2012 Vineyard Economics Symposium

Published on May 17, 2012

Reported by Nick Frey 

Optimism dominated the Vineyard Economics Symposium in Napa this week. Their annual survey of growers, wineries and bankers reported the most dramatic changes in the last few months (Survey was completed in February) included Grape Prices Going Up; Demand for Grapes Is High, and Wineries Signing More Long-term Contracts. Another trend is for more growers to be producing bulk wine or supplying wine for private label products. Needless to say growers were smiling and wineries were wondering how they would deal with their increased cost of goods. Even so, 71% project positive growth for CA wines in 2012 and 89% project positive growth in 2013.

There are some concerns among growers, including lack of vineyard planting materials, increasing regulations, and the cost of materials. And while most feel improvements in the economy will support increased sales, concerns remain about the health of the economy. Recent signs of consumers “trading up” with their wine purchases added to the optimism for North Coast growers and wineries. Interestingly, 87% of growers think wineries will raise prices in 2012, while only 50% of wineries indicated they plan to raise prices. A bit of a disconnect that may make grape price negotiations more difficult than growers expect.
Glenn Proctor, Ciatti Company, reported this is the tightest overall grape and bulk wine market in a decade. International markets have also tightened. There is no relief expected in domestic supplies as non-bearing acres are below replacement and very little bulk wine exists. Those wineries that have locked in supplies with longer term contracts will have an advantage in the coming years.
Grape spot market prices have increased 10-50% and there are more contracts of 3 to 5years or more being offered. Some wineries are renegotiating contracts, increasing prices and extending terms. Proctor advised growers to watch return/acre for contract options. A higher price but with yield or brix limits may not provide the best return.
Sonoma County Chardonnay bulk wine is selling at $14-28/gal, up from $10-15 in 2010. Cabernet Sauvignon is $23-28/gal; Merlot $14-18/gal; Pinot Noir $27-31/gal and Zinfandel $18-25/gal. Negotiants who relied on bulk wine supplies are not entering multiyear contracts for bulk wine and some are contracting for grapes.
Price increases are occurring around the world. Neverthless, some wine brands are now sourcing wines from foreign countries, i.e. converting a CA brand to an imported brand. Should the dollar strengthen against the Euro or Australian dollar, this trend is likely to increase.
Rick Aldine, Agajanian Vineyards reported Sonoma County Chardonnay spot market prices of $1500-1850/ton; Zinfandel at $2300-2650/ton; and Pinot Noir at $3200-4000/ton. Lake County Sauvignon Blanc is selling at $1000-1300/ton.
Lise Asimont, Francis Ford Coppola Winery, reported wholesalers are resisting increases in FOB prices. This is forcing them to reduce reliance on bulk wine and purchase more grapes. They are also offering longer term contracts that have a flexible pricing mechanism for the outer years. In some cases they are looking at new AVA sources that have historically been “undervalued”.
Rob McMillan, Silicon Value Bank, discussed the global economy and implications for the CA fine wine sector. The weakening of the Euro relative to the dollar will impact imports and therefore domestic grape or wine demand. CA wineries are having margins squeezed due to the slow economic recovery and increasing cost of goods sold. Grapes, glass and packaging are all increasing in price.
It is good to see renewed optimism among grape growers, especially Sonoma County growers. However I have concerns about the amount of exuberance among growers. Uncertainties about imports market gains, the US economy and the value of the US dollar relative to other currencies, and the ability of wineries to increase wine prices to retain margins all can impact our grape market demand. This is clearly a time  for growers to position for the future, seeking solid winery partners when contracting unsold fruit. It is also time to work with wineries with whom you are contracted. There may be opportunities to renegotiate both price and term. I spoke to one winemaker who indicated that long-term growers have asked for price increases he could not support and they switched to a higher bidder. But high price is not the only consideration. What is the financial health of the new winery? Are there yield limits or increased farming costs? Are there high Brix minimums that both lower tonnage harvested and increase the risk of not meeting contract minimums.
Understandably, growers who have suffered through 3 difficult years are anxious to take advantage of this new market demand. But it is a long-term business and relationships remain an important part of the business. While tempting to “get as much as you can,” it is important to not burn bridges with good winery partners. You may need them in the future.