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The Law of Unintended Consequences

Columnist: Tim Carl
May, 2017 Issue
Columnist

Tim Carl
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Love him or hate him, President Donald Trump is already having an impact. His proposed budget would slash funding for—or completely eliminate—many aspects of the government and shift much of the focus to military spending. Many of the changes he advocates will not make it through Congress. But the ones that do, will create an impact that will be felt throughout the economy and perhaps especially in luxury goods such as wine.

For example, the proposed 21 percent decrease in the U.S. Department of Agriculture’s $17.9 billion budget will likely impact many trade organizations, such as the Wine Institute, which currently receives nearly one-third of its roughly $21 million budget from the Market Access Program. The MAP is a partnership with the Foreign Agriculture Service, U.S. agricultural trade associations, cooperatives, state and regional trade groups, and small businesses that share the costs of overseas marketing and promotional activities to build commercial export markets for agricultural products and commodities.

Because only one-fifth of the USDA’s budget is discretionary, and because MAP funding falls within this category, it’s likely the $7 million currently provided to the Wine Institute will be affected if the budget passes.

A president’s budget is never passed exactly as written. It goes through many iterations with each often resulting in a gentle shift back toward more spending and less-drastic cuts. But even if the cuts do not happen, the chilling effect of proposed cuts will likely result in plans, new hires and initiatives being put on pause until the final budget details get worked out. Such pauses never have an immediate impact, but given that the U.S. demand for wine has slowed in recent years, it is likely that new markets are being sought to help maintain growth. Like any strategic planning, what is being done today will have its effect three to five years down the road.

Here’s another one. On Feb. 27, 2017, U.S. Attorney General Jeff Sessions said, “I'm definitely not a fan of expanded use of marijuana. States, they can pass the laws they choose. I would just say it does remain a violation of federal law to distribute marijuana throughout any place in the United States, whether a state legalizes it or not.”

Because California recently passed Proposition 64, which legalized the recreational use of marijuana for adults age 21 years or older and permitted smoking in a private home or at a business licensed for on-site marijuana consumption, such a comment from Sessions has a chilling effect on business planning.

Proposition 64 opened the door for farmers, including vineyard owners, to begin plans for cultivating and selling marijuana, and it was assumed that many vineyards in Northern California would apply for permits to plant up to an acre of the newly legalized crop, to help subsidize their grape-growing businesses. But because of the uncertainty surrounding how the government will enforce federal laws (which still consider marijuana to be a Schedule 1 substance, according to the Controlled Substances Act of 1990, with no legal medical use allowed and high potential for abuse). Other Schedule 1 drugs include heroin and LSD.

On the campaign trail, President Trump indicated his strong support for states’ rights, but with Sessions’ statement and a lack of clarity on the topic, the resulting general uncertainty has caused many potential producers to pause their plans to grow and sell marijuana in California. Depending on your point of view, this might be a wonderful result. If you are a fan of Prop 64, however, you probably feel frustrated. Either way, from a business point of view uncertainty can have a chilling effect, especially in the wine business.

Wine and vineyards have long lead times. (Vines take four to five years to grow before producing and most wine has to age, sometimes up to three or four years.) As a result, the impact of any pause in decision-making has both short- and long-term impacts. These two examples underscore the potential for a pause and/or reduction in the Wine Institute’s activities surrounding attempts to expand the wine market beyond the U.S. consumer. However, with the uncertainty surrounding Prop 64, implementation we may see some vineyard operations pausing to decide if they will (or will not) apply for permits to plant “alternative crops.”

The point here is not necessarily directed to these two particular issues. The point is that when we act or even speak there are consequences. Some consequences can be anticipated, but many can’t, and it’s within those unintended consequences that businesses face both risks and reward.

One of my friends often reminds me of Proverbs 14:8, which reads: “The wisdom of the prudent is to give thought to their ways, but the folly of fools is deception.” I’ve always assumed that he isn’t directing the comment in my direction, but either way, I think we all hope that we and our leaders lean toward the wise side of the equation.

 

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