Multiple Forces Weaken Wine Grape Market

Large harvests, imports make San Joaquin valley grapes with no contract a tough sell

by Andrew Adams
Inexpensive imported wine threatens to eliminate the market previously dominated by Central Valley growers.
Fresno, Calif.—The weak wine grape market that has growers in the San Joaquin Valley concerned was the result of multiple factors that converged this vintage.

At a recent forum hosted by the San Joaquin Valley Winegrowers Association, growers heard from several experts about the market forces affecting demand for grapes from the Central Valley, which produces nearly half of California’s wine grapes. The group’s executive director, Peter Vallis, told Wines & Vines for a Nov. 20 report that growers in the southern part of the valley were very interested to hear why prices were low this year, especially for grapes on the spot market. Better returns on nuts and the apparent reduced demand for wine grapes prompted Vallis to assert the “economic viability” of wine grapes could be in doubt.

The large harvests of 2012 and 2013 have swung the industry back toward an oversupply position, and while imports this year are not expected to be as plentiful as in previous years, they continue to provide a low-cost alternative to grapes from California’s Central Valley.

Growers have always been at the whim of consumer trends, which change more quickly than vineyards can be brought into production, and Vallis said more could be done to align with trends in the marketplace. “We just need to make sure we’re planting things that have demand from the consumer,” he said.

Grapes with contracts are still viable
A panel of agricultural real estate experts reported that good vineyards with contracts remain profitable. Rather than ripping out entire vineyards to make way for nuts, maintaining some grapevines can help growers stay diversified in case almonds and other nuts experience a dramatic price drop or supply outpace demand. Domestic wine consumption remains strong and is growing, but growers can’t hang on to a vineyard that’s showing declining yields or quality.

One acre of nuts can provide nearly twice the income of wine grapes, according to information presented by Ben Slaughter of appraisal firm Correia-Xavier. That gives growers a lucrative alternative if they can’t find a long-term contract for wine grapes—a situation that’s good for them but could be problematic for the supply of domestic wine grapes.

The number of new vineyard acres to supply wine priced less than $7 per bottle is decreasing, and Jeff Bitter with Allied Grape Growers reported the group estimates 15,000 to 25,000 acres of wine grape vineyards will get pulled this winter.

In 2012 and 2013, Allied estimates that growers in the San Joaquin Valley planted 35,000 acres of vineyards for wines priced less than $7 per bottle. Those vineyards will start producing in 2015 and 2016. In 2014, growers planted less than 5,000 acres of new vineyards for low-priced wine. Joining Bitter on the panel discussion was Matt Towers of O’Neill Vintners and Distillers, who said based on shipments of California wine over the past five years, the state is in a “structurally long” position of 25.6 million cases (or about 356,000 tons).

Towers estimated that imports for 2014 would reach nearly 32,000,000 cases, or slightly less than 460,00 tons. This imported wine is typically used for bottles that sell for less than $7, and at that price the consumer doesn’t care where the grapes are grown, he said.

Protect the bottom shelf
The flood of cheap imported wine, both bottled and bulk, does not appear to be slowing. “The big thing is, and the challenge for the California industry, is imports keep growing, and they’re growing at all price points,” Vallis said.

Vallis said California mustn’t cede the lowest tier of the market to imports because that loss of market share would trigger repercussions throughout the industry. “If we give up the lower end of the product to imported wine, that’s going to have a direct effect on the rest of the industry throughout the state,” he said. “We need to do a good job of shoring up and buying American wine.”

He said it wasn’t that long ago that U.S. consumers typically started drinking cheap California wine, then graduated to buying higher priced wines from Europe—that is until Napa and Sonoma wineries started delivering wines of comparable quality. He said it’s now conceivable that a young consumer could start appreciating low-cost Argentinean or Spanish wine, and instead of moving up the retail shelf to buy a wine from Napa Valley they purchase a $60 to $70 Malbec or Rioja. “That’s something that’s not out of the realm of possibility, and that scares me,” he said.

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