Roller Coaster Ride Of The 1990’S And Future Vineyard Values: The 2001 Report

In general, vineyard farmers are very happy with the end results of the 2000 harvest. However, a look back over the last 10 years is a different story. Even the first year the new millennium offered a few exciting moments before it proved itself out to be a winner.

A LOOK BACK

In 1990 vineyard values were at an average of $41,500 per acre, and the highest sale of that year was $67,500 for an acre of the finest Ultra Premium producing vineyard. Grapes were selling from $1,500 to $1,600 a ton which represented the highest sales prices in history of the California wine grape market.
As we look back into the past the ups and downs of our 10 year roller coaster ride is very apparent. The California recession was in full swing by 1991, and by 1993 vineyard values had fallen along with all other real estate values. Grape prices had fallen to an average of about $1,400 a ton then fell further to an average of $1,300 a ton in 1994. These were very scary times for the farmers and winery owners. From 1992 through 1994 there were more foreclosures and bankruptcies in the wine country than in any other 2 to 3 year period except for when prohibition was announced.

TURNING LEMONS INTO LEMONADE

In some cases vineyard values had taken a dip of over 30% and there were very few sales being made. However, there were some very smart buyers at the time. One of them was Jess Jackson. We all thought that he was biting off more than he could chew, but he proved us all wrong. This genius gambler was in the right place at the right time with a good credit line.
It wasn’t long until things were to change and change very quickly. The market began to stabilize and then began to rally. Grape prices began to climb slowly until 1998 when there became a biding war for premium wine grapes in Napa and Sonoma counties. The prices in 1998 had jumped to an average of over $2,000 A ton. The barrier of that magic $2,000 mark had finally been broken for the first time in history. Along with skyrocketing grape values vineyard values were on the raise as well.

About this time the REIT’s (Real Estate Investment Trusts) became a hot item to invest in 1997. They began to buy vineyard properties in both counties. This time around the REIT’s made the right decision as things began to heat up and values started going through the roof.

CHALLENGES

When we entered 1990 the entire wine grape growing industry was doing battle with a little pest and going deep in debt from the replacement of so many of their vines due to Phylloxera. Billions of dollars were spent replanting entire vineyards. Now that Phylloxera appears to be behind us, the Glassy Winged Sharp Shooter begins to enter the scene in 1998. This begins another war for wine grape growers that will continue well into the new millennium.

RED, RED WINE

In the mid 1990’s the Medical profession claimed that red wine was good for our hearts, and then in 1995, the medical profession made another bold statement. They claimed that wine kills bacteria like e-coli and salmonella. The non-alcohol drinkers began drinking red wine for medicinal purposes, this time for real.

MOTHER NATURE RULES

The last 10 year roller coaster ride included El Nino in 1997 that effected the wine grapes to the point of producing the largest harvest in California. In 1998 we had La Nina which caused the wine grapes to produce the smallest harvest in history. We had just experienced the highest and lowest harvest in California’s history, in back to back years.

Because of El Nino in 1997 and the largest crop ever harvested, there was talk of a major “Glut” on the market. Everyone was afraid that they wouldn’t be able to sell their grapes in the future. This false media hit front page news. THE SKY IS FALLING! THE SKY IS FALLING! Then in 1998 when we had the exact opposite happen, the farmers wanted to return all of the extra storage equipment that they bought the year before.

“CULT” FOLLOWING

For years, Cabernet Sauvignon was king and Napa County held the crown. Napa is still the king when it comes to Cab. However, the 1990’s brought an attachment to Pinot Noir drinkers. They couldn’t get enough and the only place to get the very best was Sonoma County. As the Pinot drinker became more enamored with this light, sweet and fruity wine, more wine makers began to compete for the top position in an attempt to build the very best Pinot.

Pinot Noir grapes are the most difficult varietal to grow as well as the hardest wine to make. Ask any wine maker. As the Pinot Noir demand became stronger, it became apparent that a select few wine makers had accomplished the difficult task of becoming “Cult” Pinot Noir wine makers. Pinot Noir had placed Sonoma in the lime light and had put the “Russian River Appellation”, “Coastal Appellation” and the newest kid on the block “Green Valley Appellation” high on the list for the best land to grow this hot item.

QUALITY NOT QUANTITY

In the last ten years we began to experience a change of preference of wines toward more quality. The Ultra Premium Level saw more and more buyers paying from $30 to over $100 per bottle for what they considered the finest of their favorite varietals. The awakening became apparent when it was discovered that “Premium wine drinkers demand can not be met with the supply of enough premium wine grapes, and premium wine makers”. It appears that as the pallet has become more sophisticated, the higher premium wines will not stay on the shelf for very long.

The “Cult” factor had taken rise to more and more small “Ultra Premium” wine makers producing just enough of their sweet nectar to wet the whistle, but not enough for those that wish to buy a case or two.

They may make from 200 to 400 cases of their known varietal and the only way to get a bottle is to either be the grape grower that sold the grapes to the winemaker or a relative. There are always people waiting in line and buying futures.

The trend appears to be towards the higher end wines, which in turn pushes the “Cult” vineyard values way up in order to make those high demand quality wines. We all want what we can’t have. So, the “Cult” wineries have taken on a DeBeer’s type attitude which is to only allow enough wine for sale to fetch the highest price per bottle. After all when it’s gone, it’s gone. Make it a privilege to own a bottle of my wine is their slogan. I don’t condemn them, I applaud them for a great marketing concept. After all they are making the great wines that we all want to drink. This is America, why not capitalize on their talents.

SO, WHAT’S AHEAD?

