THE TUG OF WAR OVER VINEYARD VALUES

By John Bergman & David Ashcraft
February 2004

Once again it’s the Buyers versus the Sellers in the timeless tug of war concerning vineyard values. Over the last three years the Buyers have been dragging the Sellers through the mud with every pull of the rope. Be it the grape glut, a weak economy, the war on terrorism, inexpensive imports – you name it the sellers have had the deck stacked against them. However, in the last few months a very noticeable transition has been set in place, it appears that the Sellers have been beefing up and the rope has stopped moving for the moment.

At this point the mud is still flying and everyone is getting dirty. The Buyers are starting to look a bit weary as they begin to see that their “Buyers Market” is slowly turning to a “Sellers Market.” The Sellers have planted their feet firmly on the ground and seem unwilling to give any more headway to the Buyers as the market begins to improve. The Sellers have been re-energized by the reduced amount of import wines in the last few months, increasing overall wine sales, the reduction of nearly 100,000 acres of vineyard in the Central Valley, and last but not least no more grape glut.

After three years of the Buyers winning each game at the close of escrow, it appears that the Sellers have gotten their strength back and are becoming a force to be reckoned with. Stay tuned for more fierce action between the Buyers and the Sellers as the market continues to improve.

On Your Mark

All indications are that we are about to see a “Sellers Market” within the next 6 months in Vineyard, Winery and Estate properties in Napa and Sonoma Counties. There seems to have been a flood of upbeat news lately in the California wine / vineyard business arena. Once this information penetrates the general market place it should have a positive effect on the perception of a vineyard as an investment (the exact opposite of the negative news we’ve been reading over the last 3 years.)

Get Ready

The U.S. dollars softened value has put the import wine business in a slump by making foreign wines more expensive while making domestic wines more competitive at home and more affordable abroad. It also appears that our government is relaxing some of the direct shipping regulations of selling wines to several states. This should open up new marketplaces for California wines. The stock market is up, unemployment is down, and the so-called wine glut appears to be no more.

Get Set

2003 has been a turn around year for our industry and the entire economy. By October 2003, wine sales were up four (4%) percent over the same 10 months of 2002. That is a total of 5.2 million cases sold over the first 10 months of 2002. (The Sacramento Bee 1/2/04). During the same time Central Valley California has ripped out over tens of thousands of acres of wine grapes, all the while demand from premium wine drinkers became stronger.

Go!

The three (3) year sagging grape prices are beginning to make a comeback. Chardonnay had a tough time for 2 years, then as quickly as the glut of Chardonnay hit it disappeared. Everyone said that there would be a flood of Pinot Noir in mid 2003. As we made our way into August and early September it looked like profuse amounts of Pinot were going to be dropped on the ground. Then one day in mid September, just as the crop was about to be harvested, it was discovered that “Premium Pinot Noir Grapes” were in short supply and the grape buyers came out of the woodwork. The three month glut turned into a buying frenzy and prices started to climb back towards previous levels. This is just one example of how quickly the tables can turn and tells the story of how the market as a whole has come back into balance.

Import / Export

It has been mentioned that Australia wine exports lost 27% in wine sales in November of 2003, a trend that we hope continues. This is one of those times that we should all be happy for the weak U.S. Dollar. During the same month sales went from $213.1 million to $155.2 million and when compared to November of 2002 sales were down 11%. (SMH.com.au 1/9/04) At the same time the weak U.S. Dollar has made domestic wines more competitive and inexpensive abroad.

So, What’s Up With Vineyard Values?

As the spiraling down fall of the wine market begins to pan and turn upward, so do the vineyard values. We have seen a “Buyers Market” for one of the longest periods in the vineyard sales business in almost 50 years. In 2000 the average vineyard value in Sonoma County was near $100,000 per acre. In Napa we saw sales in the $200,000 per acre price range and on several occasions considerably higher prices were paid. Since then we have seen 20% to 35% decline in sales values on a per acre value in both counties.

The demand for vineyard land is slowly coming back. In Napa everyone wants hillside Cabernet because it can´t be planted anymore and it is of the finest quality. In West Sonoma County Pinot Noir is the hot button due to the ultra premium fruit produced and the credibility of the Russian River and Green Valley Appellations. Buyers are beginning to see that they have to reach a little deeper in their pockets than they did just a few months ago for the same vineyard acre. This scenario will play out amongst all the premium grape growing regions within the North Coast. It will take some time, but vineyard values will move back and surpass the values of 3 years ago.

Looking back at 50 years of actual sales we see exactly what has just happened over and over again. The market gets soft and vineyard values drop. The market gets hot again and the vineyard values jump. The cycles will continue to do their thing every decade as they have over 50 years of research. This decade from 2000 to 2010 is no different and it is our projection that we will see yet another 100% or more appreciation per vineyard acre.

There aren’t many vineyard properties on the market today, and that does pose a problem with more and more potential buyers beginning to re-enter the market place. Most of the properties that have been on the market for a long while have been picked over like road kill, and most buyers have been waiting until they feel very confident that the market is going to increase before they buy. Well, the market is starting to increase and the Buyers are coming out to get their final best deal. They have seen the growing trends in the economy by now and it’s my feeling that they realize that the “Really Good Deals” are about to be history.

In Conclusion

Vineyard values are turning around, especially with so called “Glut” behind us, 100,000 acres of vineyard being ripped out of late, the economy headed in the right direction, lower unemployment, and a red hot stock market. There’s only one thing left to be said Get ready, get set, hold on tight; Sellers – It’s your time to enjoy the ride.