American Economic Review: Papers & Proceedings 2011, 101:3, 152–156 http://www.aeaweb.org/articles.php?doi 10.1257/aer.101.3.152 = What Is the Value of Terroir? By Robin Cross, Andrew J. Plantinga, and Robert N. Stavins* Wine producers and enthusiasts use the term of vineyard prices.1 We do this by conducting “terroir,” from the French terre meaning land , a hedonic price analysis to investigate sales of to refer to the special characteristics( of a place) vineyards in Oregon’s Willamette Valley, one of that impart unique qualities to the wine pro- the most important wine-producing regions in duced. The Appellation d’Origine Contrôlée the United States.2 AOC system in France, and similar systems How should site attributes and sub-AVA adopted( ) in other wine-producing countries, are designations influence vineyard prices? If site based upon the geographic location of grape attributes significantly affect wine quality and production, predicated on this notion of ter- if consumers are able to discriminate such qual- roir. Under the US system, production regions ity, then vineyard prices would depend on site are designated as American Viticultural Areas attributes,3 and AVA designations might be AVA s , with finer geographical designations redundant. Alternatively, consumers might not known( ) as sub-AVAs. Such designations allow be able to discriminate among wines perfectly wineries to identify the geographical origin of and might use AVA designations as signals of the grapes used in producing their wines, and— average quality of wines from respective areas, equally important—seek to prevent producers and or might derive utility directly from drink- outside an AVA from making false claims about ing /wines which they know to be of particular the nature and origin of their wines. pedigree. In this case, site attributes and AVA What is the value of terroir in the American designations would influence vineyard prices, context? Does the “reality of terroir”—the loca- with parameters for site attributes indicating tion-specific geology and geography—predomi- how producers value intra-AVA differences in nate in determining the quality of wine? Does vineyard characteristics. Presumably, producers the “concept of terroir”—the location within an attach premiums to site attributes that enhance officially named appellation – impart additional wine quality, provided that consumers can per- value to grapes and wine? Does location within ceive and are willing to pay for such quality such an appellation impart additional value to differences. vineyards? What if, at the extreme, variation in vineyard The central question we address is whether prices is explained completely by AVA designa- measurable site attributes—such as slope, tions that is, site attributes are irrelevant ? This aspect, elevation, and soil type—or appellation would( indicate that terroir matters economi) - designations are more important determinants cally—as a concept, though not as a fundamen- tal reality. In other words, producers recognize the value of the AVA designation because they 1 The notion of terroir is sometimes extended beyond * Cross: Department of Agricultural and Resource natural endowments to encompass the history and culture of Economics, Oregon State University, Corvallis, OR a place, but we employ a narrower and more common defini- 97331 e-mail: [email protected] ; Plantinga: tion of terroir focused on physical attributes of the location Department( of Agricultural and Resource ) Economics, Olivier Gergaud and Victor Ginsburgh 2008 . Oregon State University, Corvallis, OR 97331 e-mail: plant- ( 2 The Willamette Valley is designated as an) AVA. Within [email protected] ; Stavins: John F. Kennedy( School the valley, there are six sub-AVAs: Chehalem Mountains, of Government, Harvard) University, 79 John F. Kennedy Yamhill-Carlton District, Ribbon Ridge, Dundee Hills, Street, Cambridge, MA 02138 e-mail: robert_stavins@ McMinnville, and Eola-Amity Hills. harvard.edu . We thank Charles Mason( and participants in 3 Wine quality is affected not only by site attributes, but a session at )the 2011 ASSA Meetings for helpful comments also by the quality of growing stock, as well as vineyard on a previous version of this paper. management, and the skills and resources of the wine maker. 152 VOL. 101 NO. 3 WHAT IS THE VALUE OF TerroIR? 