For those wanting to know how much their wineries and vineyard are worth, Tony Correia has been a go-to expert, particularly in the North Coast, for three decades.
An accredited rural appraiser, he specializes in valuations of large, complex agricultural properties, particularly wineries and vineyards, plus undivided partial interests and water rights. Mr. Correia is set to be a panelist at the Business Journal‘s Impact Napa: Wine conference Thursday in Napa.
He led the Fresno-based appraisal firm Correia-Xavier for 16 years, selling his interest to Stan Xavier in 2008 but remaining on as a Sonoma-based independent contractor.
In recent years, Mr. Correia has been doing less traditional appraisal and more valuation assessments for tax and litigation purposes. With more public attention to the IRS view on American Viticultural Area value as an intangible asset under Section 197 of the Internal Revenue Code, he’s been doing a number of AVA valuations.
“The concept of the value of an AVA is solid and valid,” he said, pointing to the long recognition in the Old World that viticultural place names have value. He notes that $5,000-a-ton pricing for certain Napa Valley cabernet sauvignon points to that place value.
This work has grown out of years of his comparing the economics of grapegrowing in different regions based on metrics such as bottle, grape and land prices.
Mr. Correia talked with the Business Journal about recent transactions and the influence of global farm land investment and looming shortage of North Coast winegrape and Napa Valley vineyard land.
What is happening in vineyard and winery real estate?
There is an increased level of activity, especially in the last 12 to 18 months. Quite a few more vineyards, wineries and vineyard estates have been sold.
We’ve certainly seen a change in the types of buyers who have come into Napa Valley, compared to what we’ve seen in the last several years.
There’s the perception of a coming grape shortage. But it is not coming this year, because it looks like a good crop. The metrics there look like it’s going to be coming in about average-sized.
Replanting is part of the bigger grape-shortage picture. The last big replanting was in the late 1980s and early 1990s with replanting after phylloxera. [A vineyard blight of that aphid-like insect led to the replanting of about 12,000 acres of vines in Sonoma and Napa counties by 1995, according to the University of California.]
What we’re seeing in these replants in the last several years is that, given pricing structure for grapes in Napa Valley, there is strong movement to more acres being replanted as cabernet sauvignon. A lot chardonnay is coming out and being put in as cab or some for other Bordeaux varieties like sauvignon blanc. There is not much expansion of vineyard acres, because there is not a lot more land that can be planted on.
How are agricultural property values an economic bellwether?
The longer perspective is that in the last several years we have seen a dramatic increase of interest on a global scale for acquisition of agricultural and farm land. A lot of funds are buying farm land in Brazil, the U.S., parts of Africa and the Ukraine. There is something called the “demographic dividend,” in that there is not that much good, productive farmland out there, and we have to feed people.
There is a perception that farm land will be one of best investments to be had. In the wake of the financial crisis, the yields of the stock and bond market have people looking to hard assets, and farm land has traditionally been one of choice.
In the U.S., there has been a strong increase in property value on farm land. There have been huge increases in value in the Central Valley for high-value production agriculture.
The sexiest farmland one can own is wine land, and sexiest place to be is in Napa Valley. We are seeing lots of international buyers for vineyards.
Buying of vineyard estate property, commercial vineyards and winery properties is a good thing. Property taxes will be going up, and the new owners will be spending more money locally. It’s a strong indicator of economic activity.
From a grower perspective, they are having pretty good years. 2012 was the best they have ever seen, with grape prices high and production high. And it’s looking like 2013 will be very strong, and growers will be making money. It’s the old story that when a farmer has a good year, he buys wife new Cadillac, then the Cadillac dealer buys a house. It trickles through the economy.
We have not seen an increase in values in Napa Valley per se. I’m talking about the ag economy in general. Corn ground in Iowa has gone from $3,000 an acre to $15,000 an acre. In the central valley, farm land value has risen from $7,000 to $15,000 acre. In Napa Valley, we have not seen strong increases in value, but there have been a lot more transactions.
The history of Napa Valley vineyard value is of plateau and short periods of small increase. I think we have plateaued for while. And if the trend continues with increased demand, then there will be pressures on values.
Statistics might show an increase in Napa Valley values, because during the darkest years of 2009 and 2010, there were owners who were squeezed and had to sell. So what we have seen in sales are not the best indicators of market value. There are still some folks who might be overleveraged, but for the most part distressed sales have gone away. The nature of transactions is changing. People are buying because people want to sell.
What is most affecting ag property values these days?
These are global trends. Most growers are making more money today with strong grape yields and strong prices. Typically, we do not see prices rise with production levels high. Often, that means there will be a little dip in pricing with an increase in supply.
Depending on the size of this crop, growers may not be able to sell excess tonnage at premium prices, but they may be able to sell contracted tons at a lower price.
The inventory of available properties is slowly being chewed up. In 2009 and 2010, there were a lot of properties on the market and owners were going begging for buyers. As inventory dwindles, we will see upward pressure on prices.
What’s at top of mind for Napa Valley wine businesses?
One of the big topics in California is water. So far, it has not become an overwhelming issue in Napa as has in certain parts state with the big state and federal water systems. Some areas are seeing dramatic declines in water levels, like near Paso Robles.
The declines in that area have come at a time of dramatic expansion of processing capacity in the Lodi area, where growers produce quality grapes in a lot of varieties at higher yields. Several North Coast producers have set up modern processing facilities there to produce greater wine volume more cost-effectively. The aquifers in that area don’t recharge rapidly
Napa is not immune, but it has pretty good average rainfall. We’re not dependent on snowmelt in the Sierra. In most areas, groundwater is pretty good. Some areas are pretty touchy and have been that way for years. That needs to be monitored carefully to avoid overdrafting of aquifers.
Cities create huge volumes of wastewater. Once it goes through a three-stage treatment, it can be used to irrigate and replenish ground water in areas with saltwater intrusion like near Salinas at the mouth of Monterey Valley and in Los Carneros [between southern Napa and Sonoma counties].
Another issue that comes up is how long we’ll be able to sustain increasing grape prices, like cabernet sauvignon selling for over $5,000 ton. I’ve been hearing from some wineries that they might not be able to maintain profitability if grape prices creep up much more. There might be a plateau in grape prices. How many $100 bottles of Napa cab can a market sustain? It’s difficult to make a bottle of wine for $25 if you’re paying $5,000 for the grapes.
The concept of the 75 percent requirement for crushing Napa gapes is getting attention. [Law requires at least 75 percent of grapes to come from the appellation on the label, but many wineries use a higher percentage.] The issue is processing capacity. Up and down the coast, we’re reaching processing capacity.
This year and last year are proving we can carry heavier yields on vines. For many years, winemakers had been demanding growers limit yields to three to five tons an acre, based on the theory that one avenue to higher quality is lower yields. But as the grape shortage has emerged, wineries have allowed growers to carry more fruit on the vine without loss in quality.
We have learned a lot about growing grapes in the past 15 to 20 years. The modern style of vineyards has trellis configuration, vine spacing and row orientation, canopy management, etc. can produce a few more tons and still maintain the same level of quality.
This means Napa Valley can produce more grapes. If we can produce more grapes, do we have the physical ability to crush more grapes, and can wineries afford to pay Napa Valley prices for that amount of grapes? Supply and demand are always in balance; the pivot point is price.
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