California's wine grape industry is not going to heck in an oak barrel or a stainless steel tank.
“What we have is insufficient demand for the existing supplies,” pronounced wine industry expert Barry Bedwell in explaining the current economic plight of California wine grapes in his best impersonation of actor Strother Martin. As you recall, Martin was immortalized for his famous line, “What we have here is a failure to communicate” from the movie Cool Hand Luke.
Bedwell, California wine broker coordinator for Joseph W. Ciatti Co. and Jon Fredrikson of Gomberg, Fredrikson and Associates avoided the G (glut) word like a glass of bad White Grenache when they reported on the status of the industry to a rapt crowd of more than 1,000 at the 9th annual United Wine and Grape Symposium recently in Sacramento, Calif.
Fredrikson and Bedwell are two of the most respected wine industry analysts. Bedwell's opening comment about “insufficient demand” was calculated to net a laugh from the audience, and it did.
However, it has not been a laughing matter for most wine grape growers and many wineries over at least the past two years as acreage coming into production has soared, creating an oversupply in many varietals and sending prices plummeting; imports taking an increasingly bigger share of the U.S. wine market and wine finding tough going in getting shelf space from beers and spirits.
No wine glut
However, there is no California wine glut, Bedwell said. There are oversupplies of some varietals like Cabernet Sauvignon, Pinot Noir and perhaps Syrah. However, supply and demand are getting closer to balances for Chardonnay, red Zinfandel, Sauvignon Blanc, Merlot and White Zinfandel.
The California wine industry is in a “down cycle,” not in wine glut, according to Bedwell, after experiencing a decade of phenomenal growth following the 1991 French Paradox. That broadcast heralded the health benefits of moderate wine drinking. Sales have increased by 75 million cases since then.
“What I think Jon and I were trying to do in our industry assessments is counter the overwhelming negative publicity of the wine industry over the past few months that is ignoring the cyclical aspects of this industry,” said Bedwell.
“This is a remarkably strong, $1.5 billion a year industry,” Bedwell said.
“Is there an oversupply of wine grapes? Absolutely,” said Bedwell., who said the value of wine grapes dropped $200 million last year and likely will drop another 7 percent to 10 percent this season as the industry works off oversupplies.
“The California situation is not a glut,” echoed Fredrikson. “A glut is the wine lake in Europe where growers are producing wine that is not intended for sale as wine but to be used as gasohol as part of a social program.”
Bedwell said the California wine industry has become notorious for overreacting. When things are good, new plantings quickly catch up with grape and wine demand and an oversupply situation is created, even with growing wine sales. When things go bad, growers become too aggressive with bulldozers in taking out vineyards.
They may already be doing that with some of the so-called lesser varietals like Chenin Blanc and French Colombard in the economically hardest hit area of the southern and central San Joaquin Valley.
These jug, dry white varietals have been among the lowest priced wine grape over the past two seasons, and growers are either dozing them out or abandoning them.
Bedwell said that may be a mistake. Madera, Calif., wine grape grower Steve Schafer and chairman of the California Association of Winegrape Growers, had evidence of that when he said two months ago he received a winery inquiry for French Colombard.
While variety plays a role in keeping or pulling a vineyard, Bedwell cautioned growers to evaluate a vineyard's efficiency first. “If a vineyard is producing below average quality or tonnage, take a hard look at it,” said Bedwell. Don't pull it solely because it seems to be the wrong variety.
Bedwell estimates 30,000 acres of Central and Southern San Joaquin Valley wine grapes will be bulldozed before next summer.
While Bedwell and Fredrikson tried to paint something other than a gloom and doom picture for the future, Bedwell did acknowledge that between 50 and 200 wineries in the state will either change Bulldozers Wine sales to be competitive until demand catches up to supplyownership or “have difficulty staying in business” within the next three to four years.
However, that may not be any different than any other three- to four-year period.
