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North Bay Business Journal

Monday, April 9, 2012, 6:15 am

Experts: winegrape shortage to persist for years

By Kathe Guglielmetti, Moss Adams LLP

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    NAPA — Not enough winegrapes have been planted in California, leading to a shortage of fruit for wine in the next several years, so growers and wineries should be actively working together to boost that supply, according to two major industry experts.

    On Feb. 23, accounting firm Moss Adams LLP hosted a Wine Industry Financial Roundtable at the Napa Valley Marriott resort. The topic was “Shifting Strategies for Grape Sourcing.” Featured speakers were Joe Ciatti, a prominent wine business broker with Zepponi and Company of Santa Rosa and former driving force of giant wine and winegrape brokerage Ciatti Co. of San Rafael, and Hugh Reimers, executive vice president and chief operating officer at Jackson Family Wines.

    “A monumental change in supply occurred in January 2011,” Mr. Ciatti said at the beginning of his presentation. “An excess of grapes has become a shortage.”

    He emphasized that the change is not due to short crops, as some believe: The past three years’ harvests were historically large, however decreasing year by year.

    He noted that the 2011 winegrape harvest of 3.3 million tons was actually above average, even though it was less than the 3.7 million tons harvested in 2009 and the 3.6 million tons of grapes from 2010.

    The problem is that growers have not been planting grapes.

    New vines have represented about 4 percent of the total of 500,000 acres of grapevines in California for years, but about 10 percent of planting and replanting each year is needed to replace aged stock and satisfy growth in consumption. Wine consumption growth averaged 4.5 percent yearly for the past decade and is now projected to continue at 3 percent annually for the foreseeable future.

    Mr. Ciatti predicted that the grape shortage would last six to eight years.

    Revolving cycle of shortage, excess

    Large varietal plantings occurred for the first time in the 1970s across the state, Mr. Ciatti said. More plantings took place a decade later (particularly in 1983) of Chardonnay, Zinfandel (for white wine) and French Colombard in the Central Valley, and the North Coast counties of Napa and Sonoma replanted several vineyards.

    Mr. Ciatti said that the biggest planting came in 1992 — and again about 10 years later — in all parts of California. The result was a significant oversupply that lasted through the 2010, but ended last year.

    What’s a possible solution for this shortage?

    “Secondary” areas such as Lake, Mendocino and Monterey counties, Paso Robles and the northern interior valley have plenty of land for more grapes, Mr. Ciatti observed. Unfortunately, environmental, financial and regulatory restrictions will make it tough to add much acreage in Napa and Sonoma counties, he cautioned. There, growers will have to replant and optimize their vineyards for higher production.

    Mr. Ciatti explained that about 50,000 to 100,000 acres of vines should be planted per year. But even if that is what’s planted, they won’t start producing until 2016–17, and it will be 2018 to 2020 before the industry sees ample grapes again.

    Growers in the drivers seat

    The shortage has meant that growers are in a very strong position for a change: “Growers are walking on water right now,” Mr. Ciatti said.

    Mr. Ciatti thinks growers might also consider turning their grapes into bulk wines for the short haul.

    “Wine has a better return than grapes right now,” he said.

    This would be a good time for wineries to buy vineyards if they can, and also sign contracts for 3 to 7 years. Wineries should help their growers replant existing vineyards and new ones with long-term contracts.

    But he strongly warned the audience: “Don’t overplant. You’ll know it’s time to stop when everyone is in a frenzy to replant.”

    Global grape supply in balance

    Hugh Reimers, whose background is winemaking in Australia, cautioned not to expect significant relief from shortages internationally.

    “The grape supply is in balance globally,” he said, noting minimal plantings worldwide.

    Jackson Family Wines owns wineries and vineyards in coastal California and owns producers and imports wines from Italy, France, Chile and Australia.The past few years were tough, but now the company is seeing steady growth in sales.

    “People are moving up the market,” he said.

    Similar to Mr. Ciatti’s observations about inadequate nascent acreage, Mr. Reimers said 20 percent of vines were nonbearing in 1999, compared to only 4 percent today.

    On top of that, exports were about 50 million cases last year and growing at 10 million cases per year.

    “That alone requires about 20,000 acres per year of new vines,” Mr. Reimers said.

    Exacerbating that need, wine consumption is expected to grow from today’s 2.5 gallons per capita to 3.8 gallons in 2025, requiring more wine and grapes.

    “Growers should seek long-term contracts with responsible providers, and they should package their less-desirable varieties like syrah with those in most demand like cabernet,” he said.

    For wineries, Mr. Reimers suggested grower contracts of five or more years and also recommended buying and planting vineyards.

    Plant where there’s water

    During a question-and-answer session following the presentations, both Mr. Reimers and Mr. Ciatti agreed that growers should plant varieties in appropriate areas — especially areas where there’s water. That is going to become a bigger and bigger issue.

    They recommended areas like Pope Valley in Napa County, in nearby Lake and Mendocino counties, as well as Monterey, where there’s plenty of water; and the upper interior of the state (Lodi, Clarksburg and the Sacramento Valley).

    “Realistically, the best land is already planted,” Mr. Ciatti said. “Understand why an area wasn’t planted before you pioneer.”

    Better economy, better financing opportunities

    Other questions arose about financing for growers. Fortunately, the strengthening economy will present more financing options, both speakers felt sure of.

    Mr. Ciatti, who now makes a living buying and selling wineries and vineyards, rather than grapes and bulk wine, as he did decades ago, ended with a rearview look over the past few years.

    “Negoçiant brands without assets have had high valuations, and buyers did not even ask about supply,” he said. “Now the first thing potential buyers ask is, ‘What about grape supply?’”

    Grape shortage aside, merger-and-acquisitions activity is strong, Joe said.

    Zepponi & Company is looking at 10 projects representing more than $350 million.

    Find more information regarding the Moss Adams roundtables at mossadams.com/roundtable. Learn more about its Wine Industry Group at mossadams.com/wine.

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