Beginning around the end of the Great Recession, a conversation emerged in the wine industry concerning the supply of winegrapes, both here in California and internationally.

The temporary pause to the growth in wine demand created by the recession masked the lack of vineyard planting activity that had essentially plateaued since the last period of oversupply in the early 2000s. With the percentage of nonbearing acres hovering at an estimated 2 percent to 4 percent, below replacement levels, and vineyards being removed in the California's Central Valley and throughout the European Union, wineries became increasingly concerned with long-term supply as demand again began to grow.

Then came harvest 2012. And then there was harvest 2013. After several lackluster years, the total grape crush in California set a new record, totaling 4.018 million tons of winegrapes in 2012. Harvest 2013 eclipsed that tremendous harvest by 5 percent, totaling 4.231 million tons, according to the U.S. Department of Agriculture's preliminary Grape Crush Report, released Feb. 10. [See the Business Journal report on the crush report.]

Overall, the 2013 North Coast harvest continued the stunning back-to-back turnaround from the weak 2011 harvest.

Growers of pinot noir in District 3 (Sonoma and Marin counties), for example, delivered 28,400 tons in 2011, while 2012 and 2013 clocked in at 54,100 and 52,800 tons, respectively. Similarly, Napa County cabernet sauvignon tonnage jumped from only 50,800 in 2011 to 71,500 in 2012 and 65,800 in 2013.Dealing with all the wine

With the 2013 grapes rolling in and tank space still filled with 2012 and in short supply, wineries were faced with the logistical question of what to do with all those grapes. Now, that harvest is behind us, the question has become, what to do with all that wine. Many well-managed North Coast wineries deftly handled the downturn and held cased good inventories lean throughout the recession.

As demand returned, spotty shortages were revealed and sourcing became a prominent issue, particularly with a tight bulk-wine market all but removing that fallback inventory-management tool. The large 2012 harvest was a relief to inventory-starved wineries, and most immediately made plans to move up release dates and stretch the vintage cycle from the normal 12 months to 15 months or more. Faced with the second large harvest in a row, those plans are now being revisited.

An added complication to the planning process is the status of the international wine supply. Although the increasingly strong direct-to-consumer market is somewhat insulated from the ups and downs in the EU and New World competitors, the challenging wholesale market is not.Allocations amid global supply changes

Now that wineries are again sitting on healthy inventory levels, it is important to understand the prevailing global conditions and how those might impact a winery's effort to allocate inventories to various channels. Rabobank's recently released Wine Quarterly report prepared by the bank's Food & Agribusiness Research and Advisory Group summarized the outlook for international supply.Europe

Wine inventories in Europe have rebounded as both Italy and Spain revised 2012 production figures upward and experienced strong production in 2013, overall. Spain saw nearly 40 percent jump in production in 2013.

This is particularly remarkable given the effort throughout the EU to reduce overall vineyard acreage. Spain has reportedly removed 147,000 hectares (about 360,000 acres) of vineyard, yet improved vineyard efficiency is pushing per-hectare yields up. Argentina and Chile

After export volumes dropped due to a poor 2012 harvest, the 2013 harvest was good and exports, particularly bulk wine, have gained strength. Chile will likely see a reduced harvest because of frost, though this follows two bumper crops in 2012 and 2013.Australia and New Zealand

The Australian harvest is again being tested by severe heat, as it was in 2013. However, last year's conditions were expected to reduce the crop size, yet the continent reaped the largest harvest in five years.

New Zealand, albeit a relatively small producer, is expected to see a 2014 harvest that could rival its record 2013 vintage.California

Back in California, the strong back-to-back harvests are have led to a sizable jump in available bulk wine. According to Turrentine Brokerage, there is roughly 15 million gallons of California bulk wine on the market, compared with a low point of less than 5 million gallons immediately prior to harvest in 2012.Local impact

So, what are the implications of the regional and global supply picture for local wineries, many of which were hoping to raise prices to offset higher grape costs? Case sales volume continues to grow, and we expect industry revenue growth to improve, with the high-end strengthening even more.

However, there will be headwinds for wineries attempting to raise prices. The sheer volume of 2012 wine that is coming to the market will have a natural dampening effect on prices. Negociants are ramping up with access to cheaper, high-quality bulk wine, which will add to the competition in the wholesale channel.

Lastly, we expect importers to target the U.S. market with greater volume. Not only is it an attractive growing market, but also other markets remain weak. Wine exports to China, a notable buyer of high-end selections, slowed dramatically last year, as internal reforms crushed the market for expensive wines as gifts to government officials.

Rabobank remains bullish on the California wine industry and its long-term future. However, inventory management and sales planning with a view of macro industry conditions will be critical to an individual winery's success....

Charles Day is regional agribusiness manager for Rabobank, NA, serving the financial needs of the wine industry in Napa and Sonoma counties and elsewhere on the North Coast. Contact Mr. Day at 707-545-6887 or Charles.Day@rabobank.com.