One of the more common methods of explaining the multi-definition term “sustainable” is with a three-legged stool illustration.
One of those legs is always economic viability.
In California’s wine grape industry, that money leg is so short that the sustainability stool is tilted like the Leaning Tower of Pisa. It is so far from a break-even point for some growers that the term winery subsidy comes to mind rather than sustainability.
Allied Grape Growers President Nat DiBuduo told a packed state-of-the-industry audience at the recent Unified Wine and Grape Symposium in Sacramento, Calif., that grape prices are “not economically sustainable” in all grape growing regions of the state.
“They are closer (to sustainability) in the San Joaquin Valley than they have been in years,” he added. One reason is more than 100,000 acres of vines have been pulled out over the past decade because of economic non-sustainability, and growers have planted more economically attractive crops.
Unfortunately, most other grape growing areas of the state do not have alternatives and are faced with taking whatever wineries will pay — or not pay in some cases. Grapes annually are unharvested in coastal areas.
“The grape industry would not be anything without wineries and the wine industry would not be anything without grapes,” DiBuduo reminded growers and vintners once again. There should be “synergism,” alluding to the often adversarial relationships between California growers and vintners.
Prices remain below break-even across the state; price discovery is still elusive at harvest time, even with contracts; harvest standards change often (hang time and changing Brix standards) and imports continue to cut into California sales, including bulk imports sold under an American wine label by California wineries.
“If it says American, it should be 100 percent American wine,” he said. Wineries are allowed to sell American appellation wine, if it contains up to 25 percent imports. Growers are challenging that.
While other states and countries like Australia are promoting their wine industries, California’s wine industry still does not have a mandatory assessment marketing promotion commission, a void DiBuduo continues to point out.
“We have to invest our own money in marketing and research and development." He calls the current voluntary investments in those areas “minimal.”
DiBuduo said the Allied staff did cost/return analyses for grape growing areas of the state with an average return of investment of 9 percent to come up with a “break-even” price per ton.
The break-even point and the average price growers were paid in Napa for grapes in 2009 was the widest in the state. It was a gulf. Napa producers were paid an average of about $3,300 per ton for grapes that season. They would have had to harvest 6 tons per acre to break even at that price. A more typical yield is 3.3 tons, which would put the true value of the grapes at more than $6,000 per ton.
DiBuduo acknowledged that a Napa wine grape vineyards can sell for as much as $300,000 per acre because of a shortage of developable land. Allied used an average value of $177,000 per acre to reach the $2,700 per ton spread. One reason for the high vineyard costs there is that the only source for a new vineyard is to buy an old one and redevelop it. He also conceded that paying high prices for productive vineyards in Napa may be a “lifestyle” decision by the wealthy.
DiBuduo’s sobering grower economic plight came at a Unified symposium that was readily upbeat because the economy is turning around and wine sales are following. The event drew a reported 12,000 to the Sacramento Convention Center for several days of programs and a trade show.
There was a more decidedly winery marketing bent this year with a lack of information from wine brokers offering an overall world picture of wine supplies. The past few symposiums have had a global perspective, since world surplus bulk wine supplies have a major impact on California grape sales. That was not part of the industry overview presentations nor was Jon Fredrikson of Gomberg, Fredrikson and Associates at the event, offering his insightful, overall marketing analysis of the industry.
While a moderate turnaround in higher priced wines is evident, the experts admitted that price conscious buyers are not returning to more expensive wines since they discovered quality in value-priced wines during the economic downturn.
Nevertheless, DiBuduo is optimistic at least for 2011 for several reasons:
• California wine sales continue to increase.
• The 2010 crop statewide was down 14 percent with a crop comparable to 2006-2009 crops. The Central and North Coast areas and Lodi-Clarksburg area were down 20 percent each. The Central Valley, the largest grape growing area in the state, with 1.6 million of the estimated 3.55 million tons crushed, was down 7 percent.
• Bulk wine imports are down. However, bottled imports are up.
• Plantings are continuing. However, the 14,000 to 17,000 acres planted last season are less than the year before. 65 percent of what was planted last season was red wine grapes; 35 percent white wine grapes. It was the opposite in 2009.
• Cabernet Sauvignon and Chardonnay continue to represent the biggest percentages of newly planted vineyards, according to nursery surveys. However, Muscat Alexander and Rubired (primarily for concentrate) shared healthy percentages of nursery sales.