There are about 850 wineries in California, but half of them sell fewer than 5,000 cases annually. California's wine industry has long attracted wine aficionados who make money elsewhere to invest in wineries. There is an old saying that goes: “Know how to make a small fortune in the wine business? Start with a large fortune.”
The largest 25 wineries in the state ship 90 percent of all California wines in markets worldwide, and it is unlikely any of those will go out of business or change owners. They may change marketing approaches to weather the down cycles, but most have been around for decades and will continue to be from now on.
Wine sales grew at about 4 percent last year, up from 1 percent the year before, according to Fredrikson. This growth is consumer response to many price promotions and discounts to move surplus wine.
Demand should remain strong this year, he added, “as consumers respond to continued discounting and especially if the economy gradually improves.
“Trade and consumer interest will pick up considerably for California wines as more of the excellent 2001 vintage is released,” added Fredrikson.
Wine marketing will remain competitive as demand catches up with supply. “And that will happen; it's only a matter of time,” he said.
Fredrikson and Bedwell did industry assessments by regions and varietals.
“There are no one liners in the in the wine industry, especially true this year,” said Fredrikson. Each region, wine segment and winery are different. Some he said had good years in 2002, while others did not. It's all in marketing.”
In his regional approach to looking at the business, Bedwell said prices in the central and Southern San Joaquin Valley have seen the worst while the coastal area has not yet “hit bottom.”
Here is Bedwell's market outlook for 2003:
North Coast: The spot market (5-15 percent of the total market) will continue to have difficulty, even in Napa and Sonoma. Overall prices will remain stable due to higher number of reference price contracts.
Central Coast: Given the growing amount of grapes on the spot market (10-25 percent), average prices should ease as annual purchases continue a downward trend. Gap between the Central Coast and Northern Interior areas will narrow in accordance with bottle price trends.
Northern Interior: Acreages of over-supplied varieties should be reduced as growers face reality of another year of below cost spot prices. Grapes under contract should be relatively stable as the 15-30 percent available on the spot market takes the majority of pricing pressures.
Central and Southern San Joaquin Valley: Prices for grapes purchased for wine have bottomed, and bounce may occur in 2003 due to pullouts and increases in sales of lower priced bottled varietal wine. Annual purchases (25-50 percent of the market) will still be impacted by the concentrate market and a surplus of raisin varieties. Vineyard plantings have stopped.
For the key varietals in the state, here are Bedwell's projections through 2005 based on 2001 yields and non bearing acreage now planted:
Chardonnay: Production levels slightly above 600,000 tons for the next three seasons. “Not bad considering the growth we have seen in Chardonnay market over the past couple of years. There is light at the end of the tunnel already on a regional basis for 2003.”
Cabernet Sauvignon: Market says tonnage is too much. Looking at 470,000 tons 2003. “Not a good situation. If that comes true, I'm not sure all will get picked in the valley. We have a ways to go” in getting Cabernet supply back into balance with demand.
Merlot: Positive outlook. Three to 5 percent increase over next three years. Much better situation for Merlot given the demand projected.
Zinfandel: Less Zin production over next three to four years with known pull outs so far. Production will decline to 351,000 tons by 2005 from 375,000 in 2002. Good Zinfandel growers have taken a beating last few years, but better times ahead. Take close look at vineyard before making final decision to take it out.
Pinot Noir: Short crop in 2002. Normal yields in 2003 could pop tonnage up significantly. That is cause for concern. There will be significant price pressure, mostly on older clones.
Syrah: Big jump in 2003 to 123,000 tons and 132,000 in 2005. Syrah is a blending grape in some areas, replacing old blenders Barbera, Carignane and Ruby Cabernet. However, be very cautious about pulling Ruby Cab. There should be good demand for Ruby Cab in the future. Syrah is not developing into varietal programs many expected. Very much a regional and quality market. Certainly not a slam dunk.
Sauvignon Blanc: Not much change in tonnage from 2001 to 2005. Positive signs ahead for Sauvignon Blanc.
“There are some good signs if we keep a positive focus in the industry. I believe that is where we are heading,” said Bedwell.