Spring 2009

John Bergman & David Ashcraft

Rocky Road Leads To Blue Skies Ahead For The Wine and Vineyard Business

    As the old saying goes, do you want the good news or the bad news first?  Well, since we are all pretty much aware of the bad news, let’s start off with some good news.  Living in one of the premiere grape growing regions of the world has its benefits, even in a horrible economy.  Wine sales volume is actually up!  The grape market is in balance and poised to be in a shortage.  Up to this point vineyard values have remained stable and the government seems to be doing everything within its power to right this economic ship.  Even though our crystal ball remains cloudy we would like to discuss some of the reasons to be optimistic and a few of the challenges that still lay ahead.

Want to get away?

    For those looking to get away from home for a few days, a trip to the wine country is what many people are doing instead of shipping off to the islands or hopping a plane to Europe.  In this crazy, somewhat scary economy people that live within 200 miles of our area are opting to drive to the wine country for a few days.  Perhaps we could call it an extended staycation that is most definitely less expensive than taking a trip to Europe, Mexico, Hawaii, the Middle or Far East. Staycationers are saving money and having much more fun as the Napa and Sonoma wine country has some of the finest restaurants and wines in the entire world.  Just hop in the car and here you are.  Easy, affordable and most of all enjoyable!

Overall Wine Sales Still Increasing, “One Billion Dollars!”
   
     With all the gloomy news, the barrage of bad economic data showing negative growth and recessionary trends there was a bright spot within the wine industry in 2008.  The United States  exported more than One Billion dollars worth of wine in 2008.  This is the first time the US has surpassed the billion dollar mark in wine export sales.  The actual amount of wine sales for California wines increased 2.1% on an annual basis as well.  While the prior years growth was 4%, we’re not complaining. The 2006 to 2007 increase of 4% was a jump of more than 12 million cases over the prior year.  It would seem that people are not giving up their wine, even in sketchy economic times. Even though 2008 saw less growth; overall wine sales were much better than many other commodities. Sales are still going in the right direction in spite of the economy, not like the automobile and construction industries, high-tech, retail or you name it. It is safe to say that people will continue to drink wine. For the most part the difference will be that the consumer will purchase a less expensive bottle with each meal than they did last year.  Another interesting twist, the January 2009 Winter Wine Land weekend event held in the Russian River, Dry Creek and Alexander Valley Appellations (consisting of 112 wineries) saw less people, but had more sales revenue than the 2008 event.

Less Is More,
Less $ = More Sales

    The wineries that are the happiest at this time are the ones that cater to the $15 and under crowd. Oh, by the way these under $15 per bottle buyers used to be the $50 and over crowd a year ago. The smart high-end wine makers are offering more bang for the buck in today’s quirky market.  Wineries should be paying special attention to their coveted wine club members and other enthusiasts that are interested in a better (value) deal.

Put It All Together And Shake It All About

    At this point the jury is till out regarding the 2009 harvest and grape sales. There are numerous factors that have had and will have an effect on what happens in 2009.  One of those factors was due to the major frost last spring that was the worst in nearly 40 years.  This historic frost reduced production all across California.  Then at the beginning of 2009 we had the warmest January in history combined with the least amount of rain seen in decades. Due to the heat, some of the growers are worried about premature bud break.   Drought has been a serious concern, fortunately we had a nice run of rain in February. 
   
    At the same time we are heading into a grape shortage this year. Demand is still strong for high quality wine grapes, so we may see an increase in price per ton or at least prices will remain stable. Put those two items together, toss in the drought wildcard, add the fact that higher end wine sales are slipping quickly, and the result is one big question mark.

"In the  businees world, the rearview mirror is always clearer than the windshield”, Warren Buffet

    No matter the ultimate outcome it is wise to think conservatively until we see the light at the end of the tunnel.  Be assured that there is a light at the end of the tunnel; we just don’t know how long the tunnel is at this time.

What do the grapes have to say?

Here is how we see the strength and weaknesses of certain varietals : 

Chardonnay - Looking strong and better in certain AVA’s, such as Coastal and Russian River areas. It’s an all around daily drinker for most and does very well in both the inexpensive and ultra premium market place.

