Record California Wine Crop 'a Blessing'

Speakers at Unified Symposium detail the supply-demand outlook for wineries and grapegrowers

by Jim Gordon, Kate Lavin and Andrew Adams
unified wine grape symposium allied growers nat dibuduo
Source: Allied Grape Growers
nat dibuduo unified wine grape symposium
Nat DiBuduo speaks to reporters following his State of the Industry address at the Unified Wine & Grape Symposium on Wednesday in Sacramento.
Sacramento, Calif.—California’s 2012 winegrape harvest broke the previous record for biggest crop, totaling 3.885 million tons. Meanwhile grapevine nurseries sold enough vines last year to plant at least 27,000 acres, more than all the vineyards in Oregon.

In a different decade these two projections by the Allied Grape Growers would have triggered a call for restraint from the state’s growers to avoid piling up a big surplus that would then depress grape prices. But as Allied’s president and CEO Nat DiBuduo argued Wednesday during the Unified Wine & Grape Symposium, the giant harvest and new plantings are probably just what the grape and wine industry needs right now.

“The large 2012 crop was a blessing, not a curse,” coming as it did after a much smaller harvest in 2011 and as consumer demand for California wine continued its upward march, DiBuduo said. “Today we are still experiencing good demand with moderate expansion.”

The official accounting of the harvest will come in February with the release of the state’s Preliminary Grape Crush Report, but many in the wine industry view DiBuduo’s projection as an authoritative preview.

If new plantings continue at last year’s pace, however, a surplus could easily develop. He pegged 15,000 net new acres as a moderate growth rate that is sustainable. The planting data comes from Allied’s annual survey of grapevine nurseries that reached the suppliers of 90% of major grape variety vine sales, he said.

Not a speculative expansion
Knowing what varieties were planted and where helps explain why this is not a speculative expansion, DiBuduo said. Cabernet Sauvignon was the No. 1 or No. 2 most-planted variety every year in the last four. Cabernet is the biggest selling varietal red wine and has been steadily growing, so a need exists for the new acreage.

In 2012 French Colombard was the No. 2 planted variety in California, almost entirely in the interior valley, where it is grown largely for non-varietal wines. Its new acreage has “backfilled” vineyard land that had been in other varieties, he said. In 2011 Muscat of Alexander was the No. 1 cultivar planted, and this came in direct response to the new and rapidly growing demand for sweet and/or sparkling Moscato white wines.

These are different planting rationales than those of 1999-2002, when a rapid surge in planting of major varietals including Merlot and Chardonnay set the state up for a smothering surplus when the large 2005 harvest arrived. The 2011 and 2012 plantings are not going to negatively affect the prices of Sonoma County Chardonnay, DiBuduo said as an example. Further, growers who did plant this time had winery contracts “almost exclusively,” he added.

Many of the state’s growers have enjoyed higher prices paid by wineries during the past two vintages, driven, DuBuduo said, by an overall shortage of wine and grapes globally, the re-establishment of a robust market for mid-priced wines following the recession and forethought by winery buyers competing to lock in a continuing flow of fruit.

Rising grape prices should not affect the prices of higher-priced wines, he said, calculating that an increase of $100 per ton translates to 12 cents per bottle. In the highly competitive value wine categories, however, it could.

“The underlying factors that create a stable market look to be in our favor,” DiBuduo concluded, “at least for the foreseeable future. But we must maintain quality grapes and wine and offer value in order to be successful.”

A look at bulk wine
Glenn Proctor, partner and broker for Ciatti Co., painted for attendees a picture of the California bulk wine market. He said many sellers in 2012 were able to demand all-time highs, and wineries in need of supply were not in a place to argue.

Going into 2011, the Central Valley market was already relatively strong, Proctor said, but starting in January 2012 prices began a rapid increase. Between January 2011 and January 2012, bulk Cabernet Sauvignon from California’s North Coast jumped from $10 per gallon to about $17 per gallon. “We saw buyers who normally bought from the coast trading down because they didn’t want to raise their wine prices,” he said.

Likewise, Proctor said some wineries from Napa and Sonoma opted to buy Chardonnay from the Central Coast in an effort to save money (a difference of about $3 per gallon as of January 2012). Wineries and negoçiant buyers who typically deal with Napa Cabernet looked elsewhere in the North Coast where, he claimed, “Cabernet was the king” in 2012. “There is available inventory there,” Proctor added.

Another trend as prices spiked for Napa Cabernet was the increased interest in Napa Merlot as a blending component, which was in high supply and sold for nearly $20 less per gallon in January 2012. “Cabernet drove Merlot in that bulk market,” Proctor said, adding that as Cabernet prices started coming back down, “Once they saw how much Cabernet they could buy, they stopped buying Merlot.” The question that remains unanswered is whether negoçiant buyers who left Napa for the North Coast will return now that supply is up and prices have come back down to earth.

A global scale
Bulk wine buyers weren’t limited to California vintages; according to Proctor, the global market will grow in importance, with wine from Old World countries of France, Italy and Spain vying for buyers alongside competitors from Argentina, Australia, Chile and South Africa—not to mention newcomer China.

