Shortfalls Predicted in Grapes and Labor

Vineyard Economics Symposium looks ahead

by Jane Firstenfeld
Napa, Calif. -- "If we don't do something, I think we will be back here next year to talk about a shortage," David Freed warned the growers and financial folk at the 2007 Vineyard Economics Seminar in Napa on May 15. Freed, chairman of UCC Vineyards Group with holdings of more than 2,000 acres in California's coastal regions, reviewed results of the 2007 Vineyard Economics Survey conducted by winebusiness.com. A total of 125 grapegrowers, wineries and allied parties around the U.S. responded to the survey, addressing issues of wine sales trends, factors that drive and constrain them, consumer attitudes toward wine, changing wine preferences, grape price trends and supplies.

Most respondents felt Pinot Noir, Pinot Grigio, red Zinfandel and Sauvignon Blanc would be in short supply over the next three years; Chardonnay, Cabernet Sauvignon, Syrah, White Zinfandel and Merlot were predicted to produce oversupplies. Interestingly, however, a majority of respondents (63.3%) felt that the price of Cabernet Sauvignon in their areas would increase by 2009; a significant number (41%) also felt that Chardonnay grape prices would go up by then, although only 20% felt Chardonnay prices would rise this year.

Investments in new technology (51%) and increased mechanization (47%) were viewed by California respondents as areas requiring additional investment during the next three years, while only 15% planned to acquire new vineyards. Freed suggested that the price of vineyard acreage in premium California growing areas is to blame for that figure: respondents said they would expect to pay an average of $24,700 per acre of developable land on the Central Coast; $57,667 in Sonoma County and $118,529 in Napa County. Add in newly planted vines, and the expected price in Napa soars to $167,941 per acre.

Steve Fredricks and Brian Clements from Turrentine Brokerage introduced their Manic-Depressive Wheel of Fortune and tracked the cycles of the global grape/bulk wine market, advising growers to take a forward outlook, despite the recent, prolonged excess in the marketplace. "The trend of excess is hard for people to get away from," Fredricks acknowledged, suggesting that the California industry has been "making battle plans for the future based on looking in the rear-view mirror."

Although much of the state's record 2005 crop and sizeable 2006 crop is still available on the bulk market, and clearing it out will be a challenge, new buyers are in the market this year, according to Clements, and reluctance to plant new acreage almost guarantees a shortfall in the near future. With almost no new plantings of Cabernet Sauvignon in recent years, for instance, all but 6% of Cabernet vineyards are now bearing commercially viable levels of fruit. "Six percent is below replacement level," Clements said, predicting shortages. And although "Growers have had it with Merlot," he said, "Sooner or later, depending on Mother Nature and sales, we will have a shortage. If you graft Merlot or pull it out, by the time you have a (new) crop, Merlot will be back."

In his presentation, Grape Prices to Winery Profitability, Rob McMillan, division manager for Silicon Valley Bank (SVB) also addressed the financial barriers to planting new California vineyards, noting that total nonbearing acres in California's premium wine regions are at 3.5%, a historic low that defies the normal nine-year planting cycle and portends the shortages predicted by previous speakers. He termed grape shortages for many years for fine wines, "an absolute at this point. Napa's planted out, and very expensive. With these land costs, the math doesn't work."

Given the pending shortage, he said, "We would expect to see bottle prices rising. But our clients say 'no.' About 90% say they are not raising prices, or if so, only by 2 to 7%."

Attorney Robert Fanucci, a partner at Gagen, McCoy, and himself a Napa County grapegrower, moderated A Conversation with California Grape Growers & Buyers, including Nat DiBuduo, president of Allied Grape Growers, who noted that with the U.S. slated to become the world's top wine market within the next few years, "The target's on our back," and expressed his hope that California can develop prices and contracts where growers can survive and the industry can compete.

Panelist Jeff Frey, owner of Frey Farming, called for socially responsible sustainable practices. Steve Hill, general manager of Durrell Vineyards in Sonoma County, touched on the current difficulty with immigrant labor, which has forced him to maintain a staff of skilled workers year round, rather than with seasonal breaks. "If I let them go after harvest, I won't be able to replace them. I now manage my labor force as 12-month people, although the work varies throughout the year. Sometimes we work 30 hours a week, sometimes 80." Of necessity, too, his workforce has become ever-more skilled at the necessary vineyard tasks.

