Winegrape supply and demand near balance

Although gloomy economic news has eroded public confidence and shredded business balance sheets, the outlook for the state's wine and grape sector remains fairly sunny, according to speakers at the annual Unified Wine and Grape Symposium. About 12,000 people attended the annual symposium last week in Sacramento, many packing the session on the "State of the Industry" for analysis of sales and the market outlook for 2009.

The take-home message for winegrape growers is that supply and demand are roughly in balance, and with a 2008 crush estimated at about 2.8 million tons, there may be a slight supply shortfall going into the next crop year. Although sales of higher-end wines—priced above $20 a bottle—have declined, it appears buyers are trading down to lower-cost wines, which in some categories are enjoying increased sales.

Growth brands last year were in the under-$7 a bottle, table wine segments, which account for more than 60 percent of the California wine market.

And, even with modest growth in consumer demand, experts predicted that winegrape crops in coming years may continue to be shy of demand. This slight mismatch may have a positive effect on grower prices, but an overall negative effect on the wine sector's ability to maintain or expand market share in an increasingly competitive global market.

If wineries can't buy from California farmers, they may go elsewhere—to Chile, Argentina, Australia or South Africa. Experts suggested it's time to look at carefully increasing vineyard plantings for well-managed, long-term growth.

Allied Grape Growers President Nat DiBuduo pointed to a number of issues growers will have to address in coming crop seasons: planting decisions, improved economic and environmental sustainability, capital investment, research and more aggressive marketing.

The results of a confidential nursery survey conducted in January by Allied Grape Growers found new vines going in on between 14,000 and 18,000 acres, compared to about 26,000 non-bearing acres in 2007. Acreage numbers for 2008 have not yet been released, but based on the Allied survey, in 2009, about 59 percent of winegrapes planted were red varietals, 41 percent white.

For new vineyard plantings, 36 percent were pinot noir and 22 percent chardonnay. Cabernet sauvignon totaled 13 percent of new vines, while 16 percent were pinot grigio.

"Immediate grape supply growth will be limited," DiBuduo said. "Plenty of opportunities exist for expansion. The tide is turning."

DiBuduo cautioned, however, that opportunities are not the same for all varieties or districts.

For example, pinot noir, which enjoyed a boom thanks in part to the movie "Sideways," now may be in over-supply. DiBuduo said contracts for this varietal are slowing. About 43 percent of pinot grapes are planted in high-end regions, but high-end wine sales are sagging due to the economy.

Merlot, however, is now in short supply and DiBuduo advised it might be time to plant a few acres on speculation, "if you want to take a risk." He said the market for merlot is balancing quickly.

Overall, DiBuduo said winegrape acreage, at about 780,000 acres statewide, isn't changing much, but the mix of varietals is shifting.

"We're seeing renewed interest from growers to plant winegrapes as part of a balanced approach to their farming operations," he said. "Some of the 'old faithful' varieties—chardonnay, cabernet sauvignon, maybe even merlot—could see increased demand that would justify new plantings in the near future."

Sizing up the current economic downturn, DiBuduo said, "Economic factors should be short term. Plan accordingly for 2011."

He also urged growers to fully understand farming costs and negotiate contracts that provide adequate grower returns, citing a target of 8 percent to 12 percent annual return on investment.

He reminded growers as they negotiate contracts with wineries and hear that times are tough, "remember that they're putting wine on the shelf that was made three years ago (during a grape glut)."

Bill Turrentine, whose grape brokerage sources fruit from throughout California and the world, said in the short term the wine and grape sectors face a bad economy, with consumers trading down in price. Restaurants and wine clubs have experienced sales difficulties, and there's the threat of a new excise tax, liquidity challenges and water problems, Turrentine noted.

"But the long-term trend is for recovery three to five years out," he said. "The current trend toward more affordable wines hurts some, but it helps others."

Wine industry analyst Jon Fredrikson said California wine sales squeezed out a gain of 2 percent last year, compared to sales in 2007. And, a favorable monetary exchange rate boosted California wine exports, up 18 percent in 2008.

But the National Restaurant Association reported wine sales for their members "fell off a cliff" in July and haven't recovered. Fredrikson said wine warehouses are adjusting inventories, some cutting supplies to the bone.

"Frugal is hip in America," Fredrikson said. "Who knows how bad the economy will go? We do know people are still drinking wine."

Panelists for the session focusing on business issues facing the wine and grape sector offered insights on where the economy may be going.

The best-case economic scenario, according to Jim Anderson, Silicon Valley Bank analyst, is that gross domestic product, or GDP, will continue to shrink until the third quarter, but no deflation; unemployment will stabilize at about 8 percent; and risk capital will return to the market in late 2009.

The worst case? GDP declines or is flat until 2020, mirroring Japan's "lost decade"; deflation runs at 1 to 2 percent a year; people continue to stay out of the market; and unemployment rises to 12 to 15 percent and stays there.

"How do we relight the fire under this economy?" Anderson asked.

Several panelists suggested that the current economic downturn represents not only far-reaching change, but also unprecedented opportunity. Others noted that the outlook for slower economic growth allows businesses, including vineyards and wineries, to refocus their businesses—strengthen balance sheets, invest in people and technology, energize the work force, position for the future or prepare to transition ownership to the next generation.

"If you're smart about the way you look at your business, you're going to find ways to succeed," panel moderator Rob McMillan of Silicon Valley Bank told attendees. "For example, there are real estate investors sitting on the sidelines right now with slugs of cash, because they know this is where they position themselves for future success."

Allied Grape Growers' complete presentation is available online at www.alliedgrapegrowers.org.

(Kate Campbell is an assistant editor of Ag Alert. She may be contacted at kcampbell@cfbf.com.)

Source: California Farm Bureau Federation