Anchoring and Property Prices: The Influence of Echelle Des Crus Ratings on Land Sales in

the Champagne Region of France

Olivier GERGAUDKEDGE – Bordeaux Business School

Andrew J. PLANTINGAUniversity of California, Santa Barbara

Aurélie RINGEVAL-DELUZEUniversity of Reims Champagne-Ardenne

AAWE Conference – MendozaMay 26 – 30, 2015

Motivation

• We analyze vineyard sales and grape prices in the Champagne region.

• Determine whether Echelle Des Crus (EDC) ratings are an anchor in the land market and the market for grapes

• EDC = set of numerical quality scores for villages in the region used as part of price-setting system for wine grapes

2

Champagne Region

Echelle Des Crus

• Began in 1919 and persisted until 1990 when it was abandoned in favor of a free market system for establishing grape prices.

• Currently, the EDC no longer plays a role in determining grape prices and, therefore, should have no influence on any prices.

• However, given its importance throughout the 20th century, it is possible that the EDC is an anchor for participants in the land market and/or the market for grapes. 4

Market for grapes

• Two-thirds of all champagne are produced by négociants like Moët & Chandon (Epernay), Mumm (Reims)

• Négociants purchase grapes from growers in the surrounding area (within the appellation area)

• In 1990: 241,430 tons of grapes traded5

Echelle Des Crus

• Before 1990, the price paid for a kilogram of grapes was:

Regulated price × EDC/100 6

Echelle Des Crus

• Example #1:– Village: Mesnil-sur-Oger (Côte des Blancs)– EDC rating: 100%– Price received: €4.39

• Example #2:– Village: Montgueux (Aube)– EDC rating: 80%– Price received: €3.51

7

Regulated price for a kilogram of grapes in 1990 :

€4.39

Echelle Des Crus

• Both are top places for Chardonnay grapes

• Both places have superstar producers: – Montgueux: Jacques Lassaigne– Mesnil-sur-Oger: Krug (Clos du Mesnil)

• Main difference: distance to Reims and Epernay

• Where the major champagne houses are located

8

Distance to Reims & Epernay

Montgueux

Straight-line dist. to:•Reims = 130 km•Epernay = 107 km

Mesnil-sur-Oger

Straight-line dist. to:•Reims = 43 km•Epernay = 17 km

Echelle Des Crus

10

EDC and Labelling• Grand cru: wines made

with grapes from villages ranked 100.

• Premier cru: wines made with grapes from villages ranked 90-99.

• Autre cru: wines made with grapes from villages ranked 89 and less.

11

EDC and Labelling

• GC + PC = 23% of the total appellation area

• Mostly found in two regions:– Montagne de Reims (4,023 ha)– Côte des Blancs (3,110 ha)

• Labelling their product grand cru or premier cru is a way of signaling quality to consumers.

• Gergaud (1998) and Menival & Charters (2013) find evidence of higher prices for grand cru and premier cru champagnes.

12

Is EDC a smart rating system???

13

Is EDC a naive rating system???

14

Echelle Des Crus

• One village, one rating but…

• Different altitudes15

Echelle Des Crus

• One village, one rating but…

• Different slopes & land attributes16

• Silica sand• Alluvial fans• Surficial formations• Ferric Iron-bearing sediments• Sedimentary rocks• Marl• Chalk

Echelle Des Crus

• One village, one rating but…

• Different exposures! 17

Champagne Boulard (Murgiers)

18

EDC = 84.33%

Champagne Boulard(Vieilles Vignes)

19

EDC = 85.9%

Champagne Boulard(Grand cru 100%)

20

EDC = 100%

Main objectives

• Test whether the EDC is still used as an anchor by champagne producers

• Estimates based on:– Vineyard prices– Grape prices

• Model:– Price = f (land, weather, EDC)– EDC is endogenous and depends on land & weather– Instrument used: distance to Reims

21

Why distance to Reims?

• Exogenous:– The decision by champagne houses to locate in

Reims in the 18th century, was determined by factors other than proximity to high quality vineyards.

• …

22

Why distance to Reims?• Besides being the major center

for commerce in the region, Reims offered another advantage to champagne houses.

• Beneath the city was a large network of caves dating back to the Gallo-Roman period.

• A remnant of limestone quarries, that could be converted to cellars for storing champagne.

23

Why distance to Reims?

• Relevant:– The latest versions of the EDC still depend, to a

certain extent, on a distance factor.

• …

24

EDC – Main Determinants (1) (2)

Distance to Reims -0.05*** -0.03*** (-16.96) (-5.53)Limestone (prop.) 6.62*** (5.66)Silica sand (prop.) -3.85*** (-3.88)Sedimentary rocks -3.83** (-2.56)10% < Slope coeff. < 20% -1.85** (-2.07)20% < Slope coeff. < 30% -2.87*** (-3.05)Slope coeff. > 30% -2.07* (-1.71)Av. annual Rainfall (in cm) -0.46*** (-2.69)Av. annual frost days (in days per year) -3.61*** (-3.63)North-East orientation 2.47** (2.11)Constant 88.14*** 102.66*** (204.83) (29.28)Observations 298 220R-squared 32% 65%

• Model (1) : R² = 32% !