Pinot Grigio -Pinot Grigio has made a serious comeback in the last 3 years and appears to be getting in the race. It is on the move in the right direction especially in the $10 - $12 range.

Cabernet Sauvignon -  Looked strong in 2008, and still on the rise. It has been the steadiest varietal in the market of late. Cabernet will always be king in certain AVA’s in Napa and Sonoma Counties.

Merlot -  The days of “F&$#ing” Merlot are history.  Due to many growers ripping it out, and the public favor coming back, Merlot is regaining its past glory. It will always be needed as long as the Bordeaux drinker has anything to say.

Zinfandel - The bottom line is that Zin is in to win even though it always appears to be the tortoise in the race,  especially “Old Vine Zin”, which is in high demand and sought after. When Zinfandel vines reach that 25year mark (and depending on the size of the zinfandel harvest), the tables turn upward with the right marketing.

Syrah - Syrah is surging a bit as sales are climbing faster than they have in the last 5 years. Look for even better times ahead.

Petite Sirah -Petite Sirah has been doing well as a blender in higher end wines. Also, a few standalone Petite Sirah wines are doing very well and are becoming the wine of choice in a few select areas.

Pinot Noir - Pinot is still a very hot item.  Even with all the new Pinot plantings and the challenging economy Pinot still seems to have staying power many thought would fade.  A couple things that are helping keep Pinot at the top is that Pinot is commonly known to be the hardest grape to grow and the most difficult wine to make. In addition, not all Pinot Noir will meet the favor of some wine makers palates, thus the old adage that “Pinot Noir is either great or it’s not”, will segregate the price point of this very fragile grape.

Steady As She Goes   
   
   One bit of good news is that there have been very few foreclosures or bankruptcies on vineyard properties in Napa or Sonoma Counties during this recession. Plus there doesn’t appear to have been much of a pushback in vineyard values either.  While a majority of the real estate problems have been in the lower market there has been a noticeable decline in sales in the higher end market in the last few months. 
   
   How will this effect vineyards, you might ask.  It is our opinion that vineyard values will remain stable with the exception of some sellers who find themselves in a distress situation.  We also feel that most distress sales will be related to average to below average vineyards and will be valued accordingly.  Premium vineyards in premium locations will still demand a premium price.  If grape prices remain stable or increase then most sellers will be able to ride through this rocky period without having to forfeit too much property value.  This kind of market creates the classic scenario of getting both the buyer and seller to be realistic in an uncertain market.

   Napa County has seen a phenomenal rise in per acre vineyard values since 2000. Our projection was to see a 100% appreciation from 2000 to 2010. Napa broke that record in 2007. Napa vineyard values run from $90,000 up to over $300,000 on a per acre value, with an average price of around $187,000 today. Each AVA area has its own statistics and values which reflects the differences in per acre value.

   Sonoma County has seen per acre vineyard value growth vary among different AVA’s. For instance, Pinot Noir in the Russian River, Sonoma Coastal or Green Valley AVA’s are going from $85,000 to $140,000 per acre. This benchmark has set all records in Sonoma County.  The lowest per acre vineyard in Sonoma County will run around $70,000 p/acre for an older vineyard in need of a replant. The average vineyard value today is around $82,500. It is anticipated that vineyard values will hold, with some varietals holding better than others in both Counties. Time will tell, with wine sales having their effect on vineyard values. We see price adjustments for high-end wines that will keep sales moving and will help maintain strong vineyard values.

Buyers & Sellers

    Our firm has experienced numerous buyers for vineyard, winery properties or brand labels. The best part is that most of our buyers don’t need financing. Our problem at this time is that we have very few quality wineries or vineyard properties to show them. So, if you are curious to know what your property is worth, or are interested in selling your vineyard or winery, you may wish to give us a call on a confidential basis, just to check things out.  We are looking forward to having a great, positive, happy, and healthy 2009 with a bountiful harvest and of course, a glass of wine or two.

“Reflect on your present blessings, of which every man has many; not on your past misfortunes, of which all men have some.”, Charles Dickens