Seminar Focuses on Grapegrower Concerns

Napa Valley Grapegrowers' vineyard seminar traces trends, suggests strategies

by Paul Franson
Napa Valley Grapegrowers, Silicon Valley Bank
Rob McMillan from Silicon Valley Bank
St. Helena, Calif. -- The Napa Valley Grapegrowers, which spun out of the local farm bureau to focus on education, held its second annual seminar for vineyard owners Friday at Meadowood in Napa Valley. A crowd including vintners and executives from wineries that own vineyards received a report on current conditions with a peek into the future.

The seminar is a rare occasion for the growers, since most of the group's programs cover technical topics for vineyard managers and workers, rather than issues more important to owners. To some degree, it was a compact combination of the Wine Industry Financial Symposium and Vineyard Economics Seminar for Napa Valley growers.

The program began with a look back at the Napa Valley's wine business from two senior statesmen in the industry, Jack Cakebread and Dan Duckhorn. They provided a vintner's view to the growers in the audience.

Cakebread reminded attendees that he had bought his first property in Rutherford for $800 per acre in 1973. He's since added the Dancing Bear Ranch vineyard on Howell Mountain, named for local bruins undeterred by loud rock music designed to chase them away; a Pinot Noir vineyard in Anderson Valley; and Soscol Ridge in southern Napa Valley. Cakebread recently expanded his red wine production facility--he earlier built a winery just for whites nearby, in the Oakville appellation.

Duckhorn's winery began 30 years ago with numerous small investors, and Dan Duckhorn regrets not buying more land early. The winery now sources grapes from about 60 growers. Early on, it differentiated itself with Merlot, fortunately diversifying into other varieties, in view of what Duckhorn called "that damn movie"--"Sideways," of course, which some say was responsible for devastating Merlot sales for a bit.

Duckhorn also diversified, adding Paraduxx Zinfandel blend as well as Goldeneye in Anderson Valley, and the new Canvasback Syrah blend. It sells about 67% of its 125,000 cases direct--much of that directly to retailers and restaurants in California. This allows the winery to retain 67% of revenues, rather than 50% when the wine is sold through distributors in other states.

A few years ago, many of the original investors in Duckhorn sought an exit strategy, and GI Partners bought the stock, replacing 80 shareholders with one. Duckhorn says little else has changed; he and his former wife and co-founder, Margaret, remain active in management.

After the upbeat talks from Cakebread and Duckhorn, Rob McMillan of Silicon Valley Bank hurled some cold water on the attendees. He discussed how credit problems in the economy impact the wine business, including a prediction that home prices will continue to fall until they approach the historic level of 2.8 times average household income after rising to more than 4 times. "Expect two more years of this," he warned.

Locally, the problem has meant that large banks that formerly could provide loans of $100 million now stay under $20 million. McMillan said that surveys show the greatest strength in wines selling between $12 and $20, not the higher level that had been strongest. He noted that three business models--the small, integrated producer; the n├ęgociant and the large, low-cost producer--seem most viable, with moderate-sized wineries stuck in the middle.

Napa Valley Grapegrowers, Silicon Valley Bank
He did offer some good news for growers: The industry remains under-planted, which is helping maintain prices, although imports are likely to satisfy some of the demand.

And he said he expects more sales of wineries, and mentioned that he's involved in three sales now. "They'd surprise you," he claimed.

As a break from the talks, two noted winemakers, Cathy Corison of her self-named winery and Michael Silacci of Opus One, both talked about trends in winemaking techniques and wine styles and offered tastes of their wines for illustration. Both tend toward restrained wines rather that the blockbusters for which Napa has received so much notice, and both noted a return to these more moderate styles.

One way for growers to increase the value to wineries of their vineyards and crops is to brand them, or make them distinctive. Grower Lee Hudson discussed how he did that with his well-known Hudson Vineyards. He prefers to sells fruit by the acre, not per ton, and insists on selling his grapes to winemakers who complement his fruit. He also maintains control over the use of his name, and doesn't grant it easily.

Michael Brill has created a new type of business that can benefit growers as well. His Crushpad custom microcrush business in San Francisco lets 5,000 clients make 750 different wines. After only five years, 60% of the production is now on behalf of people who sell the wine, not just the home winemakers who were early customers.

Brill noted that his business' real differentiation comes from "selling" vineyards; he also can help growers by creating sample wines they can use to showcase their fruit. Napa Valley Micro Crush does the same, but CrushPad also provides sophisticated software systems that help manage and market the process.

Marketer Paul Wagner provided growers with a quick introductory course in marketing, outlining practical advice including, "If you can't explain what makes your business special in seven words or less, you won't be successful in communicating what it does."

Perhaps the most eagerly anticipated talk--hence its position at the end of the conference--was by leading vineyard assessor Tony Correia. He once again emphasized the reality of Bill Turrentine's grape cycle, noting that we're in an up part of the cycle at present.

But he noted that growers in California basically stopped planting in 2001, and they seem hesitant to do so, so shortages are inevitable. "Even if growers started planting today--and no one is--we wouldn't have enough acres of grapes." He warns that water issues will continue to grow, too.

Correia said that planted Cabernet Sauvignon vineyards in the heart of Napa Valley are selling for about $275,000 per acre (the range is $150,000 to $350,000), with average land in the county $160,000 per acre (the range is $100,000 to $275,000). In outlying areas, it can be as low as $50,000 to $75,000, but price is rising faster in the heart of the valley.

Top home sites add $3 million to $3.5 million, and a winery permit adds $1 million to $5 million. Those entitlements can make conservation easements especially attractive for someone who just wants to grow grapes; these valuable easements are set to expire in a year, however.

Amazingly, he still reported seeing real estate speculation in Napa Valley, though the valley is almost fully planted out.

To the mixed crowd of growers and vintners, a recurring theme was apparent. Is the independent grower an anachronism? Dan Duckhorn predicted, "In the long run, all growers will be making at least some wine."

But Lee Hudson noted that it doesn't make sense for wineries to own the property to produce all their own grapes. "It's cheaper to buy fruit than develop vineyards at the present cost of land," he claimed. Nevertheless, he does make some wine under his own name, as do many of the growers represented at the seminar.
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