A Bad Year? Climate Variability and the Wine Industry in Chile

Short-term climate conditions may afect crop yields and vintage quality and, as a consequence, wine prices and vineyards’ earnings. In this paper, we use a Computable General Equilibrium (CGE) model for Chile, which incorporates very detailed information about the value chain of the wine sector in the country. Using information for the 2015-2016 harvest, we calibrate climate variability shocks associated with a “bad year” for the wine industry in Chile, when premature rains occurred in important wine regions, reducing the area harvested and leading to wines with less concentrated favors, particularly for reds. We model the climate shocks as a productivity change in the grape-producing sector (quantity efect). Moreover, we model quality efects as a shif in the foreign demand curve for Chilean wine. Given the specifc economic environment in the model and the proposed simulation, it is possible to note the reduction of Chilean real GDP by about 0.067%. By decomposing this result, we verify that the quality efect has a slightly greater weight compared to the quantity efect.