"VINEYARD CYCLES, AND THE NEXT DECADE"

By John Bergman & David Ashcraft

September 2002

Many factors have converged to create a climate of nervousness amongst vineyard investors in the past couple years. However, investors tend to look at the glass half full and we hasten to add this is not just based on a pollyana attitude. Rather we use historical hindsight and trends to help us look forward. Based on this philosophy one can argue that the ills we are experiencing today are not so different than just 10 years ago. More on that later.

3 Things That Effect Vineyard Values

There are three things that effect vineyard values.

These are also the same three things that predict the annual financial outcome of a vineyard. Today we are seeing a grape glut all over the world including the State of California even with the finest management that money can buy. Despite Mother Nature giving her best, we are seeing the grape farmer stressing to sell his grapes.

To be sure one of the culprits is the general decine in the economy along with over planted vineyard varietals. Five years ago there was a strong demand for wine grapes and everyone began planting too much of a good thing. Now, we have too many wine grapes and not enough demand.

We Go Through Down Cycles Every 8 Years

This is not the first time the boom-bust cycle has happened in the last 100 years, and it will not be the last. This time it’s the Economy, the next time it may be Mother Nature causing a problem. What ever the cause these cycles are going to occur every 8 to 10 years.

People will stop planting grapes now for a while, demand will get stronger and we will experience a shortage again. Then those same people that stopped planting will get back on the band wagon and in 3 to 5 years we will have another glut. “The Beat Goes On”.

Vineyard Business Cycles

To truly understand the value in vineyard related property and it’s overall upward trend over the last 50 years, no matter what the economic conditions, one must take a look at the cause and effect of the varying business cycles overtime. The graphs below provide an example of how the business cycle ebbs and flows overtime yet maintains steady upward momentum.

Business cycles tend to run their course in about 8 years although this is not always consistent. The cycle may take more or less time. Let’s focus on the current business cycle starting back in the early 90’s and running through present day.

The early 1990’s started out as a rough economic period not so different from today. With constant negative economic news, The Gulf War, recession blues and “the sky is falling” mentality running amuck through the press. There appeared to be no where to run and no where to hide.

Some people took advantage of these circumstances, bucking the trend buying vineyard properties at depressed prices. They were rewarded by mid-deacade when the demand for wine started to increase along with grape prices. Increased vineyard property values followed.

Keep in mind the people who purchased vineyard properties in the early 1990’s paid less than a premium and were now experiencing an increased vineyard income and value in their land. By the mid to late 1990’s no one could deny the incredible prices being paid by wineries for wine grapes as demand sharply out weighed supply.

Here Comes The Bandwagon

Seeing this incredible opportunity everyone and their brother decided to plant grapes (this tends to be a typical pattern throughout history.) By now we’re approaching the year 2000 and everyone is riding high on the Technology / Internet New Economy and vineyard values have hit an all time high. Let’s step back and take a look at the factors that drove the market to its peak around 2000:

All of these factors contributed the latest upswing in the vineyard business cycle.

The Other Shoe Dropped

Since we’ve taken a look at the Yin let’s now focus on the Yang and why the market has softened. The current downward direction of the vineyard business cycle started with the meltdown in the New Economy, coupled with an oversupply of grapes and other significant events. Since the bubble burst there has been an incredible amount of pressure on all types of assets including vineyard land. This particular downward trend in the business cycle had many negative factors converging at once including:

The result has been lower prices for average and below average quality wine grapes, a reduction of planting new vineyards and a softening in vineyard prices.

Bottoms Up!

As we near the bottom of yet another vineyard business cycle and prepare for the next leg up investors will undoubtedly focus on high quality vineyards and locations such as Napa and Sonoma Counties.

The Higher End Is Stronger Than Ever

There are times when there are too many grapes, and there are times when there are not enough grapes. However, there will never be enough “ULTRA PREMIUM QUALITY” grapes being grown. This is due to the fact that there is not enough premium land available to produce ultra premium grapes to service to high-end wine drinking demand.

