + β3k ∑4k=1 Vinificationj,i + β4l ∑15l=1 Appellationk,i + εi Column (3) of Table 2 presents the robust regres- sion results for this specification. These findings indi- cate that for Ontario wine prices ‘terroir’ matter. For example, compared to an Ontario wine with no par- ticular appellation designation, a wine from Four Mile Creek acquires an additional 35% premium of which 19% is due to having its own sub-appellation, 7% for being under Niagara-on-the-Lake, and 9% for a Niagara Peninsula appellation. The size of the premium differ- ences from one appellation to another is striking: It var- ies between 5% (Lake Erie North Shore) and 39% (St. David’s Bench). These differences highlight the impor- tance of appellation designations even in a relatively new and also small wine region of Ontario. Another finding is about the size of the over-estima- tion regarding the premium attached to vintage, variety, and vinification, if we ignore appellation/sub-appellation differences. According to the regression results in Table 2 – the difference between column (2) and column (3) – the estimated coefficients for vintage, variety and vini- fication variables were over-estimated by between 1% points and 18% points. For instance, premium attached to grape varieties pinot noir, chardonnay, and cabernet franc are 7.2%, 4.2%, and 4.1% points respectively were over-estimated unless appellation designations were tak- ing into account. Similarly, regarding vinification, over- estimations are 17.6%, 8.7%, 7.4%, and 6.8% points for name vineyard and estate, named vineyard, estate bot- tled, and single variety, respectively. These differences are not only statistically significant; indeed, they are economically significant too. Table 2. ln (wine price2002) = f (wine characteristics); robust regres- sion results. (1) (2) (3) Characteristics coefficient t-stat coefficient t-stat Vintage Wine Age 4.56% 11.94*** 3.88% 10.66*** Variety Chardonnay 9.34% 5.39*** 5.16% 3.07*** Pinot Noir 25.40% 12.59*** 18.23% 9.25*** Cabernet Sauvignon 25.47% 11.12*** 23.02% 10.4*** Cabernet Franc 16.81% 8.47*** 12.67% 6.61*** Riesling -0.99% -0.55 -4.16% -2.36** Sauvignon Blanc -1.42% -0.55 -3.28% -1.33 Merlot 22.69% 10.02*** 20.09% 9.2*** Pino Grigio -1.01% -0.40 -3.45% -1.43 Vinification Single variety 22.04% 13.83*** 15.27% 9.88*** Estate bottled 14.97% 7.29*** 7.61% 3.69*** Named vineyard 30.48% 17.46*** 21.80% 8.59*** Named vineyard and estate 34.87% 13.81*** 17.25% 9.31*** Appellation/sub-appellation Beamsville Bench 4.69% 1.26 Creek Shores 8.34% 1.79* Four Mile Creek 18.69% 6.1*** Lincoln Lake Shore 22.99% 7.78*** Niagara Lake Shore -8.81% -2.33** Niagara River 10.09% 2.62*** Short Hills Bench -2.37% -0.37 St. David’s Bench 22.27% 5.8*** Twenty Mile Bench 2.47% 0.62 Vinemount Ridge 20.04% 5.53*** Niagara Escarpment 17.70% 5.6*** Niagara-on-the Lake 7.15% 3.41*** Niagara Peninsula 9.28% 6.14*** Lake Erie – North shore 5.14% 1.8* Prince Edwards County 32.50% 13.28*** Constant 2.315 124.27*** 2.289 125.57*** Obs. No. 4,213 4,213 adjusted- R2 0.27 0.34 F(13, 4199) 119.99*** F(28, 4184) 78.48*** Note: Significance levels (two-tailed) 1% (***), 5% (**), and 10% (*) 44 Omer Gokcekus DISCUSSION To summarize, these findings 1) highlight the eco- nomically significant effect of terroir or a regional repu- tation even in a relatively new wine region; 2) indicate that ignoring the importance of terroir clearly could result in an overestimation of the premiums attached to different vintages, varieties, and vinification; and, moreover, 3) show that these premiums are not uni- formly overestimated; there are variations among vin- tage, varieties as well vinification. Consequently, a wine maker should be paying attention to things that they can choose or control, but meanwhile they should keep in mind the location of their winery in order to set realis- tic expectations for the return on their investments and efforts. REFERENCES Carew, R. and Florkowski, W. J. 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Patterson, T. and Buechsenstein, J. Wine and Place: A Terroir Reader. Oakland: University of California Press, 2018. VQA Ontario Wine Appellation Authority (2019). 2019 Annual Report. Wine Economics and Policy Volume 10, Issue 2 - 2021 Firenze University Press Productive efficiency of wine grape producers in the North of Portugal Micael Santos1,*, Xosé Antón Rodríguez2, Ana Marta-Costa3 Organic and conventional grape growing in Italy: a technical efficiency comparison using a parametric approach Federica Cisilino1, Fabio A. Madau2,*, Roberto Furesi2, Pietro Pulina2, Brunella Arru2 Competitiveness framework to support regional-level decision-making in the wine industry: a systematic literature review Jorge Mota*, Rui Costa, António Moreira, Silvana Serrão, Carlos Costa Does belonging to an appellation make a difference? New evidence from Ontario Viticultural Areas Omer Gokcekus How do sparkling wine producers adopt a sub-appellation? 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