Are Napa, Sonoma vineyards getting too pricey?

Charles Day, head of the agricultural lending group, Rabobank, NA

CHARLES DAY,

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.

But those who question the sustainability of current vineyard pricing also raise some valid points. While the rise in vineyard pricing may be understandable, given the meteoric rise in grape prices, some would argue that grape-pricing itself may have gotten a bit overheated.

Increases in prices for Napa cab grapes seem to be outpacing the increase in pricing for Napa cab wines. This could make sense if vineyard production was decreasing, but production of Napa cab has actually been increasing in recent years as wineries have replanted vineyards and grafted existing vineyards over to Cab from other varietals.

Perhaps, an even bigger concern is that lofty prices may indeed be justified for top-quality vineyards, but these high prices are increasingly being applied to less-than-stellar vineyards. Are those vineyard prices really justified to produce more standard-quality fruit?

Whether or not North Coast vineyard values are getting a bit overheated is a hot topic of conversation in many circles, with strong evidence on both sides of the argument. We’ll have more to share this issue with clients via a webinar in July. In the meantime, we’ll continue to monitor the situation closely.