-- Though billed as "Capital Requirements for Growth and Options for Sourcing the Funds," one of the most interesting sessions at the Unified Wine & Grape Symposium last week hardly touched that subject. In today's unsettled capital markets, the experts in investing and finance instead talked about costs, values and markets.
Indeed, one of the few references to sources of money for planting came when panel member Rob McMillan of Silicon Valley Bank jokingly asked a competitor in the audience if he had any money. The answer? A terse, "Yes."
The session's moderator was Dick Maher of Maher & Associates, who has managed many prominent wine companies and chairs Wilson-Daniels, a leading wine marketing organization. He invited the speakers to comment on the present market for land and grapes.
The speakers were CPA David Brotemarkle, of Brotemarkle, Davis & Co.; Joe Ciatti of investment fund Vintage Wine Trust; appraiser Tony Correia of Correia-Xavier, Inc; Bill Hill of Premiere Pacific Vineyards, plus McMillan.
Vineyard appraiser Correia, who tries to remove some of the stars from potential buyers' eyes--generally unsuccessfully, I suspect--pointed out that today's cost of development is dramatically more than it was a few years ago--especially the land costs, but also all materials and labor. "Entitlements have become a big issue. The costs of getting permits and approval can be significant, and there's no guarantee that you'll get approval."
It's not just the planting that's an issue. Like many other speakers at Unified, Correia warned that water costs are accelerating dramatically. "Farmers in some areas are paying $800 per acre-foot for water that was only $75 to $100 a few years ago."
He noted the huge rise in land costs, too. In Napa Valley, the most expensive, typical costs were $40,000 per acre in 1998; they're typically $160,000 now for raw land that will take four years to develop, though property in less desirable areas can one-quarter that cost.
"Sonoma is much less," he commented: $25,000 to $45,000 per acre now.
And while other crops are being replaced by grapes in Napa and Sonoma, in Monterey County, vegetable growers are paying as much as $60,000 for an acre of prime land, more than grapegrowers can afford. He noted that land to be developed for grapes has typically sold for $28,000 in Monterey County recently.
Likewise, in the Lodi-Delta area, land is $6,000 to $14,000 per acre-- typically, $10,000--while in the Central Valley itself, acres sell for $2,500 to $12,000. "Grapegrowers don't pay $12,000," Correia said. He noted that the highest use of the land now is almonds, pistachios and pomegranate orchards. "They're very profitable, and the market continues to be strong."
Development costs alone aren't the whole story, for the opportunity cost if the charge for debt and equity is 10% per year, can add up. In Napa Valley, with land at $150,000 per acre, the opportunity cost is $15,000 per year," and he suggests potential buyers consider that in figuring future returns. "You make money selling the land, not growing grapes."
Finally, noting the optimism of buyers unwilling to study history, Correia commented, "The most expensive four words in the English language are, 'This time it's different.' "
While profiling Vintage Land Trust, former bulk wine broker Ciatti also noted something that might surprise many growers and wineries, "All whites are in short supply. There are red wines around," the latter getting back in balance after years of excess.
As an investment, he named the Delta and Clarksburg as his favorite place to buy vineyards. "It's got water, and it grows the hot varietals well: Riesling, Chardonnay, Pinot Grigio, Sauvignon Blanc and Pinot Noir."
He also reported that Chardonnay in Monterey is in balance, and Sonoma grows the hotter varietals, Chardonnay, Sauvignon Blanc and Pinot Noir. By contrast, "It's difficult to buy a vineyard and make money in Napa."
"I like Lodi at the moment," Ciatti added. "The buyers are coming back, and labels are looking for grapes." He also said he loves the fruit in Mendocino and Lake counties, but he hasn't seen many contracts there.
Bill Hill of Premier Pacific likes to buy cattle ranches and orchards and develop them, planting at high density. He claimed his costs are $42,000 per acre for high quality land--on top of the land--which drew a gasp from an audience accustomed to less than $20,000. He added that the grapes must be destined for wines that sell for more than $14 per bottle, however.
He made one of the few comments about capital sources, pointing out than many new institutions, pension funds and other nontraditional investors such as Hill's company and Silverado Partners are coming into the wine market.
McMillan of Silicon Valley Bank focused on the competitiveness of the market, noting that the top eight wine companies grab 87% of sales, and that there are more than 5,000 U.S. wineries but only 600 wholesalers, with a couple dominating each state. "There are 500,000 commercial wine accounts," he said, emphasizing the problem on reaching customers.
He said, "Customers tell me that in the '90s, if you made good wine, it sold itself. Now, a wine can be rated over 90 and you can't sell it."
McMillan forecast that 75% of the wine companies in the industry will change hands, either to a new generation or in other ways, in the next 10 years. "Twenty-five percent will do so in five years," he predicted.