Demand rises to finance alternatives to water as drought persists

Agriculture lenders are contemplating the effect of California's recent dry spell on the North Bay wine industry, with both near and long-term implications under consideration for vineyards and other agricultural ventures in the region and beyond.

Those lenders cautioned that many factors have yet to play out during the current growing season, and noted that a longer term, multi-year drought in California has still managed to support back-to-back banner grape harvests in 2012 and 2013.

Yet the challenges of what is shaping up to be a drier 2014 are starting to emerge, reflected in a heightened demand to finance the purchase or lease of wind machines as an alternative to water-based frost management and the longer-term desire to finance infrastructure for water storage, those lenders said.

"There have been a lot of people looking to buy and lease wind machines, because they have no water for frost protection," said Terry Lindley, chief marketing officer of Santa Rosa-based American AgCredit. "They are not cheap."

Those drawing on sources like the Russian River for sprinkler-type frost protection, where a light coating of ice protects vines from a deeper freeze, could see their access limited during a drought. That possibility has prompted growers to pursue other avenues for protecting their vines in the winter, along with those relying on reservoirs that recharge through runoff from regular rainfall.

Growers can pay up to $30,000 to buy and $7,500 for a three-month lease of a wind machine, which helps circulate warmer air above a vineyard with the cooler air at ground level as an alternative to sprinklers, Mr. Lindley said. The machines are not suitable for all topographies, but offer the advantage of operating without the need for water.

He pointed to the recent demand as a barometer for drought concerns, and described how early budding can contribute to mounting costs in a warm, dry year.

"A weaker harvest is not just weaker due to yield, but requires more cost to produce," said Adam Beak, head of Bank of the West's premium wine group. "Ultimately, you have more expensive wines."

Yet those costs pale in comparison to the price of constructing a new reservoir, an extensive process of environmental review yet one that more growers are looking to explore as a hedge against drought, Mr. Lindley said.

"There are so many growers out there who rely on these reservoirs," he said, adding that large storage tanks are also in demand.

Despite those looming concerns, lenders noted that many grape growers are entering 2014 with better cash reserves. Coupled with a widespread push to beef up crop insurance coverage, it puts many in a good position to weather a year of potentially lower yields and higher production costs.

"We've had two really strong back-to-back years, so most of our growers are in a very strong position," said Charles Day, who heads the agriculture lending group for Rabobank in the North Bay.

Mr. Day joined others in acknowledging the boost that recent rainfall has had for river flows and vineyard reservoirs, but noted that those supplies are still too low to dispel fears of drought. The situation is even more magnified on California's Central Coast, which has so far received even less rain than the North Bay, he said.

He echoed the observation of increased demand for wind machines, and noted that the machines themselves have become in short supply.

An ongoing question, one that those lenders said is too early to determine, is whether or not the recent drought conditions are indicative of a larger climate trend. Yet whether or not the past few years of mercurial weather are a shape of things to come, the same concerns remain.

"The guys who have access to water, who are better capitalized and put some money aside during the good years, they will fare better," Mr. Beak said.

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