Grape Supply Loosens in Short Term

California's 2012 crop is larger than expected, but long-term, shortages loom

by Paul Franson
bulk wine
Napa, Calif.—Early this year, it looked like wineries might face unexpected shortages, prompting many to rush to lock up supply. Now, with a near-perfect vintage and crop yields higher than expected, wineries and growers holding bulk stocks have released some of their wine, and things are looking a little brighter—at least for this year.

At the Wine Industry Financial Symposium this week, Steve Fredricks, president of Turrentine Brokerage, one of the largest brokers in bulk wine and grapes, examined both short- and long-term grape supply.

He said that in the past, long-term trends saw excess supply causing wineries to make shorter commitments for a smaller percentage of needs—even though wine sales growth and higher costs led to increasing bulk and grape prices.

Wineries turned to international sources with little concern from consumers. There was little planting, however.

In 2011 there was a small crop, so bulk buyers returned to the market, causing bulk prices to spike and grape prices to rise. This made planting grapes economically viable once again, though international sourcing continues.

    Lenders expect weak dollar and new investors

    Wine and grape brokers were not the only ones who offered expert perspective on the wine industry’s health at the Wine Industry Financial Symposium. Here are a few insights that lenders gave:

    Vernon Crowder, a senior vice president with Rabobank, stressed in his presentation that foreign exchange rate play a big role in imports and exports of wine. “Expect the dollar to continue to be weak,” he said, going to about $1.35 per euro in 12 months. That weakness keeps California wine exports competitive, despite having the world’s highest cost of production.

    When interest rates inevitably start to rise, perhaps in 2014, the dollar will go back up close to its historical norm, and that’s when bulk wine imports will be more of a threat to U.S. producers.

    Rachelle Schlesinger of Prudential Agricultural Investments, noted in her talk that a consolidation of brands and vineyard property is ongoing with an increased demand for land in particular. The outlook for wine industry investment has changed in that non-traditional capital is now interested. She said institutional investors now find the ag business in general as “sexy”—and wine in particular.

    Bank of the West
    Adam Beak, senior vice president of Bank of the West, cautioned that the generally optimistic scenario for vineyards and wineries is not necessarily spreading to all sectors of the industry. “In this case the rising tide is not lifting all boats. If you have a business plan that’s not working, then concentrate on fixing that.”
    —Jim Gordon
Highest and best use
Huge demand for Cabernet Sauvignon and Moscato saw wineries shift their grapes to the highest and best use, not their cheapest lines. They’re using Napa Cabernet for Napa Valley AVA wines, not North Coast or California AVAs, for example.

This year, supply and demand appear fairly well balanced—and that’s fortunate, for there are no huge reservoirs of wine waiting offshore.

Italy is expecting its second consecutive short crop, and prices are firm or elevated. A shortage of Pinot Grigio has led to a drop in exports.

Bulk inventories are more balanced in France, and the crop is also below normal. In Spain, bulk inventories are more balanced and the country is experiencing its third dry year in a row; the 2012 vintage is projected to be 30% below normal yields, and asking prices are up 40%. A large Spanish winery is turning to Chile for supply, taking 50 million liters.

In the southern hemisphere, Australian growers are seeing a return of demand from local wineries, and this spring’s harvest was of average crop size. As a result, it has low inventories of bulk value red. Argentina is supplying generic red and Malbec, and both are popular. Chile is a major supplier of varietal value wines.

Washington equals Paso Robles
Washington has 44,000 acres of vineyards—about the same as Napa Valley. State wineries crushed 142,000 tons in 2011 and are expecting more than 200,000 tons this year. Washington Cabernet production last year was about the same amount as in Paso Robles, Calif. Fredricks said that a Washington grower can get $1,000 per ton at 5 tons per acre; those are good returns, particularly since land prices are relatively low.

In California, bulk wine availability is almost the same as it was a year ago at 5 million gallons. (That’s down from 20 million in 2010.)

In 2011, the state crushed about 375,000 tons of Cabernet; Turrentine expects that figure to rise to 425,000-450,000 tons this year. Fredricks said that prices were up but have slid a bit. Growers don’t plan to make bulk wine; they can sell all the grapes they have.

For bulk California Cabernet Sauvignon, 1 million gallons are now available, double the number from a year ago. The greatest volume is from Napa, which had almost no bulk Cab on the market a year ago. This is also up significantly from earlier in the year, when stocks were almost depleted and wineries grew alarmed.

At present, the California Cab supply is weak and demand is high. Prices are $7-$11 per gallon for California appellation. It’s available from Chile at $4.70-$5.40 per gallon landed in California, and prices are slightly higher from Argentina at $5-$5.80 per gallon. Little Cabernet is available elsewhere.

The state crushed 550,000 tons of Chardonnay in 2011, Fredricks said. Tonnage is expected to rise to 650,000 or more this year.

Stocks of bulk Chardonnay are a little under 1 million gallons, down from 1.5 million a year ago. Much is from non-coastal regions. The price is $5-$7.50 per gallon for California Chardonnay. From Australia, it’s $4.80-$5 per gallon in California.

Pinot Noir should also take a big jump this year, Turrentine said, expecting the amount crushed to rise from 120,000 to 225,000 tons. The amount of bulk Pinot Noir offered stands at about 200,000 gallons, down from 350,000 a year ago or even a few months ago.

Red vs. white transition
Lodi is switching from white to red Zin, but at lower yields. In 2005, for example, about 150,000 gallons of white Zin were offered and 40,0000 gallons of red. Now it’s 40,000 of white and 60,000 of red.

In all, about 300,000 gallons of red Zin is being offered at bulk—slightly up from a year ago, but way up from early this year.

One-million gallons of Merlot is for sale (the same as last year), and it never dipped in supply like other varieties.

A new phenomenon this year is the demand for wines for the extremely popular red blends, including sweet reds. They typically include Zinfandel and Merlot filled out with blending grapes.

Fredricks categorizes Grenache, Barbera, Carignane and Ruby Cabernet as “old-time” red blenders—as well as Rubired, which is never made into a varietal wine but is proving very popular among blended wines. More than 250,000 tons were crushed in 2011, far more than the others. Syrah was second at a little more than 100,000 tons.

Fredricks calls Syrah, Petite Sirah, Petit Verdot and Malbec “upscale” red blenders, though ironically, Petite Sirah was a mainstay of the field blends of yesterday.

Another category that came from nowhere into huge demand is Muscat, used for Moscato. Wineries have had to turn to global bulk sourcing—especially Argentina and Chile—to satisfy current demand at the desired prices, though as happened with Pinot Grigio, California supply is increasing.

Fredricks concluded with a peek into the future. In the short term, he sees better supply of bulk wine this year with bulk prices and demand decreasing. As a result, the grape market for 2013 may start slower than this year’s frantic pace.

Longer term, he predicts continued growth in consumer demand with a continuing low percentage of non-bearing acres as growers don’t overplant. We’re entering a short supply cycle which will eventually lead to an increase in production, he said.

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