Sometimes the light's all shinin' on me
Other times I can barely see
Lately it occurs to me
What a long, strange trip it's been
The Grateful Dead, of course, must have been singing about the long, strange trip of the wine business. They were singing about hot markets and cold markets, about big crops and small crops, about rain and drought.
I was reminiscing about the strange wine business journey with a longtime grower client recently over lunch at Willi’s and he said something that surprised me. He said that the single most valuable thing I have done for him over the years was to expand his radar screen to help him detect potential problems before they bit his head off.
I argued, on the contrary, that the most important thing I had done for him was to identify opportunities not to point out potential problems. He agreed that opportunities are important but he made a good point about risk. The grape and wine business is full of risks of all kinds, coming from all angles. There’s Red Blotch and Pierce’s Disease. There’s botrytis and powdery mildew. There’s the wrong clone, the wrong site, the wrong trellis system, the wrong irrigation, the wrong frost protection and the wrong crop load. All kinds of viticultural decisions can go wrong.
And then there’s the whole complex challenge of marketing your grapes. There’s the wrong contract, the wrong market timing and the wrong customers. There’s the local, national and international competition. There are markets that go up when you think they are going to go down and go down when you’re expecting them to go up. There is a lot to go wrong. You’ve got to dodge the bullets first, my friend declared, before you can take advantage of opportunities.
What are some the bullets flying over our heads right now? The most important bullets are often individual to each grower or brand owner, but there also many that make life exciting for just about everyone. The business-wide bullets include the following:Drought. Of course, drought is more than just a single bullet; it’s a potential game changer. Drought worries us not only for 2014 but for future years as well. No one knows how long the drought will last or how big an impact it will have. And the impact can vary widely from one region to another and from one site to another.Frost. Warm days and dry soil stir vines to push early, increasing exposure to frost. Low water supplies limit frost protection. With some luck, we could dodge this bullet.Lots of wine in bulk. The wine business absorbed a big crop in 2012 but a second big harvest in 2013 has filled wineries to the brim (see the accompanying graph). This was looking like a potential problem for those with lots of excess inventory, but maybe this bulk wine will prove to be a good hedge against the effects of drought and frost in 2014 and beyond.Rising consumer demand. This is more of an opportunity than a threat but still it has risks for both growers and brand owners if they fail to play the market well.International competition. There are not huge quantities of good quality varietal wines around the world that are languishing without a market. Nevertheless, if prices should go up much in California, global supplies would shift from low priced markets and would quickly capture market share in the U.S.Wholesale consolidation. This is an opportunity for very large companies but a serious problem for medium and small producers.
What has the grape market been telling me, my grower friend wanted to know, about the state of the wine business? After the two large crops, there are decent amounts of Pinot Noir, Chardonnay, Merlot, and Zinfandel grapes available from most North Coast appellations. Cabernet Sauvignon, however, continues to be short. Buyers are "kicking tires" across the North Coast. But when it comes time to talk turkey about new deals, many growers kick the dusty ground and resist quoting a price. It would sure be nice to get some rain, they say.
Coffee after lunch was strategy time. With the major unknown of drought hanging over the wine business, this is a good time to hedge bets. As they say, no one ever went broke making money. Both buyers and sellers would probably be smart to spread their purchases and sales over several months as the market develops, as long as you can make deals that make financial sense. Don’t try to time the peak of the market. There are too many unknowns to be sure of a correct guess. Have patience and look for the right long term partners. And, on this long, strange trip, never forget the broker who expands your radar screen.
Brian Clements is a partner and vice president with Novato-based Turrentine Brokerage (turrentinebrokerage.com), a 40-year-old business-to-business marketer of winegrapes and wine in bulk and bottles.