THE BLOG

What Currency Devaluation in Argentina Means for Wine

02/01/2014 09:53 am ET | Updated Apr 03, 2014

The big news from Argentina this week is that the central bank has allowed the peso's currency to fall against the dollar. This is a watershed moment for Argentines, but it may affect American wine consumers as well.

For the past couple of years, Argentina's central bank has been using its reserves to buy pesos, propping up the value of the currency in global markets. The government has maintained an overvalued peso in part to disguise the inflation created by its massive spending programs. But not everyone has been able use the overvalued peso to buy safer currencies like dollars; the government has used a variety of measures to stop Argentines from selling their pesos.

Because of the strict controls on buying dollars at the official exchange rate, a black market for dollars arose. Argentines needed to spend more pesos to buy a black market dollar (or "blue" dollar), but many decided it was still worthwhile to buy imports or defend against future uncertainty. Of course, if the government ever allowed the peso to float in global markets, its value would drop to something close to the black market exchange rate.

That's what happened this week. Without warning, the central bank stopped intervening to bolster the peso, and it dropped more than 10 percent in one day. The immediate result is that imports are more expensive for Argentines, and Argentine exports are cheaper for foreigners. In principle, this could benefit both Argentine winemakers and American wine consumers. Winemakers could receive more pesos for every dollar of wine they sold, and consumers could see lower prices at the same time.

In practice, things don't always go so smoothly. There are distributors in the middle who could grab some of the benefits from both winemakers and consumers; wine prices are notoriously slow to respond to fluctuations in exchange rates. And winemakers will have to pay more for the things they import, notably barrels made with French and American oak.

If the peso continues to fall - the black market rate today stood at around 12 to the dollar, compared to the official rate of about 8 - then we may see more young, unoaked wines coming out of Argentina in the near future. These should sell at slightly lower prices than their current equivalents. The price of oaked wines shouldn't change much, since the cost of barrels hasn't risen when measured in dollars.

All of this will only be true if Argentina manages to avoid a spiral of falling exchange rates and rising prices, which it hasn't always been able to avoid in the past. The ups and downs of Argentina's economy are a constant challenge for exporters there, and our hearts go out to the wineries who must navigate yet another storm not of their making. The best way we can help them is to continue enjoying their wines. Salud!