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Vine Notes

Charles Day (Charles.Day@rabobank.com) is senior vice president and area manager of the North Coast Wine & Agriculture group of Rabobank, N.A. The content, views and opinions in this article are based, in part, upon research produced by RaboResearch Food & Agribusiness, a unit of Rabobank Group. The information contained herein is intended for general educational purposes only and is not to be construed as legal, tax, or financial advice. Please consult with your own legal, tax or financial advisor for guidance with your own particular circumstances.

Vine Notes (nbbj.news/vinenotes) is a monthly column by Rabobank, Heffernan Insurance Brokers and Farella Braun + Martel.

After an unprecedented growth rate in California agricultural land values between 2010 and 2015, land prices have come down in many regions over the past two years. However, the North Coast is not one of them.

In this area known for its ability to produce premium wine, we expect to see continued growth, but likely at a slower pace.

According to a recent paper produced by RaboResearch senior analyst Roland Fumasi, the outlook for California land prices depends on the region, and even specific differences between properties within the region. Generally, land value appreciation is expected to slow but continue on the North Coast. The paper, “Imminent California legislation increases land valuation complexity… but Other Economic Factors Remain Relevant,” reports that the unweighted average value of Napa and Sonoma vineyard – and vineyard plantable – properties will increase by a modest rate of 2 percent in the 2018–2019 period, a significant cooling-off from recent years. The analysis considers potential impacts of the Sustainable Groundwater Management Act (SGMA), along with other factors like interest rates and crop prices.

RAPID GROWTH IN LAND AND GRAPE PRICES

Vineyard and prospective vineyard valuations have risen significantly in Napa and Sonoma counties over the past two years. The unweighted average change between 2015 and 2017 for both Napa and Sonoma combined was 12 percent, but this is only part of the story. The growth rate from 2010 to 2015 proved even more impressive at 29 percent. All in all, since 2010, property values have risen by an unweighted average of 35 percent in the two North Coast counties.

Fumasi’s RaboResearch paper offers further detail on the rapid rise in vineyard land values in particular. Between 2010 and 2017, the reported sales prices of certain types of North Coast properties rose much faster than others. While a 35 percent rise was the overall average during that time, prime plantable Napa ground and outlying vineyard average prices rose by about 70 percent, and Napa secondary plantable and secondary vineyard ground prices rose by roughly 50 percent. Further, the low-end of the prime Napa plantable acreage values rose even more than this; it doubled.

Land values have certainly followed wine grape prices. Napa and Sonoma red grape varietal prices have risen by 69 percent and 48 percent, respectively, since 2010. White grape varietal prices have risen by about 27 percent. The challenge is that wine prices have not kept up.

However, property buyers are looking forward, not backward. There is only one Napa and one Sonoma, and land is a limited resource. As demand for premium and ultrapremium wines continues to grow, investors recognize the longer-term potential.

SGMA’S IMPACT ON PRODUCTION

The Napa and Sonoma wine regions are heavily dependent on groundwater for irrigation. While final plans to comply with SGMA are still being written, it is likely that its implementation will lead to some degree of groundwater pumping restriction. In 2014, the California Department of Water Resources (DWR) issued its initial groundwater basin prioritization. In May of this year, DWR released a proposed update to basin priorities, which recommends that 14 basins be upgraded from low priority to either medium or high priority.

Four of these proposed upgrades would directly impact Napa and Sonoma counties, and DWR’s final decision on the revisions is expected to be released in October. These wine regions are as follows:

Vine Notes

Charles Day (Charles.Day@rabobank.com) is senior vice president and area manager of the North Coast Wine & Agriculture group of Rabobank, N.A. The content, views and opinions in this article are based, in part, upon research produced by RaboResearch Food & Agribusiness, a unit of Rabobank Group. The information contained herein is intended for general educational purposes only and is not to be construed as legal, tax, or financial advice. Please consult with your own legal, tax or financial advisor for guidance with your own particular circumstances.

Vine Notes (nbbj.news/vinenotes) is a monthly column by Rabobank, Heffernan Insurance Brokers and Farella Braun + Martel.

1. Alexander Valley, Alexander Area sub-basin in Sonoma County, which includes much of the Alexander Valley American Viticulture Area (AVA) and portions of the Chalk Hill AVA.

2. Santa Rosa Valley, Healdsburg Area sub-basin in Sonoma County, which includes portions of the Dry Creek Valley and Russian River Valley AVAs.

3. Wilson Grove Formation Highlands Basin in Sonoma County, which includes portions of the Green Valley, Russian River Valley, and Sonoma Coast AVAs.

4. Napa-Sonoma Valley, Napa-Sonoma Lowlands sub-basin in Napa County, which includes a portion of the Los Carneros AVA.

Many vineyard properties in this region were already likely to be impacted based on the initial 2014 basin prioritization. If the proposed revisions stand, SGMA’s impacts on the North Coast will broaden even further.

MAYBE THAT WINE CELLAR WAS A GOOD INVESTMENT

While SGMA implementation will likely put pressure on some profitability assumptions that are being made for land valuations, there is — perhaps — one silver lining. Fumasi reminds us that Napa and Sonoma-grown wine grapes are not a commodity. Certain standard economic assumptions that apply to commodity (undifferentiated) crops do not apply to wine grapes from Napa and Sonoma.

Increased scarcity raises value. These grapes cannot be replaced by products from other regions. AVAs matter. So, to the extent that SGMA implementation reduces planted acreage, wine and wine grapes from these areas will become even scarcer and more valuable.

But will the increased value be enough to offset lower production and increasing unit costs for growers and landowners? We just don’t know yet.