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Wine industry lenders are keeping an eye on the likely sizable 2018 North Coast wine grape crop and smoldering concerns about wildfire smoke in wine.

Some vintners have been turning down opportunities to buy fruit beyond the volume specified by contract, lenders and growers said. The haul last year from North Coast vineyards was 467,000 tons, 1 percent below the decade-long average and almost 8 percent under the five-year average. But the 2018 crop for key North Coast varieties such as Napa Valley cabernet sauvignon and Sonoma County pinot noir is shaping up to be sizable. The first official tally will come in early February.

“For most of our growers, all their contracted fruit was paid at the contracted price,” said Charles Day, North Coast manager for Rabobank’s wine business. “For uncontracted fruit, prices paid by wineries were all over the map. They ranged from the contract price to steep discounts that, in some cases, barely covered harvest costs. There probably will be a few deals with processors to crush on spec. Clients of ours who are negociants and rely on bulk wine will be pretty happy with this year.”

For the past few years, bulk-wine prices have been rising as the supply dwindled, squeezing margins for negociants. But with the potential for more fine wine becoming available on the bulk market, prices are likely to come down, helping these virtual vintners but also potentially calling for adjustments in the percentages that lenders advance to negociants based on bulk-wine value, Day said.

The North Coast had two massive waves of wildfires in the past 12 months, with October 2017 blazes coming at the tail end of harvest and Mendocino Complex Fires this past summer igniting wildlands of Lake and Mendocino counties.

There have been grower reports that thousands of tons of grapes in Lake County were rejected over vintner concerns about “smoke taint.” That’s the term for resulting wine deemed “off” because of smoky smell and taste characteristics.

“It was my experience in past year that the wineries that wanted to find way to work around their relationship found ways to do that, whether that means taking the fruit and both parties being on the hook,” said Rob McMillan, founder of Silicon Valley Bank’s Napa-based Premium Wine Division.

Such business bonds were especially important during and after the massive October 2017 wildfires in the North Bay, Day said. Though almost all the grapes had been harvested, some of the fruit still on the vine was among the region’s most valuable, particularly high-end cabernet sauvignon grapes in Napa County hillside vineyards.

“For those wineries, it was very important for their programs, so in most cases we saw they made an effort to bring all that fruit in and honored the contracts,” Day said. “They crossed their fingers that smoke taint wasn’t going to become an issue later on. The long-term maintenance of (those relationships) was most important to them.”

While any extra costs for testing the received wine and treating suspect portions of it for smoke taint isn’t specifically spelled out in borrower agreements, a common vintner tactic has been to hold back a certain amount of the grape-purchase price until the full cost of such measures is known, Day said.

“As long as those payments are still outstanding, we (as lenders) typically will adjust for that,” he said.

But such a holdback runs up against the producer’s lien obligation to pay the full value, as determined at the time of delivery. And then there’s the additional wrinkle of the 1976 Clare Berryhill Grape Crush Report Act. The same California law that provides the wine industry with a critical snapshot of a grape tonnage and pricing in the annual crush report, and calls for paying growers within 30 days of delivery unless otherwise spelled out by contract, also requires grape-purchase pricing to be locked in by Jan. 10 after harvest.

Such holdbacks may sometimes also play into how growers structure their finances — to a point.

“If the grower is looking to push some of the income into the following year, the income is split into a December and January structure, but most payments are done by then,” Day said. “Occasionally, wineries run into a cash-flow pinch, and they’re carrying grower payables past February and well into the year. It does affect their borrowing relationship because of the statutory lien that supersedes what we have in our loan documents.”

California law grants growers automatic producer’s liens on wine made from delivered grapes, and those liens have priority for payment over other secured interests such as loans, according to law firm Dickenson Peatman & Fogarty. But it can take months to enforce such liens if the grower doesn’t get paid, and foreclosing on those liens can leave a grower that doesn’t need winemaking licenses with the task of finding a licensed agent such as a broker or vintner to take on the wine until it’s sold in bulk or bottles.

“But as long as the winery has a good relationship with the grower, it’s often not a problem,” Day said about carried grower payables.

One aspect of the science of smoke taint that is increasingly accepted is fermentation releases challenging sugar-bound chemical compounds over time. Potential taint from the Mendocino Complex Fires this summer could be better known by this coming Jan. 10, but the situation after the October 2017 wildfires was barely determined by the January 2018 pricing deadline.

Jeff Quackenbush covers wine, construction and real estate. Contact him at jquackenbush@busjrnl.com or 707-521-4256.