The North Coast wine industry took notice when it was recently announced that E. & J. Gallo will buy the Stagecoach Vineyard in the Atlas Peak American Viticultural Area of Napa Valley.
Although terms of the deal haven’t been disclosed, the sale highlights two trends in the wine industry: the movement toward “premiumization” (covered before in this column) and an increasingly tight market for grapes destined for higher-end wines.
Known for its cabernet sauvignon and Bordeaux varietals on the eastern hillside of the valley, Stagecoach is a large vineyard holding by Napa standards. Its acquisition signals a continued march toward higher price points among large beverage companies, as well the larger trend of vineyards moving out of the hands of independent growers into those of larger wine companies.
As larger wineries move to lock in grape sources for future growth through these types of acquisitions, it may become harder for smaller, virtual brands without the capital to own or lease vineyards to access the fruit they will need for compete in the same space.
RaboResearch Food & Agribusiness’ recent Wine Quarterly report (January 2017) explores these and other trends that may pose challenges for wine companies that have a limited investment in vineyard holdings and production facilities. The “asset-light” model these wineries deploy has some distinct advantages. First, without the significant amount of capital normally dedicated to vineyards and production facilities, the data in the Wine Quarterly report shows that the return on assets tends to be higher for asset-light companies. Second, asset-light companies that aren’t wedded to specific vineyard properties can be more flexible in shifting product offerings with changing consumer tastes and preferences.
In a world of excess supply, the asset-light model can take full advantage of low-priced grapes and bulk wine, and reduce the cost of goods. However, global inventories of wine are generally trending down, which could imperil that cost advantage as markets rebalance and prices rise.
But not all asset-light models are created equal, as the report suggests. There are still pockets of excess supply, both in domestic markets, like the Central Valley, and internationally. Grape markets in places like Chile are currently balanced, but this is likely more due to recent poor harvests. In a structural sense, Chile likely still has production capacity in excess of demand. Wineries that have a flexible sourcing model may be able to take advantage of the areas of excess supply that may continue to exist for some time.
Here on the North Coast, prices keep rising. Our 2016 grape harvest was generally very good in both quality and quantity. Despite the stronger harvest, grape prices kept advancing, and even bulk wine prices stayed fairly strong. The Wine Quarterly reports that the average price per ton for Napa cabernet sauvignon climbed from $4,453 per ton in 2010 to $6,288 per ton in 2015.
Further, once the California Grape Crush Report was finalized in March 2016, we saw that the average price had risen to $6,828 per ton for the year. If this trend remains, production costs will continue to rise, and producers without their own controlled sources could become the most vulnerable, particularly those that rely heavily on the spot market.
Historically, agriculture often tends to swing from shortage to excess, with periods of excess usually lasting longer than periods of shortage. Steady increases in prices like the ones we’ve seen recently for North Coast grapes drive vineyard plantings, and that production isn’t easily adjusted once online. However, with the lack of new vineyard acreage being added during this cycle, North Coast wine producers should consider not pegging their hopes on a quick return to excess supply.
Charles Day (email) is senior vice president and area manager of the North Coast Food & Agriculture group of Rabobank, N.A.
The content, views and opinions in this article are based upon research documents “California Agricultural Land Values Outlook 2016: Back to Reality” and “Wine Quarterly Q4 2016,” produced by Rabobank Food & Agribusiness Research and Advisory. The information contained herein is intended for general educational purposes only and is not to be construed as legal, tax or financial advice. Please consult with your own legal, tax or financial adviser for guidance with your own particular circumstances.
Vine Notes is a monthly column (see previous columns) by authors from Rabobank and Farella Braun + Martel.
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