• Model (2) :– + 100 km = -3 pts– + 10% limestone = +6,6 pts– + 10% silica sand = -3.85 pts– + 10% sedimentary rocks = -3.83 pts– …

• Model (2) explains 65% of the EDC

• The rest is probably… Politics?

25

Cost of transporting grapes

• The cost of transporting grapes to Reims – was an important consideration when the EDC ratings

were first established in 1911 (Nollevalle 1961) – but no longer has an appreciable effect on returns to

grape production

• (Transp. cost / Total value):– 0.13% from Marne– 0.21% from Aisne – 0.46% from Aube

26

Distance to Reims & Epernay

Anchoring effects

• Laboratory experiments show that final estimates will often be systematically related to initial values.

• Even when these starting points are arbitrarily chosen (Northcraft and Neale 1987, Ariely et al. 2003, Maniadis et al. 2014).

• This phenomenon is referred to as anchoring

28

Empirical Evidence

• Fine art auctions:– Beggs and Graddy (2009)– Find that the previous sale price for a painting has a

strong influence on the current sale price.

• Prediction markets:– McAlvanah and Moul (2013)– Show that Australian horseracing bookies fail to make

sufficient adjustments to betting odds after a late withdrawal of a horse, thus anchoring on the original odds .

29

Empirical Evidence

• Real estate transactions:– Bokhari and Geltner (2011) – Bucchianeri and Minson (2013) – Found that higher listing prices for single-family

homes are associated with higher final selling prices

• Rental prices:– Simonsohn and Loewenstein (2006) – Migrants to a city rent more expensive apartments if

their previous city had higher-priced housing, and vice-versa

30

Sources

• Vineyard transactions:– Parcel-level data (12,433 obs.)– Sample period: 2002 – 2012– Sociétés d’aménagement foncier et

d’établissement rural (SAFER)

• Grape prices:– Village-level data (10,853 obs.)– Sample period: 1991 to 2012, except

for 1992 – Comité Champagne

31

Sources

• Weather data:– Village-level data– Sample period: 1994 – 2011– Daily information (temp., rainfall, frost days)– 33 stations spread across the Champagne

region– Comité Champagne

• Soil data:– Parcel-level data– Orientation, Slope, Altitude, Soil type– BRGM

32

Grape prices

• Declined in the early 1990s during the global economic recession

• Then increased steadily after 1993 as a result of growing demand for champagne

33

Vineyard prices

• Per hectare of land • We excluded any sales that include buildings• X 3 in 11 years

34

Vineyard Prices Model

• Premier cru model:

• Autre cru model:

• We avoid the need to control for the influence of PC and GC by estimating the model with a sub-sample of obs.

35

Soil and weather variables

Annual dummies

IV results

• Autre cru: a one-unit in the EDC the price of vineyards by 7.1%.

• Premier cru: a one-unit in the EDC the price of vineyards by 9.4%.

• Prices are increasing in the size of the parcel

• Strong upward trend in the nominal price of vineyards

36

IV results

• Several of the soil variables have significant effects.

• Altitude affects the price of AC parcels negatively.

• Differences in slope and aspect have limited influence.

37

IV results (year-by-year)

• Increasing impact of the EDC over time both on:– PC vineyard prices– AC vineyard prices– PC>>AC

• Vineyard prices are still anchored to the EDC

38

Grape Prices Model

• Premier cru model:

• Autre cru model:

• We avoid the need to control for the influence of PC and GC by estimating the model with a sub-sample of obs.

39

Annual dummies

Contemp. weather var.

Soil variables

IV results

40

• Autre cru: a one-unit in the EDC the price of grapes by 2%

• Premier cru: a one-unit in the EDC the price of vineyards by 0.7%

• Effect is smaller than for the vineyard prices (capitalized value of the stream of profits from grape production)

IV results

41

• EDC was officially abandoned in the recent past

• Despite this EDC still had an

– increasing impact on PC grape prices– significant but decreasing impact on AC grape

prices

• Overall, we find strong evidence for anchoring.

• In all of the IV specifications we tested, the EDC is found to have a positive and significant effect on grape or vineyard prices.

• The effects of anchoring are large in magnitude

Conclusions

42

• The role of the EDC in determining prices for grapes officially ended in 1990.

• Yet, our results indicate that it continues to have a strong influence on grape and vineyard prices!

• Main reasons for this is probably an increased uncertainty due to:– Climate change– Upcoming extension of the appellation area ( AC

vineyards)

Conclusions

43

Appendix

44

Echelle Des Crus: History

• In 1890, champagne producers could import up to 49% of their grapes from outside the region, and were not prevented from using other fruits, such as apples.

• Combined with a string of bad harvests, many small growers in the region were facing bankruptcy which eventually caused severe riots in the region.

45

Echelle Des Crus: History

• Demonstrations by thousands of growers were held to protest the prices paid by the houses and the policies of the national government.

• These demonstrations eventually turned violent, resulting in the burning and looting of champagne houses and government buildings and eventual military occupation.

• In response to the “Champagne Riots” the Champagne production area was formally designated and the EDC was established. 46