North Coast growers, vintners look at strategies to combat shortage

'Someone turned the light on in January'; many want to plant

By Jeff Quackenbush May 21, 2012
North Bay Business Journal
Wine industry economics in California have changed dramatically in the last year - even since the beginning of this year - as more wine producers realize the marketplace for grapes and wine in bulk won't be large enough to keep pace with sales of finished wine. And the outlook for adding significant supply of major varietals in the state, particularly in the North Coast, will be challenging for the foreseeable future, according to experts at a major industry seminar last week in Napa.

Glenn Proctor of winegrape and wine brokerage Ciatti Co. and Rick Aldine of grape merchant and negociant Agajanian Vineyards told the audience of about 220 at the 17th annual Vineyard Economics Seminar on May 15 that two historically large winegrape crops constrained in size because of bad weather have sent the prices for red varieties cabernet sauvignon, pinot noir, zinfandel and even merlot, plus wine varieties chardonnay and sauvignon blanc, soaring in the past two years.

"It seems like someone turned the light on in January," said seminar founder David Freed of Silverado WineGrower and Silverado Premium Properties, which own more than 12,000 acres of California coastal vineyards.

Forty-five percent of the 84 respondents to the seminar's annual survey of vintners, growers and professionals in industry finance said they want to plant winegrapes this year, including 100 more acres in Mendocino County, 400 in Napa County, 570 in Sonoma County, 312 somewhere in the North Coast and 10,000 more acres statewide.

The premium wine boom of nearly two decades ago sent grape prices soaring as growers and wineries planted thousands of acres of vines. But today, planting more vines encounters serious challenges, mainly from a current lack of vine materials at nurseries, followed by the cost of materials then the time and cost of environmental regulation, according to survey respondents.

Regulation is the biggest single impediment to putting grapes in the ground, particularly in the California coastal regions, Mr. Freed said.

In 2009 and 2010, buyers of grapes and wine were selling excesses as they trimmed inventories, but in recent months the market as become the tightest its been in a decade, according to Mr. Proctor. Large-volume buyers are out looking for grape contracts and offering multiyear terms, and brand-builder vintners are becoming grape buyers because of limited bulk wine for sale.

"If demand continues to grow, we don't have the supply to back it up," Mr. Proctor said. The cost escalation is giving California competition from imported finished and bulk wine.

Summarizing Silicon Valley Bank's annual premium wine industry forecast, released last month, report author Rob McMillan told the seminar audience that a number of economic indicators point toward an improving economy and greater consumer spending, particularly on luxury goods.

Mr. McMillan disputed claims that the wine industry faces an immediate shortage of grapes and wine.

"We don't have a drastic shortage we're sitting on right now," said Mr. McMillan. "We're moving to a shortage."

In the near term, the relative dearth of significant new winegrapes coming into production statewide and especially the coastal regions will push grape and bulk-wine prices higher, he said.

When input costs are rising quickly along with bottle sales but passing higher costs to consumers is challenging because of increased competition and a sluggish economy, wineries must shore up supply in longer-term, flexible-pricing contracts to ease the impact on net revenue, according to seminar speaker Lise Asimont, director of grower relations for Francis Ford Coppola Winery in Sonoma County's Alexander Valley.

The winery's cost of goods sold for its brands have increased by a quarter to a half in the past two weather-constrained vintages, whiles bottle sales have increased 68 percent in the past five years. "Our competitors are raising their FOBs, but not 25 to 50 percent," she said about prices to wholesalers.

Vintners were able to raise FOBs during the wine sales boom in the latter half of the 1990s that also sent winegrape prices soaring, but the sluggish recovery of the U.S. economy together with many more wine options for consumers from private- and control-label brands in the past 15 years have made wholesalers more resistant to taking price increases, according to Ms. Asimont.

Through a number of sourcing strategies, Coppola has been able to limit the increase in costs of goods sold to just 13 percent so far this year, she said. The company has shifted sourcing more to vineyards along the California coast from bulk wine, signed grape-purchase contracts of three years or longer at pricing not solely tied to percentages above winegrowing district average pricing, strategically moved sourcing for a given brand when costs rise by more than 15 percent to 25 percent, extended grape contract terms at higher prices and recruited new long-term grape suppliers.

How quickly the supply crimp becomes a crunch depends on whether the 2012 crop is larger or smaller than relatively sizable harvests of the past few years, Mr. McMillan said.

"Consumers are not going to drink worse wine," he said.

Producers of brands made from ample, inexpensive wine for sale in bulk will have to change their tactics to keep store shelf prices stable amid rising costs, he noted. Makers of such brands will have to buy grapes or move the brand from domestic wine sources to international ones.

With a crunch on bulk cab for sale, buyers are hunting for California and imported bulk merlot as a blender or replacement red wine program anchor, particularly for negociant brands, according to Mr. Proctor. The variety plummeted in popularity after the one-liner from the 2004 movie Sideways, and growers across the state ripping out the vines or grafted to a more en vogue variety.

This year, asking prices for bulk merlot from Napa County range from $19 to $25 a gallon, a 38 percent to 46 percent increase from 2010, according to Ciatti figures. Statewide, bulk merlot prices have shot up even more dramatically, rising 63 percent to 69 percent.

"Merlot is back," Mr. Proctor said.