• The domestic bulk wine market has strengthened, reflecting lower supplies to impact the grape market.
• North Coast wineries are looking for grapes now. For the past several times, the buying, if any, started at harvest.
Likely need for more grapes
Taking the increasing sales trend into the future, DiBuduo hesitantly told the crowd that California likely will need more grapes to meet growing demand in the future.
“Unless something changes, there will be a significant shortage of California grapes for the California wine industry in the future."
Nevertheless, he still reminds growers “don’t plant without a contract, and planting contracts are being offered.” However, he added that growers often do not know what “minimum” price contracts actually mean in dollars until after harvest. The upturn in wine sales is also resulting in vineyards being planted on speculation.
“Planting has slowed down on the higher end of the market. Most new grape contracts are being offered in the Central Valley” for value priced grapes, he said.
However, he said there are former grape growers who want no part of a new vineyard, preferring to stay with more stable and profitable crops like almonds, walnuts and pistachios.
“There are still growers getting out of grapes” because of past low prices and market uncertainty, said DiBuduo.
DiBuduo’s rate of return numbers reflects why, even with a seemingly growing demand, growers do not want to plant grapes.
For Sonoma growers, Allied estimated 2009 grapes purchased from growers were undervalued by an average of almost $1,000 per ton. A similar figure separated what growers in Mendocino, Lake and Solano counties received for their crop last year and what the grapes were worth.
The spread narrowed to about $200 per ton in Monterey and San Benito counties. For the other coastal area of Santa Barbara and San Luis Obispo, the spread was about $600 per ton.
For the Lodi-Clarksburg area, the spread was $140 per ton over what growers received and what they deserved for their average yields. It was less than $100 per ton for the Fresno/Madera area.
Variety acreage details
DiBuduo also detailed the acreage (bearing and non-bearing) for most of the major varieties.
• The draining of the tanks from imported bulk Chardonnay, most from Australia, is helping Chardonnay grape sales. 10 percent of the state acreage is non-bearing. Any growth in Chardonnay plantings is for lower priced wines. ”I know of 400 acres of Chardonnay that went in the Central Valley last year without a contract. That grower is pretty upbeat or crazy,” DiBuduo said. He warned that another displacement of California Chardonnay by Australian Chardonnay as happened in 2008 could be problematic.
• Pinot Grigio plantings have slowed. The question is will the market be able to absorb the 21 percent now non-bearing. However, Pinot Grigio may be cannibalizing other white wines.
• Muscat Alexander is the hottest new wine varietal in the state due to the growing popularity of sweet wines. Supplies are expected to be short through 2012, even though 25 percent of the acreage planted is non-bearing. It was the highest selling variety in the San Joaquin Valley last year and has spawned a two-year winery contract-driven planting explosion that will hit the market in 2013. “My concern is will we have enough Muscat. We need to make sure California has enough on a long term basis to supply that demand. If not, it will be outsourced outside of California. We want to maintain that market for ourselves.” DiBuduo said there are 100,000 hectares of the variety planted in the world and that could come into the U.S. as bottled or bulk wine.”If it’s a fad, we are in trouble."
• 12 percent of the state’s Cabernet Sauvignon is non-bearing. Supply is short but coming into balance with demand. Supply is growing at the low end. Implications are: plant cautiously and where it is feasible for the long term.
• Merlot. Not much action but “I would not pull out Merlot right now. I think it will come back,” said DiBuduo, citing only 3 percent of acreage non-bearing. Supply will be flat through 2014 with pull-outs and grafting over.
• 18 percent of Pinot Noir is non-bearing. However, plantings are slowing with new production through 2012, mostly for low end wines. High end Pinot Noir is in balance with demand.
• 26 percent of the Rubired acreage is non-bearing. Although classified as a wine grape, it is used mostly for red concentrate, and that market is hot. Red concentrate prices are at $12 per gallon. White concentrate is also in short supply with prices more than double of what they were a few years ago. The 2010 concentrate crush should come in at 500,000 tons, when the first crush comes out in a few weeks.
• The Zinfandel marketing will result in pull-outs, grafting and shifts from white to red Zin. No growth opportunities here, except maybe in Napa.
“I am optimistic about 2011, but it will not be a cake walk, especially in the coastal areas,” DiBuduo said.
DiBuduo did not call it a turnaround year — too many uncertainties for that.