Shift changes balance between growers, wineries and consumers
By Joe Ciatti and Cody Jennings
After nearly 10 years of oversupply and low prices, California winegrapes and bulk wines are suddenly in a position of scarcity. Wineries are scurrying to find grapes and secure vineyard assets, while négociant wineries see their wine sources dwindling. How did we come to be in this situation, and what lies ahead for growers, wineries and consumers?
At times we forget that the wine business is fundamentally driven by agriculture. The amount of wine for sale at any given time is determined by how many grape vines are planted and fully productive, and by the relative success of each harvest. Meanwhile, on the demand side, another set of variables is at play: How is the economy doing, what varietals are in fashion and how much does it cost to produce a case of wine?
Historically, supply and demand for winegrapes have seldom been in sync. Since the early 1970s, there have been winegrape shortage cycles generally lasting between six to 10 years. In the 1970s, California saw large varietal grape plantings for the first time in Sonoma, the Central Coast, Monterey, Lodi, and the Central Valley. These plantings were driven in part by tax incentives and a growing interest in wine on the part of baby boomers.
The trend continued through the 1980s with significant plantings of French colombard, Chardonnay and (white) zinfandel in the Central Valley, as well as more moderate quantities throughout the North Coast. At the same time, many growers were tackling the phylloxera plague by replanting older vineyards to resistant rootstock. The result was a decade of vigorous planting which culminated with the harvests of 1989 through 1991 bringing an excess of grapes to the market. The ensuing glut came at a time when many wineries were facing bankruptcy and foreclosure due to an economic recession.
Fortuitously, a rebounding economy and an unexpected report by CBS’s “60 Minutes” on the “French Paradox” sent demand soaring once again. The wine industry swung rapidly back to a supply shortage, which in turn led to large vine plantings from 1992 to 1999 — the largest plantings of varietal grapes in the history of California.
The turn of the century saw the state’s first three million ton winegrape harvest as a flurry of the prior decade’s vineyards came online, and once again the market struggled with an excess of grapes and bulk wine. One year later the industry took another blow as the events of Sept. 11, 2001, caused a steep drop in demand for case goods in the retail market. Over the next decade the industry adapted to a position of sustained excess, and the quantity of bearing vineyard acres remained relatively flat. As a consequence, grape prices were depressed and bulk wine inventory climbed to record highs. Perhaps the most telling barometer of the 2000s grape and bulk wine markets was manifested in the rise of numerous négociant-style wineries, which thrived on plentiful wine stocks and low cost wine supply.
In January 2010, even after large crushes in 2009 and 2010, there were indications that things had started to stabilize, and by the 2011 crush, it became apparent that we had used up the supply of grape and bulk wines in the state. California is now moving from a period of oversupply back to scarcity — and again, it may be several years before growers can catch up.
The winegrape market has not kept pace with increasing wine consumption in recent years. Since 2001, new vines have been planted at a rate of about 4 percent annually, which is hardly enough to cover the replanting required each year to replace aged vine stock, much less satisfy current growth in consumption. California wines rang up strong sales in 2011 — nearly 6 percent higher than the year before – and are expected to continue growing at a fast clip. With global consumption expected to rise from 2.5 gallons per capita to an estimated 3.8 gallons in 2025, California will need more grapes and more wine.
With the apparent supply imbalance in full sight, grape and bulk wine prices have increased significantly over the past six months and continue to trend upwards — a situation that puts growers in a very strong position. If they can resist the temptation to overplant, and if they have the resources to wait the three to five years necessary for newly planted vines to produce a commercially viable crop, growers should do well. As with any new development project, however, planting vineyards carries considerable risk. One way growers can mitigate this risk is by securing long-term planting contracts with wineries. Such contracts can typically extend out eight or more years from the time the vineyard produces its first commercial crop.
For their part, wineries seeking additional grape supplies are pursuing every avenue possible to address their immediate and long-term supply needs. They are contacting their existing growers to secure long-term grape contracts, reaching outside their traditional supply base to source new contracts, considering the acquisition of existing vineyards, and pursuing the development of new vineyards. If grape prices continue to rise and growers maintain a strong aversion to long-term supply contracts, more wineries will be motivated to seek out acquisition targets in the form of planted vineyards or arable land.
Négociant brands, meanwhile, find themselves in a deteriorating position as relatively inexpensive wine stocks dry up and sourcing costs rise. Those without long-term grape or bulk wine supply contracts are facing volume constraints and shrinking margins.
Many believe that grape and bulk wine prices will remain elevated well into the coming decade. In addition to the three-to-five-year development lag from the time vineyards are planted until they become commercially productive, an apparent bottleneck at the nursery level has emerged, such that many would-be vineyard developers are having trouble securing plant material to put in the ground in 2013 and even 2014. Additionally, tighter regulatory and environmental requirements in some regions are impacting the feasibility and timing of new vineyard development.
The end result is that we may be looking at a winegrape shortage lasting six or eight years — and that is assuming growers do eventually find ways to get more vines in the ground. Can this cycle be avoided in the future? Probably not — unless growers plant judiciously, wine marketers discover how to anticipate trends by six to eight years, financial markets operate rationally, and mother nature cooperates year in and year out. In the meantime, the new grape scarcity should translate into busy times for California grape growers, anxious times for wineries, and interesting times for American wine consumers.
Santa Rosa-based Zepponi & Company is a leading global wine industry mergers and acquisitions advisory firm with expertise in strategic transaction analysis, valuations and creativity in structuring transactions. Mr. Ciatti is a principal in the company and Mr. Jennings is an associate www.zepponi.com.
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