What Goes Around, Comes Around
By John Bergman & David Ashcraft
October 2004
Here we are at the end of our 2004 harvest, the earliest harvest season of wine grapes ever in Napa and Sonoma Counties. However, it appears by all accounts that we have an excellent high quality year for wine in this vintage.
Over the last 3 years we have been enduring constant hardship in our industry for numerous reasons including the oversupply of fruit, rising farming costs, a lack luster economy and increased foreign competition. All of these issues have caused serious pressure on grape prices with most varietals seeing a decline in price per ton and in the worst cases fruit remained on the vine, or was dropped on the ground. Thankfully, the tide has started to turn again and some grape prices are actually headed in the right direction.
Glut Check
Any seasoned vineyard owner knows we go through up and down cycles. We are once again in the midst of a cycle reversal as we approach a grape shortage over the next few years. That’s right, grape shortage. As the demand for wine continues to grow so will the need for more grapes to fulfill the marketplace. Wait a second, isn’t there a glut going on? Simple answer, right. Wrong. The truth is that the grape market is constantly shifting from oversupply to undersupply. On occasion we hear that one or another varietal is in “balance”. This “balance” is shaky at best. In other words a varietal is typically in a state of excess or shortage and rarely in balance for a long period of time.
Due to the oversupply of the last few years, profit margins for many farmers have decreased. The combination of an increase in operating expenses and lower prices for grapes has resulted in many thousands of acres of vineyard to be ripped out and very little new vineyard planted. Thus the looming shortage as demand catches up and surpasses the available supply.
Necessity, Is The Mother of Invention
Looking back over the climax of our last few grape cycles we’ve seen grape shortages in 1989 and in 1997, excess supplies of grapes in 1982, 1991 and 2002. During 1997, the height of one of our largest recent shortages, it was predicted that an over supply would happen in the following years.
Fast forward to 2002 during our latest oversupply and we find for all that appeared negative, positive effects resulted as well. When there wasn’t another container to put that last gallon of bulk wine into, and the over flow was running in the streets a new wine category was created, “super value wines”. Call it genius, opportunistic, or just plain good business sense Fred Franzia decided to turn all of that wine into what has come to be known as “Two Buck Chuck”. Rumor has it they sold over 2 million cases during Christmas of 2003 alone. This not only helped get rid of an over abundance of bulk wine, it also turned several thousand beer drinkers into wine drinkers. More consumers, this is a good thing.
During trying times many farmers also became wine makers by crushing their own fruit. It wasn’t uncommon to hear farmer Smith ask, “Now that I have all of this bulk wine, what the hell am I suppose do I do with it?” Lots of farmers turned wine makers found that they made more money by selling the bulk juice than on previous grape purchase agreements. Of course most farmers want to farm and stay out of the lab. The good news is that past and present trends are shedding light on a not so distant future that will keep the farmers in the vineyards and on their tractors.
Royal Flush
Now that the tide is turning we are seeing some varietals do better than others. In fact the all mighty Cabernet Sauvignon grape has recently had to share the lime light with some up and coming varietals. We’ve heard it before, “Cab is King”. While the throne is securely in place we may have to make room in the royal court for other highly sought after treasures such as Pinot Noir, Syrah, and Zinfandel. Even as no one expects the King to topple, Cabernet looks to be in a continued over supply situation for the next two years.
On the flip side Chardonnay has already begun a steady climb out of the dungeon back towards the good graces of the wine country kingdom, especially Russian River Appellation Chardonnay. It wasn’t too long ago that Chardonnay was a four-letter word and is already showing signs of a shortage.
Once Bit, Twice Shy
Most of the wineries are not offering long term grape purchase agreements today. Some of the wineries got massacred when the grape glut hit by having long-term grape purchase agreements that were not tied to the market value of each particular harvest season. During the first part of our oversupply period many wineries paid a great deal more under contract for fruit than they could have purchased on the spot market. In some cases the vineyard owners and wineries re-negotiated terms and continued their relationship. In many other cases contracts were cancelled outright and growers didn’t have a home for their fruit.
Now that the hand writing is on the wall, it would seem that most forward thinking wineries will want to create equitable long term grape purchase agreements that will offer a fair price to the farmer, but have an “Ever Green Clause” that says that either party can break the agreement with a 2 to 3 year notice. This seems a good way for farmer and winery to work on a balanced relationship. This also provides a sense of security for any potential vineyard buyers.
Vineyard Buyer Profiles
Vineyard sales are typically highest when there is a long - term grape purchase agreement in place. This is true for a number of reasons. First and foremost it shows that there is income from the vineyard and that there is interest in the fruit. Secondly the income will most likely cover the farming costs and hopefully throw off a few extra bucks. As grape prices increase we hope to see a more profitable return on our efforts.
We have found that the vineyard buyer comes in many forms and we’ll discuss the two basic profiles. One is called “The Farmer”. This is the person that will make his or her living at farming grapes and will be focused on running the numbers in making the decision to buy. The “Farmer” isn’t so much interested in the romance or setting as he is focused on the quality of the fruit, production and income from the land.
The next client is the “Lifestyle Buyer”. This person or family wants to live in the wine country and enjoy the enchanted life style that surrounds wine country living. This person is driven by the romance and beauty thus they will add emotion to their equation in making a buying decision. The “Lifestyle Buyer” may pay a little more for that perfect view, or special wine country setting that they can enjoy and share with family and friends. This buyer in most cases will want an outside vineyard management company to do all of the vineyard work. Lastly, the “Lifestyle Buyer” is more interested in an enhanced quality of life than vineyard economics.
To truly discuss the ranges of Buyer profiles would take volumes but the “Farmer” and “Lifestyle” Buyers represent each end of the spectrum and most other Buyers fall somewhere in between.
A Look Into The Future
The cycle is turning and we will be seeing the cognizant vineyard buyers out in force. Farmers are sharpening their pencils and Lifestyle Buyers are planning their dream homes. More and more people are realizing it is definitely time to buy vineyard property. Wineries are offering contracts and more people than ever are drinking wine. Along side Cabernet and Merlot we welcome increasingly popular Zinfandel, Pinot Noir and Syrah etc.. to satisfy a variety new palettes in the world of wine. Now that things are beginning to turn around, we are seeing vineyard sales increase and vineyard prices are accelerating on a per acre value. The short story is as grapes become harder to source, prices will increase, wineries will be bidding against each other and vineyard income will go up creating a higher property value. In fact as our local wealth generator, the Silicon Valley, begins to heat up once again and the grape shortage becomes more apparent we will see another influx of high tech investors in the wine country. By this time in 2005, we predict that vineyard values will be up 10 - 20% or more over the average of today. Looking farther ahead it is our feeling that by 2010 the average per acre vineyard sale price in Sonoma County will be $160,000 and in Napa the average per acre vineyard price will be $185,000. This says that vineyard values will have once again doubled in value over a 10 year period in Napa and Sonoma Counties.
If you are a vineyard owner, hang on because grape buyers are headed your way. If you’re a winery owner sales are picking up and your bottom line will look better. If you are potential Seller let us know as we have Buyers for both vineyards and wineries of all sizes.
