August 5, 2013
There’s a grape shortage developing in the U.S., warns Citi’s Gino Rossi and Craig Woolford.
And the roots of this problem originate twenty years ago.
“An excess of US vineyard plantings in the 1990s resulted in surplus wine grape supply through the 2000s,” noted Rossi and Woolford. “The excess supply of grapes over the last decade and Californian farmers’ ability to switch to other crops has meant new plantings of vine in California have been low.”
But now the supply-demand dynamics are reversing.
“Strong consumption growth in the US has meant that demand has eventually caught up to supply and the small harvest in 2011 caused many industry participants to panic,” they add. “This sent grape prices higher, indicative of how nervous the industry is about a growing grape shortage.”
“On our estimates current vineyard plantings are insufficient to meet future demand for domestic wine.”
For now, this is a big win for foreign wine producers who are increasingly able to compete on price.
Unfortunately, this problem can’t be fixed overnight.
“If growers planted new vineyards today, the shortage could be contained in three to four years,” they add. “To meet future demand we forecast that acreage in California needs to increase by 2.5% p/a, or approximately 12,800 acres each year.”
“However, there are impediments to a quick industry response.”
Because you can make way more money growing something else.
“Using data from UC Davis and the Office of the Agricultural Commissioner, we estimate that in 2011 wine grape growers in San Joaquin Valley made a cash loss on wine grapes of -$170 per acre compared to a profit of $2,962 per acre with Walnuts and $1,483 with almonds,” said the analysts.
Here’s a look at the collapse in grape plantings.
Source: Business Insider