But while New World wine regions are planting more acres to winegrapes (New Zealand grew its acreage by 23% between 2007 and 2010, with leading cultivars including Sauvignon Blanc and Pinot Noir), acreage is shrinking in Old World wine-producing countries. Some of the decrease comes from removing unproductive vineyards, but Proctor also explained, “It’s not surprising in these Old World countries: Production is going down because they are not drinking as much.”

Argentina, Chile and Australia are far and away the biggest bulk wine exporters to the United States, with imports from Spain lagging in fourth place by quantity but growing from 2010 to 2012. Total bulk wine imports to the U.S. amount to about 40 million case equivalents, Proctor said.

As recently as 2001 the quantity of wine exported in bottles was more than three times the quantity of bulk wine exports; since then, however, U.S. bulk wine exports have been steadily climbing, now representing 45% of total U.S. wine exports, according to data from Rabobank. “We are looking at supply on a global basis different than we ever have,” Proctor said.

Chile is a source for Cabernet Sauvignon worth considering, Proctor said, with bulk selling in the U.S. for $3.60-$4.30 per gallon. Additionally, Proctor said, Australian Chardonnay is stylistically similar to its U.S. counterpart and is available to U.S. buyers for $5.15-$5.80 per gallon delivered. “After the U.S., it’s Australia for Chardonnay,” he said.

A small harvest in Europe during 2012 may have regulated bulk wine prices from Spain, France and Italy.

Importing while exporting?
Currently, Proctor said, the U.S. exports the equivalent of 600,000 tons of grapes every year as wine, even as wineries import bulk wine from other countries. Proctor explains: “I think we have to continue to convince winemakers that you can produce more than 2 tons per acre and still have quality.

“Bulk imports are going to continue to grow, there is potential to lose that market share as we move forward,” he said. Then again, “Maybe it’s OK that the imports take away some of the lowest part of the market and we work into the next price point.”

Wineries of the year
Jon Fredrikson of Gomberg, Fredrikson & Associates said the industry’s two Wineries of the Year for 2012 came in as a dead heat. The wineries he recognized for the proprietary honor are the nation’s biggest, E. & J. Gallo Winery and Constellation Brands Inc. Fredrikson said both had robust growth. Gallo grew more than 6 million cases in 2011 and added 3.5 million more in 2012. Constellation grew by more than 3 million cases in 2012, a 10% increase.

Fredrikson said the two wineries have led the industry with brand development and have worked to continually break down barriers to the benefit of the entire industry. Gallo holds eight of the industry’s hottest 25 brands, and Constellation has six.

In reviewing the past year, Fredrikson noted that one could see the short grape market in the dramatic drop in large-format sales. Table wines in 1.5-liter bottles fell from about 20 million cases in July 2011 to a low of just above 19 million in October of 2012 because the dominant wineries had no excess wine to sell and borrowed from their large-format programs to fill their higher margin 750ml products.

U.S. wine shipments grew by about 2% to about 363 million cases, Fredrikson reported. Imports accounted for 127 million of that total, an 11% increase over 2011. California, which accounted for nearly 60% of total shipments, saw a 2% decrease in volume (to 211 million cases) from 2011 to 2012. “We ran out of wine last year in California,” he said.

The United States continues to be the healthiest marketplace for wine, especially as consumption in France and Italy has decreased. Bulk wine imports to the United States hit a record high of 43 million case equivalents, in part because of the good demand for wine, especially value wine, and because California’s output hasn’t kept pace with demand. “Everybody wants to be here, this being the biggest and most profitable place in the world,” Fredrikson said.

In the first 11 months of 2012, Italy, France and Spain boosted their U.S. exports by a half-million cases, while Australia slipped by nearly 1.5 million cases.

In the retail sector, Fredrikson said red blends saw “explosive” growth of 29% in the $7-$10 range, while sales for Moscato continue to stay strong. White Zinfandel, Merlot and Syrah all saw sales slip, with Syrah down the most by 14%, or 243,000 cases.

Wine marketing and consumption still lags behind beer and spirits, and Fredrikson said wine is facing competition from specialty products such as sake, cider and craft beers as well as ready-to-drink cocktails and other products that blur the lines of alcoholic beverage categories. These new products are marketed for and popular with younger consumers.

In the on-premise sector
Charles Gill, founder and CEO of Winemetrics, said restaurants are seeing more activity with bottles priced from $25 to $59 and with by-the-glass wines from $9-$11, according to the information about wine listings that he collects from 165 national and regional restaurant groups and chains. He said Argentina, Italy and Spain are leading in the bottle-sales category, and Italian Pinot Grigio is a big seller by the glass.

Chateau Ste. Michelle just passed Beringer as the No. 1 brand on premise, according to Winemetrics. Not surprisingly, Gill noted that the three most frequently listed varietals by the bottle are Cabernet Sauvignon, Chardonnay and Merlot. White and red blends are growing very rapidly, he added.

The Unified Wine & Grape Symposium continues through Thursday at the Sacramento Convention Center.

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