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Sizable 2013 California winegrape crop should lead to lower pricing for bulk wines

September 26, 2013

Brimming winery tanks from the record 2012 crop are moderating pricing surplus winegrape tonnage and excess wine for what is thought to be another sizable crop this year, according to experts at a major annual gathering in Napa on Tuesday of the industry’s financial decision-makers.

While this may be a short-term logistical challenge of finding the winery tank space for the fruit needed to support sales, the wine business in California, and particularly in the North Coast, faces longer-term supply constraints as U.S. consumers increasingly add wine as an alcoholic beverage of choice, panelists said at the the 22nd annual Wine Industry Financial Symposium.

“We have seen demand come back to balance from where it was a year before,” said Glenn Proctor, a partner in San Rafael-based wine and grape brokerage Ciatti Co. and part of a panel on supply issues.

From a five-year low of 6.5 million gallons statewide last September, the supply of wine available for purchase in bulk soared to around 17 million gallons after the 2012 harvest, according to Mr. Proctor.

“There is a concern, if [the] 2013 [crop] comes in as large as many are expecting, what the price will be to move that volume,” he said.

After two relatively small harvests, California vintners early in the 2012 grape season were paying handsomely for bulk wine — reaching highs around $40 a gallon for Napa Valley cabernet sauvignon — and grapes, even for tonnage over the contracted maximum.

Growing U.S. consumer demand for wine — up 3.3 percent over a decade and roughly 6 percent in the first six months of this year — has pushed importing of wine, mostly in bulk for “budget brands,” or those retailing for less than $8 a bottle, to around half of California production, noted David Freed, chairman of Napa-based UCC Group, an organizer of the symposium.

Wine has gained more “share of throat” against beer and spirits in the past decade, doubling from 7 percent to 15 percent between 2004 and 2011, according to speaker Vivien Azer, vice president of tobacco and alcoholic beverages for Citi Research. Wine has become more affordable per serving compared to the alternatives, partly thanks to the average serving price of beer doubling from 2004–2011, she said.

While wine has been more innovative in the past four decades than beer or spirits with the promotion of varietal wine, that innovation is a weakness for wine because of consumer confusion and more limited ability to increase pricing, according to Ms. Azer.

That innovative edge is waning, she said. Explosive growth in craft brews — this is the third year of double-digit growth — is catching the attention of millennial consumers, who tend to like to be thought leaders in introducing taste discoveries to their friends. Also, flavored vodka and other distilled spirits are filling that thirst for exploration, but that proliferation in products in the adult-beverage aisle also is giving retailers cause to push back against producers and distributors, she said.

Deal-making of 2012 that would suck up bulk wine a few months after crush have moderated to more normal levels of wine sitting in the tank for a year or more, if it can sit there that long because of a shortage of tank space, according to Mr. Proctor.

From one of the least available bulk-wine varieties in the past three years, the supply of Napa Valley cabernet sauvignon shifted to being “long,” he said. Prices vary from $18 to $33 a gallon. By comparison, cab from the state’s Central Coast winegrowing regions range from $10 to $16 a gallon, but demand is balance with supply.

From $3,500 to $4,000 a ton for Napa Valley cab not under a long-term purchase contract, the spot-market price for the variety has moderated from $3,200 to $7,500 early this season to $2,500 to $3,000 being discussed now, as picking of such late-ripening varieties has barely begun, according to panelist Steve Fredricks, president of Novato-based Turrentine Brokerage. Behind that range in asking prices is the lack of availability of tank space, he said.

The district-average price topping $5,000 a ton in 2012 and the value of prime vineyards at $200,000 to $300,000 an acre, cab is becoming more of the king of Napa Valley grapes, pushing out chardonnay and merlot, according to panel moderator Tony Correia, a longtime agricultural property appraiser in the North Coast. He said he’s concerned some of the conversions to cab will be on land not well-suited to the variety.

“The economic climate is such that merlot is shifting to cab,” Mr. Fredricks said.

While more cab acreage has been actively going in around the state and into places such as Sonoma County’s Alexander Valley, the slow, steady growth in chardonnay sales is bringing more chardonnay acreage back into production in Sonoma County, he said.

Buyers largely are looking for Russian River Valley and Sonoma Coast chardonnay, and pricing for spot-market fruit has moderated from $1,300–$2,200 a ton early in the season to $850–$2,000, Mr. Fredricks said.

“Almost all the grapes found a home this year,” he said of Sonoma County chardonnay. “Since tanks are full, prices are down for excess fruit.”

Yet full tanks are prompting vintners to be more quality-conscious about what tonnage they’ll accept than they were last year, and likely next year will be calling on growers to move back to culling for the best fruit, according to Mr. Proctor.

Pricing is $10–$16 a gallon for bulk chardonnay from Napa and Sonoma counties and $7–$10 from coastal areas to the south, and the supply of bulk wine from both areas is tends to be about in balance or a little in excess, according to Mr. Proctor. From interior areas, there is able chardonnay available at $3–$5 a gallon.

The additional pinot noir acreage that has gone in coastal areas has been with vine clones and configurations that are more productive, leading to higher yields, Mr. Fredricks said. Most Sonoma County pinot noir was sold this year, but pricing for excess grapes was largely dependent on how well picking and tank availability coincided, he said.

Spot-market pricing for the variety ranged from $2,000–$4,600 in Sonoma County early in the season and $1,400–$3,200 at harvest.

Constraints in adding vineyard acreage in California range from lack of water and competition with nut and fruit crops in Lodi-Woodbridge and the Central Valley to regulatory limits in Napa and Sonoma counties, panelists noted. The ability of large wineries to source wine from South America and other New World regions has evened out the cycles of supply and shortage that dominated the industry for decades, according to panelist Hugh Reimers, chief operating officer of Jackson Family Wines.

The company has been among the most active of the major wine companies acquiring vineyards in the North Coast, Oregon and Washington in the past 18 months to secure supply.

While high-bottle-price regions such as the North Coast are more insulated from bulk-wine imports than is the rest of the state, increased marketing savvy abroad, such as New Zealand’s becoming synonymous with sauvignon blanc wine, plus proliferating winemaking expertise and technology could lead to more higher-end bulk wine coming ashore, cautioned Mr. Proctor.

“Just because our land is expensive, that doesn’t mean there aren’t other areas that want to take away market share,” he said.

But two years of higher revenues for growers can lead to more reinvestment in California vineyards to make them more cost-competitive, according to Mr. Proctor.

Source: North Bay Business Journal