So, here we are entering the second year of the new millennium and things are good. We all have our own opinions on what will happen. As the year 2000 came to an end the stock market was at its lowest point in years. However, within the first week of 2001 interest rates have dropped to stimulate our economy. We continue to hear that technology is moving at a faster pace than ever. The U.S. dollar is strong, but we still hear words like recession and the United States has more millionaires than ever before. One might ask – Where is the crystal ball?

MY OPINION

The wine country will see many changes ahead. Let us look around at what causes a difference. Silicon Valley in Santa Clara County appears to be moving to Santa Rosa, Petaluma, Sebastopol, Cotati and Rohnert Park. They call these areas “TELECOM VALLEY” with millions of miles of Fiber Optics being laid in Sonoma County. These Southern Sonoma County areas running along highway 101, will soon be filled with millions of square feet of commercial and industrial buildings. It is my opinion that we have not seen anything yet as to the increase of real estate values jumping to the moon in the wine country.

Below is a short list of the companies that already have a foothold in the Telecom Valley:

I feel strongly that its time to invest in small or large vineyard or land that can be developed to vineyard property with a home or a building site. As the young high tech families begin to move into these areas, they will need to find a home. As we have seen in the past, most of these families will be making way over the average income, and will wish to experience the dream of living in the wine country. They will also want to have a small to medium vineyard and build a large custom home with a pool, in-law unit and other creature comforts.

WHERE ARE THE BARGAINS?

Well known HOT wine country areas like Napa, Yountville, Oakville, Rutherford, Calistoga, St. Helena, Alexander Valley, Knights Valley, Healdsburg, Sonoma, Kenwood, Glen Ellen and other well known areas will be inundated with buyers willing to pay over top dollar. These are wonderful and well known areas that will always be in high demand. These areas are also becoming very crowded and bargains are harder to find.

However, there are other areas to look into and invest in. I strongly believe that areas like Forestville, Petaluma, Sebastopol, Occidental, Freestone, Guerneville, Cazadero, as well as other areas that appear to be sleepy little country towns in the Western portions of Sonoma County will be in major demand over the next few years. The prices in these areas are still realistic, the lush landscape is beautiful and unspoiled, the family oriented people living there are genuine and friendly.

The small towns located in the western portion of Sonoma County are like a Norman Rockwell painting as they offer a glimmer of yesteryear and innocence, yet it’s only about a 30 minute drive to the giant companies moving into the Southern part of the County. Highway 101 is just minutes from these family oriented unique areas, and is a straight shot to these giant companies that will bring thousands of jobs along with their fiber optics technology.

LESSONS LEARNED

Sonoma County has learned what not to do while watching Silicon Valley change from clean air, and a beautiful agricultural community in 1950’s to a concrete jungle filled with smog. There you will find two to three homes on an acre of land, and a lot of people in your favorite grocery store at that same time. You see I lived in Saratoga for several years and in 1987, I moved to Napa. I know from experience.

THE SECRET

The zoning ordinance in Sonoma and Napa Counties calls for 100% agricultural use in county areas. Only the cities, townships, and other semi incorporated areas will be allowed to offer zoning that would enable these commercial giants the ability to develop. This means that the beautiful lush green countryside of these counties should never change.

APPRECIATION AND APPRECIATION

I believe that a rolling hill 10 acre parcel of land with 6 acres that can be planted to grapes, a building site and views for ever in the middle of Forestville that has a value today of not more than $950,000, should be worth a minimum of $3,000,000 to $5,000,000 + in about 10 years if my predictions are correct.

YESTERDAY

Looking back over my analysis of vineyard values since 1960, one can see that vineyard values have done well if looked at each ten years. The roller coaster effect occurs over just a couple of years, but if you plan on holding your wine country investment for ten years my predictions are pretty safe to assume. See for yourself, here are the facts as they came from the county assessors office.

What will happen over the next 10 years? No one knows for sure. However if you follow trend lines, and believe that the wine industry will be around for a long time to come, then it should be business as usual. It is certain that there will be ups and downs in the future. Looking at the over all forecast, viewing at 10 year intervals, things will always be better than they were ten years before.

SPECULATION

If vineyard values have averaged from 100% to 277% jump in value every ten years, and the year 2000 average producing vineyard was $92,500, then an average of 120% increase may be the value in 2010. This means that the same vineyard that sold for $92,500 in the year 2000 may be worth $203,500 an acre in 2010. That means that the top valued vineyard that sold for $143,000 may be worth $314,600.

CRYSTAL BALL

I have been lucky in the past 14 years at making projections as to where the vineyard values may go. In fact my predictions have been on the conservative side.
I believe strongly that if you invest in vineyard properties, you must think quality. As every state in the union with the exception of North Dakota has wineries, and every corner of the world is becoming involved in making more and more wine, a smart investor must take note. My theory of “IT ONLY COSTS A NICKEL MORE TO GO FIRST CLASS” is the best insurance policy that you can get when buying vineyard properties.

WHY?

Napa and Sonoma Counties represent 8% of the entire grape producing industry in California. Napa and Sonoma represent 100% of the “Premium” wine market. There will never be enough Premium quality vineyard land to meet the supply of ultra premium wines.

ARE YOU INTERESTED IN LIVING THE DREAM?

If you may be interested in being a part of the dream of living in the wine country, you may wish to go to my VINEYARD SHOPPERS QUESTIONNAIRE, and fill it out and e-mail it to me. You may also wish to read a few of my other articles. They are basic knowledge, but may help you understand a bit more of how vineyard properties work financially. I would be happy to help you create your dream.