Despite previous presenters' calls for new vineyard plantings, Tom Murphy, CFO of Murphy Companies near Lodi, Calif., said, "I'm personally not there yet." Rather than growing more, he said, "I'm more focused on taking care of my existing business, my fruit and my investment. I've got to see improvements in that before I plant." He advised other growers, "Don't go wildcatting!" by planting grapes for which there is not an established demand.

On the buyers' side of the table, Mike Insley, VP vineyard operations and grower relations for Beam Wine Estates, commented that, when he came to the U.S. from New Zealand three years ago, he was "Staggered to see how much imported wine was out there." He advised California growers to "Grow what you do best," noting, "In California, you do most (grapes) well."

"You've got to go with what the consumer wants," added Bill Wilden, VP grape management, Constellation Wines U.S. "Plant a variety you feel comfortable with and do it very, very well." He noted that most of Constellation's winemakers prefer to buy grapes, rather than bulk wine for blending. "Winemakers have an aversion to not handling the fruit," he said.

Karen Ross, president of California Association of Winegrape Growers (CAWG), briefed the assembly on CAWG's new nationwide public relations initiative to promote California wines; PD/GWSS program funding; the stagnant state of immigration reform; the growing U.S. wine market and foreign competition, and the newest pest to California grapes, the Light Brown Apple Moth (see More Headlines, Wines & Vines, June 2007).

Napa County Assessor-Recorder/County Clerk John Tuteur wrapped up the morning by updating property tax issues both for Napa land owners and more generally, and noted that, although property tax issues are relatively simple and often overlooked by accountants, if not properly researched and addressed, "They can bite you in the butt."

Afternoon sessions included Grape Growers Who Live Poor--Die Rich, directed at family vineyard/winery businesses hoping to transition to successive generations. Mack Schwing, director of wine business programs at Sonoma State, posed the question "How do we become a sustainable winery family business?"

Deborah Steinthal, founding partner of Scion Advisors, outlined the steps required for the successful transition from one generation to the next, which include a family continuity plan, a strategic business plan and a roadmap for succession. Overlooking this process has meant the demise of many a family business, she pointed out. And while estate planning has rules, succession planning must be individually tailored for each family's own needs and desires.

Steve Dutton, Dutton-Goldfield Winery, and CFO/co-manager of Dutton Ranch Corp., detailed how his family planned for and handled the organization before and after his father's death, and how they have set things up for the next generation.

Two professionals from Moss Adams, LLP, Mike Ricioli and Sandy O'Shea, looked at Tax & Accounting Issues for Growers, explaining the differences between Generally Accepted Accounting Procedures (GAAP) and Tax Reporting; when each is appropriate and how each is applied to such activities as vineyard purchase, land preparation, vineyard development and depreciation.

Attorney Brandon Blevans, Dickenson, Peatman & Fogarty, addressed the current status of immigration reform, and explained how the Department of Homeland Security (DHS) has stepped up requirements for employer verification of worker legal status, without yet providing an effective means of doing so. If a Social Security number tendered by an employee is tagged "No Match," he said, no response is currently required from the employer. "Currently, we play a little game," he said. The employer should not jump to conclusions, he advised, but inform the employee, who is then obliged to "correct" the information.

However, Blevans said, the DHS has drafted new regulations to "put teeth" into this process; these may be implemented at any time, and do not require congressional action to pass. These changes have yet to be released to the public, but are presumed to include liability if an employer has "constructive knowledge" that the employee ID is false. It's a real catch-22 situation currently, and likely will become even more onerous once the new DHS regulations go into effect. Blevans concluded his mordantly entertaining session with a slide that simply read, "Good Luck."

Attorney Wyman Smith, a board member at Gaw Van Male and a member of its wine industry practice group, closed the symposium with Grape Contract Strategies, a concise outline of considerations for both sides of the bargaining table. Viticultural practices are evolving, he noted, and contract language is also changing to reflect more interest in sustainable and organic practices and their concomitant higher growing costs.

He pointed out that grape contracts should also be "sustainable" in regard to their economic and legal regulations. He cautioned growers to read their contracts carefully, to avoid unintentionally signing away their rights to recourse in the event of a winery bankruptcy or similar assignment of debt, and recommended that mediation is preferable to arbitration when disputes arise.

In deciding among pricing mechanisms, he stressed that growers, "Must have a mechanism to allow pricing to move with the market."

The 2007 Vineyard Economic Seminar was organized by the Wine Industry Symposium Group. For details and graphics from the presentations, and future programs, visit winesymposium.com.
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