Napa Valley vineyard asset bubble ready to pop? Not so fast, says Rabobank analyst
Growing global interest in North Coast wines has uncorked fast price escalation for the vineyards they come from, particularly in Napa Valley, but forecasts about bursting asset bubbles and crashing vineyard values may be getting ahead of reality, according to a closely followed agribusiness analyst.
Vineyard valuations for prime Napa Valley acreage are topping $400,000 an acre, but this reflects prices being paid for its choicest fruit, said Stephen Rannekleiv, global beverages strategist for Rabobank, in a recent wine industry briefing. Similar price inflation also is being seen in other premium California winegrowing regions.
“There’s a declining availability of reasonably priced fruit and increasing number of tons being sold for $10,000, $15,000 and even $50,000 a ton,” Rannekleiv said. “Obviously, that’s having an impact on driving vineyard valuations.”
The weighted-average price per ton for Napa County winegrapes topped $4,600 last year, according to the U.S. Department of Agriculture’s California Grape Crush Report. The average price for the county’s top winegrape, cabernet sauvignon, last year was virtually $7,000 a ton.
A price per ton that would work into a valuation of $400,000 an acre would be a little over $10,000, based on production costs and the historical yield of roughly 3 tons an acre from top Napa Valley vines, Rannekleiv said.
“When you look at how many wineries are increasingly paying $10,000 a ton or more, if that’s the price you’re currently paying, then those numbers do pencil out,” he said.
And given inflation in Napa cab prices in the past few years, the county average for the varietal is on track to hit $10,000 a ton in seven years, he said. The Napa cab average climbed nearly 18 percent in the past five years, based on Business Journal analysis of the crush report figures.
Also reflected in the land valuations is visitation to Napa Valley and Sonoma County, Rannekleiv said.
“This is no longer just a U.S. phenomenon,” he said. “There is growing demand outside the U.S., the recognition that U.S.–North Coast wines in the eyes of wine enthusiasts worldwide is growing, and that reputation is becoming solidified.”
And while Napa Valley is the “posterchild” for grape and vineyard price inflation, similar increases are being seen in premium winegrowing areas in California, namely Sonoma County, said Charles Day, senior vice president and area manager of the North Coast Food & Agriculture group of Rabobank.
“Russian River pinot (noir) is a good example,” he said during the conference call. “We’ve seen vineyard values shoot up 30 percent in the last several years, and that’s what we see with pinot (grape) pricing.”
He said that what’s happening in these other premium areas, also including Sonoma County’s Alexander Valley for cab and certain parts of the Central Coast, is similar to what’s been going on in Napa Valley: strong direct-to-consumer sales and demand for high-end wines are pushing up prices generally. And there’s similar concern that these supplier-level price increases to lock in supply of the best fruit aren’t filtering down to the wholesale level and on to on-premise and off-premise pricing, Day said.
But there is some evidence a correction could be coming, Rannekleiv said.
A lot of the growth in demand for fine Napa wine is driven by highly profitable direct-to-consumer sales, he said. When the number of Napa cab consumer-direct sales from 2013 and 2016 are compared, the growth was about 120,000 cases, Rannekleiv said. That equates to 2,500 more tons of Napa cab grapes needed to make the additional wine sold in that channel, but there were far more additional tons of the fruit sold in that period than needed for the consumer-direct growth.