Vine Notes: Harvest 2015 and long-term supply balance

Grape growers have a saying, “Light harvests get lighter.” As we move into the 2015 harvest on the North Coast, it seems clear that we’re looking at a lighter crop than the last few years and, if the old adage holds true, it could be much lighter in certain varietals.

Despite promising bunch counts earlier in the season, actual cluster weights for pinot and cabernet sauvignon appear likely to be down, due to a combination of factors from shatter to tired vines. Nevertheless, after three robust years, even a “normal’ sized crop will look small.

While year-to-year variations are part of life for growers, trying to assess long-term supply and demand balance by matching harvest volumes with growth in end demand can be very challenging. In Rabobank’s latest wine industry note “Too Much of a Good Thing?” the research highlights this challenge by comparing regions in California, the demand for wine produced from those regions and their respective supply conditions. The report reveals a stark contrast between supply conditions in the Central Valley and areas that produce higher-value wines.

The Rabobank report estimates that as much as 40,000 acres will have to be removed to balance the excess supply with demand for winegrapes from the Central Valley. This is in addition to the approximately 20,000 acres that have already been removed following the 2014 harvest. The conditions are brought about by a sharp reduction in demand for wines priced below $10. Consumer preference is trending toward higher priced wines and the strong value of the dollar against foreign currencies has aided imports, which tend to primarily compete in the lower priced segment.

NORTH COAST DEMAND HIGHER

The situation on the North Coast could not look more removed from that of the Central Valley. Demand continues to build in wines above $10 and when you dig deeper into the growth of wines between $10 and $25, percentage growth in volume and price is remarkable. From 2012 to 2014, consumption of wines between $10 and $25 have grown by roughly 8 million cases and is expected to continue growing in the mid-single-digit range annually. At that rate of expansion, the category could grow by another 13 million cases of annual consumption by 2017, which strongly benefits wines from the North Coast. At higher priced points, where a larger proportion of wines from Napa and Sonoma are sold, growth has been trending in the double-digits. Wines above $20 grew by more than 17 percent in 2014, according to Nielsen data.

At the luxury tier for wines over $25, demand growth is very solid, driven by higher off-premise sales but also flourishing demand at the direct-to-consumer (DTC) level, aided by the booming wine tourism sector. From the available data, it appears that DTC shipments for Napa wineries grew 14.6 percent and average prices increased by 8 percent. This upper tier is also projected to continue growing, up approximately 10 percent per year through 2017.

While growth for high-end wine has been strong and consistent, sales of finished cased goods, in most cases, have still not kept up with the rapid inventory buildup from the successive large harvests of 2012–2014. Beginning earlier this year, we witnessed a pause in the bulk market that was sending conflicting signals about the supply situation. Although bulk Napa cabernet has continued to sell briskly, despite the heavy volume, most other varietals fell back. As wineries worked to manage inventory and tank space, the bulk market was behaving as if the wine market was getting weaker, instead of continuing its steady upward climb. Contracting for tonnage of some varietals also softened a bit, though not to the extent of the bulk market slowdown.

LONGER-TERM SHORTAGE

Now it seems likely that the lighter harvest will adjust conditions quickly and we will again be able to clearly see a longer-term shortage developing for North Coast winegrapes. There were proportionally fewer new vine acres added in Napa and Sonoma counties in the last 10 years.

Now that demand has returned to a level that would normally drive new plantings, it is unlikely supply can be added at a rate that will satisfy the growing demand. The constraints on new planting, from water availability to political opposition, will not allow the kind of expansion we witnessed in the late 1990s.

Grape pricing may ultimately be the factor that limits demand. The prices for vineyards on the North Coast have been soaring, and operating costs are constantly increasing, even rising during the downturn. As higher costs are passed along, wineries will be forced to move grapes from North Coast vineyards to their upper-tier and look elsewhere, to the extent possible, to source for mid-priced wines.

In the end, however, the options for North Coast wineries to source fruit outside the area or even change appellations are very limited. Demand, coupled with production constraints, will squeeze future supply.

Charles Day (Charles.Day@rabobank.com) is senior vice president and area manager of the North Coast Food & Agriculture group of Rabobank, N.A.