The low and middle-end of wine sales are down, while the very high end of wine sales is staying strong. The person that normally drinks his/her $10 to $20 bottle of wine daily is spending $6 to $15 today. The person that normally drinks his/her $25 to $40 bottle of wine daily is drinking $16 to $30 bottles today, and it is most likely the same bottle of wine.

The $50 to over $100 per bottle per day drinker is still standing strong in the market, in fact very expensive wine sales have increased in demand throughout a soft wine sales market. As a result high-end quality wine and premium vineyards are not affected in today’s economy, especially if they have long term grapes purchase agreements. "Revenue from high-end California Wine or Wine selling for more than $15.00 per bottle, increased10% in the last year, despite a decrease of approximately 4% in lower priced wines" (Taken from the North Bay Journal as information gathered from Motto, Kryla, Fisher a CPA firm St. Helena stated during a briefing at Copia.)

If You Grow Quality, They Will Buy

Let’s use recent trends in Chardonnay to show why quality is still king. Chardonnay happens to be the varietal that has taken the hardest beating recently. Reports have circulated that some $2,000 per ton prices have fallen to under $400 per ton in one year. However, on the other hand, I know Chardonnay vineyards that are getting in the 98% percentile of sales in Sonoma County with a minimum guarantee of at least $3,000 per ton, today. These vineyards are of course very high quality Chardonnay vineyards. Nonetheless, this shows you that even with the biggest problem varietal – quality pays!

Grape Purchase Agreements Are King

We are in the midst of a “Buyers Market,” vineyard sales are slower and harder to close. Even if someone wants to buy a vineyard they may have trouble closing the transaction due to lenders and financing. In today’s market lenders are asking the magic question to every vineyard buyer. “Do you have a Grape Purchase Agreement”? If the seller of the vineyard does not have a valid contract to sell his/her grapes, I can say that it is difficult and nearly impossible to get financing today. “Long term grape contracts are King”, and may be the only way to sell a vineyard property if the buyer needs financing

Should I Buy Or Should I Sell?

I have always said that there is no time like the present for almost anything we do in life. If you package your property correctly, it will sell. If you are looking for an opportunity to get a better then average buy on a property, you can find it.

Ten years from now it won’t really matter anyway, as vineyard values for over the last 50 years have historically gone up every decade more than 100% and in some decades rocketing up nearly 300% in value. Within each of these decades, there were up markets, as well as down markets. Grapes were dropped on the ground some years, and grapes were treated like gold in others, yet vineyard values kept on jumping every decade tduring more than half of a century of research.

There are no get rich schemes in owning vineyard property, but most all are a very secure long-term investments.

Put Your Fears To Rest And Do Something

Real Estate in general is very predictable. If you hold it long enough you can’t loose and vineyard investments are no exceptions. There has never been a more secure investment in the world, especially in the wine country. As the wine demand goes up and down we go through up and down cycles, but the important thing is every time we bounce back from a down cycle, we are stronger than the prior peak. The scale goes way up, then it slips a little, then it goes way up again. Look at 50 years of research of vineyard values past, present, and future. These statistics came right from the county recorders office of actual sales.

PERCENTAGE INCREASE BY DECADE

Looking Ahead

If you want to sell, package your property well and put it on the market. If you want to buy, go out there and find that perfect opportunity. Understand that we all need education when buying vineyard properties so that we don’t make a foolish economic move. However, trying to time the market can often be a painful and frustrating experience. Again, there is no time like the present.

My last prediction in January of 2002, that would see an economic turn around by the end of the second quarter of this year has placed the entire omelet on my face. However, I can say that I was not alone in that prediction, in fact I feel comfortable with some of the company that thought so as well.

Nevertheless with this long down turn, everyday that passes brings us one day closer to the turnaround. My suggestion is to start looking now, prices have been dropped on most all vineyard properties, and it’s only a matter of time before the tide turns to a seller's market again.

In Conclusion

If you are interested in getting some education about vineyard properties, or wish to know more about available vineyard, or vineyard estate properties in Napa, Sonoma, or Mendocino Counties, you may wish to look at out website www.bergmanvineyards.com.

If you think that you may wish to be a buyer of vineyard property and wish to have professional help to do so, fill out our wine country questionnaire. We would be happy to assist your real estate needs in the wine country.