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After three consecutive years with early and late rains and hard frosts in some areas negatively impacting winegrape production, growers and wineries in the North Bay and coastal regions of California cling to hope for sustainable yields and better returns in 2012 and beyond.

This was the consensus expressed by Nick Frey, president of the Sonoma County Winegrape Commission, and one of two key presenters at the 2011/2012 Annual State of the Wine Industry Financial Roundtable held Dec. 8. The annual event, sponsored by Moss Adams LLP, attracted more than 120 attendees to the Napa Valley Marriott Hotel eager to see light at the end of the tunnel.

“The key question is will 2012 see a return to normal growing conditions, with sufficient daylight and less cloudy, cold and wet weather that severely limited bud fruitfulness and cluster count in the spring of 2011 and 2010,” Mr. Frey said. “The cold was a major contributor preventing vine flower fertilization.”

Spring conditions this year impacted grape yield potential due to the low temperatures and rain on June 4 and 28. Virtually all varieties had reduced set – the ability of grape vines to be fertilized to produce seeds and berries after blooming.

Sauvignon blanc grapes were affected the most, but cabernet, chardonnay and pinot noir varietals were also down in Sonoma County.

Yields were also lower in Napa and Mendocino Counties, but Lake County reported having a good crop and the Central Valley was minimally affected. In Lodi, crop yields were off, but prices were strong.

“Summer was as cool in Sonoma County as it was in 2010, but there were no heat spikes as we experienced in 2010. The harvest was delayed two to three weeks and October rains further reduced yields,” he said.

An aggressive program to reduce the threat of Botrytis bunch rot was initiated by many growers. Nevertheless, Alexander Valley grape growers were especially hard hit by this fungus that grows in ripening fruit.

The latest tonnage estimate of grapes harvested in Sonoma County this season is 160,000 tons, down 20 percent from the five year average and roughly comparable to results for 2003.

Grape sales are forecast at $325 million, off by $130 million from 2009. Average price per ton in Sonoma in 2010 was $2,033, second only to Napa County. Mr. Frey expects average prices to rebound from lows in 2011.

Final year-end totals will be published on Feb. 10, 2012 in the yearly Crush Report.

According to Mr. Frey, the good news is that grape buyers have returned to the market.

“Early in the season people thought they could buy grapes at the same prices as last year, but prices increased through the harvest by as much as several hundred dollars per ton.”

Mr. Frey said that buying for 2012 has already begun. “Prices had to go up, since -- until recently -- growers were selling in the spot market at a loss.” 

Other positive signs include the likelihood that acreage quarantined due to European Grapevine Moth infestations may be reduced, and the fact that wine sales continue to grow.

On-premise sales over $20 per bottle have been the fastest growing segment of the market for two years.

Another factor limiting total yield is that there are few nonbearing acres available to increase grape supply.  Today in Sonoma County some 59,660 acres are devoted to viticulture, down by 3,000 acres from the peak. Reduced acreage leads to a short supply indicating that grape prices should continue to strengthen.

 “There are two key market drivers in Sonoma County. People who traded down saw buyers purchasing $30 bottles of wine for $20, increasing demand, but lowering revenue. Second, the effects of the recession appear to be wearing off, meaning that more people are willing to buy and invest in wine,” he said.

 “In Sonoma County, conjunctive labeling and a widespread commitment to proactive marketing are enabling us to create a strong brand for our region’s wines year over year leading to increased demand and sales,” Mr. Frey said.

In addition to rain and cool temperatures, a brutal April frost on California’s Central Coast  -- plus high humidity after a storm in October in the North Coast -- reduced yields in these areas, according to Doug Walker, COO and partner with Plata Wine Partners, LLC. PWP is the winemaking arm of Silverado Premium Properties, a firm that owns 50 vineyards with over 12,000 acres from Napa to Santa Barbara.

Collectively, these adverse conditions contributed to higher farming and winemaking costs with less supply across all varietals.

“In the Central Coast frost protection systems were not in place, since these regions were not previously impacted,” Mr. Walker said.

“There is an upside to all this. We are seeing high quality fruit with good flavors and concentration, but with lower sugar levels and lower alcohol out of the Central Coast.”

Throughout California, bearing wine grape acreage has declined by some 100,000 acres and non-bearing acreage today is lower than replacement requirements.

  “Vineyards have been pulled out in the Central Valley and coastal areas further limiting supply,” he said. “And with a weak U.S. dollar, there are fewer competitive imports to balance the 2011 vintage shortage.”

 Statewide, the official forecast is that supply will be down from 2010 by 9 percent this year, which Mr. Walker believes could be a low estimate. 

On the demand side, while growth has slowed, it did not stop during the recession and is starting to accelerate.

Gomberg Fredrikson & Associates reports that, through September 2011, it sees a 7 percent gain.  Symphony IRI Group sees a similar seven percent gain through October. Others envision a more sustainable three to 3.5 percent growth rate going forward.

The recession has shifted consumer preferences, according to Mr. Walker. “Now there is greater emphasis on value evidenced by high growth brands, such as Barefoot, Mènage á Trois, Cupcake, etc., along with the advent of new concepts presented by Moscato, Sweet Red and Chocolate infused wines.”

He sees wine consumption being redefined by younger, “millennial” consumers, ages 21 to 34, that will make up 40 percent of Americans 21 and older over the next 10 years, as well as by Boomers who are living longer, healthier lives and enjoying wines, such as Pinot Noir.

While this demographic shift is important, Mr. Walker said U.S. per capita consumption of wine is still very low, at about 50th place in worldwide rankings.

“Demand is ok at the high end and in the middle, but overall consumers are resetting their expectations and buying  wines in the $10 to $15 dollar range. I think there will be fewer bargains for consumers six to nine months from now due to supply shortfalls.”

Despite the adverse impact on 2011’s crop load, he says an even larger crop would not provide enough supply.

In the short term, bulk inventories are very low, supply is tight and prices have increased. Cabernet nursery stock, for example, is not available for new plantings.

“While wine supply is currently at an 11 year low, I expect that growth will continue, particularly in the popular price points, given the new demographics and coupled with the prospects for an improved economy. All of these factors point to a solid future for the California wine industry,” Mr. Walker said.   

Moss Adams LLP has been sponsoring quarterly Wine Industry Financial Roundtables and the annual State of the Industry forum since 2003.