At a wine industry event about 10 years ago, there was a lot of discussion about top Napa Valley vineyards setting new records, with some selling for as much as $300,000 an acre. There was a sense of awe in the audience. There were conversations in the days and weeks that followed, speculating that Napa vineyards values were getting overpriced. Those values seemed unsustainable.
For the next five or six years, though, those prices remained fairly solid. Even during the years of the Great Recession, high-end Napa vineyard values held fairly steady. Now they are on the rise again.
Similarly, prices for pinot noir vineyards in key Sonoma County appellations rose about 30 percent in the same time. That’s a pretty steep rise in a short period of time. The question on many people’s minds once again is have these prices risen too high, too fast? Have Napa vineyard values gotten ahead of fundamentals? We hear this discussion often, with plenty of opposing views.
Those who argue that the rapid rise in vineyard values is justified have plenty of evidence at their disposal. Demand for high-end wines continues to grow, particularly in the lucrative direct-to-consumer (DTC) channels. Sales of Napa Valley cabernet sauvignon in the DTC channel rose 38 percent from 2013 to 2016, with very healthy growth in average prices — and better gross margins.
The growth of wine sales is driven in part by wine tourism, which is also growing at very healthy rates. Perhaps more importantly, Napa’s fame is increasingly internationally. The share of foreign visitors to Napa more than doubled from 2012 to 2016. This bodes well for demand for Napa wines in the long term.
Likewise, Sonoma County has seen occupancy and room rates jump in recent years, as veteran visitors to places like Healdsburg could tell you.
Rising wine sales are also driving up grape prices, which in turn raise vineyard values. The average price for Napa Valley cab grapes has risen 65 percent over the past six years, according to the U.S. Department of Agriculture’s Grape Crush Report. The prospect of ongoing increases in winegrape prices could make it attractive for wineries to think about acquiring vineyards — even at relatively high prices — to protect themselves from ongoing input-cost increases.
But perhaps the strongest justification for the rising value of North Coast vineyards is more strategic than financial. As I’ve noted before, wineries have been acquiring independent vineyards in key North Coast appellations at a rapid pace to secure long-term supply. Since there is increasingly limited land available to plant additional vineyards of any meaningful scale, there will likely be fewer grapes available on the market in the future, as wineries will be using the fruit for their own brands.
While this trend has been evident over the past few years, E&J Gallo’s recent acquisition of Stagecoach Vineyards was a wakeup moment for many small wineries, creating greater concern around their ability to secure supply in the future. A number of wineries that have traditionally depended on independent vineyards like Stagecoach for grapes are rethinking their sourcing strategy. Many are looking to acquire vineyards in order to secure access to fruit in the future. This will help keep some upward pressure on vineyard values.
Charles Day (Charles.Day@rabobank.com) 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 produced by Rabobank Food & Agribusiness Research and Advisory (now known as RaboResearch Food & Agribusiness). 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 advisor for guidance with your own particular circumstances.
Vine Notes is a monthly column (see previous columns) by authors from Rabobank and Farella Braun + Martel.