153 know that consumers will pay more for the expe- Our dependent variable, vineyard sale prices, is rience of drinking wine from designated areas.4 preferable in the context of our investigation into However, if site attributes known to affect wine the value of terroir. Provided that non-vineyard quality have no impact on vineyard prices, this inputs into wine production labor, wine-making suggests that consumers cannot discern qual- techniques, etc. are variable( and reproducible, ity differences. Any appreciation they might profit maximization) implies that the optimal lev- express for an area’s terroir would essentially be els of these inputs are implicit functions of vine- founded on reputation, not reality. yard attributes and input and output prices that In the next part of the paper, we discuss some are constant across the vineyards in our sample. related research from the wine economics litera- As such, we can estimate the implicit prices of ture. Then, in Section II, we describe the data vineyard attributes using the simple hedonic we employ, as well as our estimation strategy. equation presented below. In Section III, we present our results plus some As we suggest above, if consumers have lim- robustness checks. Section IV concludes. ited information about specific vineyards or are unable to judge differences in quality among I. Previous Literature wines, they might use appellation designations as signals of quality. In fact, the results of many Our analysis is related to and builds upon blind taste tests indicate that consumers have previous work by others. In one recent study, very limited ability to distinguish intrinsic quali- Gergaud and Ginsburgh 2008 find that site ties of wine sweetness, acidity, tannins, etc. , attributes of vineyards in the( Haut-Médoc) appel- and instead judge( quality by relying on extrinsic) lation in Bordeaux have no effect on wine prices signals, such as price, origin, and wine-maker or ratings. Our study builds on this work by reputation. Roberta Veale and Pascale Quester examining—in addition to site characteristics— 2008 found that tasters’ perceptions of quality the value assigned to appellation designations. were( strongly) correlated with price and country Further, we are able to measure site characteris- of origin, but not with intrinsic qualities related tics more precisely by using GIS-based informa- to taste. Similarly, Robin Goldstein et al. 2008 tion to develop detailed physiographic profiles found that when price information is withheld,( ) of parcels. nonexpert tasters show no preference for more In another recent study, Orley Ashenfelter and expensive wines and even show a slight prefer- Karl Storchmann 2010 investigate the effects ence for less expensive wines. of climate on vineyards( )in the Mosel Valley. As in our study, the authors have fine-scale data II. Data and Estimation Strategy on vineyard characteristics. They find that site characteristics—including slope, orientation, We employ a new dataset on vineyard sales soil types, soil depth, and altitude—as well as provided by Northwest Farm Credit Services, a solar radiation are significant determinants of lending institution specializing in agriculture. vineyard quality. We do not include climate This database includes the universe of 104 sales variables in our analysis, because of trivial vari- of properties in the Willamette Valley between ation in rainfall, humidity, and wind across the 1995 and 2007 that included vineyards and vine- Willamette Valley, but our site attribute variables lands land that can be developed for vineyards . proxy for the amount of solar radiation received In addition( to the total sale price, the size, and) by vineyards. the location of the property, each sale record An important similarity and difference with includes an appraiser’s estimate of the value of our study concerns respective dependent vari- non-vineyard assets, such as dwellings and other ables. Gergaud and Ginsburgh 2008 and buildings, winery equipment, and non-vineyard Ashenfelter and Storchmann 2010( employ) land. We subtract the estimated values of these measures that are based on wine prices( )or ratings. non-vineyard assets from the total sale price to obtain the value of vineyards in each sale. Because terroir relates exclusively to nontrans- 4 Likewise, producers might bid up the value of vineyards ferable attributes of vineyards, we also subtract located in designated appellations because there is prestige from the vineyard value the appraiser’s esti- associated with owning vineyards in these areas. mate of the value of all vineyard enhancements, 154 AEA PAPERS AND PROCEEDINGS MAY 2011 Table 1—Estimation Results Parameter estimate Standard error Constant 8.582 0.333 Eola-Amity Hills sub-AVA 0.438 0.138 McMinnville sub-AVA 0.154 0.230 Yamhill-Carlton sub-AVA 0.529 0.135 Dundee Hills sub-AVA 0.852 0.143 Chehalem Mountains sub-AVA 0.482 0.125 Vineyard acreage 0.005 0.002 Vineyard acreage squared −0.000014 0.000006 Share of parcel with best elevation 0.157 0.154 Share of parcel with other elevation 0.130 0.164 Share of parcel with south aspect 0.202 0.268 Share of parcel with southeast west aspect 0.088 0.267 Share of parcel with east or west/ aspect −0.270 0.471 Share of parcel with best soil 0.030 0.157 Share of parcel with good soil −0.048 0. 137 Share of parcel with best slope 0.075 0.286 Dependent variable log of vineyard price per acre = Observations 104 = Adjusted R2 0.422 = leaving the estimated price of land for vineyards. are demarcated as being in the Willamette Our dependent variable is the logarithm of this Valley AVA.