As farming costs continue to rise, while grape prices remain without appreciable growth, it has become exceedingly difficult for growers to be compensated in amounts that will enable them to sustain operations. This should be no surprise to most of us. I believe this problem will only worsen.
As winery consolidation remains on the increase, it is not inconceivable that in the not too distant future we might see a small handful (maybe no more than four or five) of mega-companies controlling the wine business. In combination, these companies will be in a position to dictate grape prices. As they compete for market share, and in the process strive to contain their costs, the effect on growers will surely be a strong downward pressure on grape prices. The question for growers is, what, if anything, can we do to protect ourselves?
One way is to organize. While this may seem to be objectionable to some, consider what is happening on the winery side. Maybe not by design, but nevertheless in fact, the effect of winery consolidation will be just that: a collection of wineries under a few giant corporations will be deciding what prices to pay for your grapes. It won’t matter if you’re growing Cabernet in the Napa Valley or Sauvignon Blanc in the Central Valley, while the prices may be different the principle is the same. And it does not look good for us. If, as growers, we could cooperatively agree on certain grape price minimums, we might – and this is only a might – be in a position to prevent a downward spiral from developing.
Steps to success
First of all, any meaningful discussion of grape prices must be restricted to a specific variety in a specific appellation. This means that any cooperative to be formed, by necessity would comprise a subset of growers. For the sake of convenience, let’s call each of these cooperatives a grower alliance. Secondly, to be successful, it would mean that virtually every grower that raises grapes of that variety within that appellation participates. Without the cooperation of most all of those growers the entire concept would collapse. I’d like to explore one way that this might work.
A grower alliance might be formed to determine a price that would result in the minimum needed to support sustainable farming operations for a particular variety in a specific area. Its goal would then be to ensure that no grapes would be sold at any price below that level. This goal might not be met overnight; it may take a few years to be reached, and then might be adjusted annually as costs increase. Growers within the alliance would agree to not sell their fruit to any source that offered a price below that minimum. The incentive for those growers refusing to sell would be in the form of compensation paid to them from a pool set up by the alliance. This pool would be generated by a modest assessment placed on the remaining growers that were successful in finding buyers. The easiest, and I think fairest, way to set the assessment would be on the basis of some percentage of the income the successful growers received. This might be in the neighborhood of 1 to 3 percent. The compensation to the unsuccessful growers probably should not be equal to the predetermined minimum price, but some amount below that, since those growers were never offered the minimum price to begin with.
Next, the question is, what to do with their fruit that was left on the vine? It could be left to rot or, more beneficially, it could all be collected and custom crushed. The resulting bulk wine would become, in effect, the property of the alliance, to be later sold with the proceeds contributing to the pool. The alliance would have to be very careful in determining the assessment and compensation amounts so as to not overly tax the successful growers or underpay the unsuccessful ones.
To see how such a concept could work we can take an example case at random. I’ve looked at Mendocino Merlot in this instance; as it happens, Mendocino Merlot is in oversupply at the moment so it may be representative of a grower alliance that would be of particular value to its constituents. Let’s assume that a new Mendocino Merlot Alliance determined that $900 per ton is the lowest a grower could receive in order to be sustainable. Last year the average price per ton for Mendocino Merlot was $1,174 with a total yield of 6,175 tons. But, if the alliance were to impose an immediate cutoff point at $900 per ton, below which some 1,189 tons or almost 20 percent of the total tonnage falls, it would be unreasonable to expect 80 percent of the growers to subsidize the remaining 20 percent. Moreover, when the low price for the Merlot grapes that year was $400 per ton, it is unlikely the market would accept such a radical adjustment. An alliance might be wise to gradually work its way up to the calculated minimum over a few years.
Let’s assume that the alliance set this year’s minimum at $700 per ton, less than the sustainable amount but a step in that direction. According to the 2004 Grape Crush Report some 209 tons, or 3 percent of total tonnage, were actually sold below the $700 per ton level. They would now remain unsold, because members of the Mendocino Merlot Alliance have agreed not to sell for less than $700 per ton. If the alliance agreed to compensate the growers of that 3 percent in the amount of $500 per ton it would need to raise $104,500 (remember, we are proposing that members of the alliance who receive price supports will not receive the full amount of the minimum price). If the remaining growers in the alliance were each assessed 2 percent of their income they would be able to raise $142,700, more than enough to cover the grower compensation plus some amount for operational costs. This 2 percent assessment should be acceptable to most growers; a grower receiving $1,200/ton – an amount very close to the new average for all grapes that sold for more than $700 per ton – would contribute $24/ton to the alliance. In exchange for this he would see the bottom of the Mendocino Merlot prices continue to rise with some expectation of stability in the market.
If his contract were based on the previous year’s county average, it would have cost him practically nothing, as next year’s average would have increased from $1,174 per ton to $1,196 per ton if we were able to prevent any Mendocino Merlot from selling for less than $700 per ton. Further, if those 209 tons of unsold fruit were custom crushed for bulk wine, at $6 per gallon, the alliance would raise an additional $117,040 (after paying $150 per ton to pick the fruit and $250 per ton to custom crush it). Those proceeds could be later added to the pool or redistributed to the alliance members.
This is just one example of how such a program could work. There are many alternate approaches. But the idea of our doing something along these lines, and doing it before our situation becomes desperate, is too important to ignore. It doesn’t matter if you’re growing Pinot Noir in Russian River or Cabernet Sauvignon in Lake County, there is and always will be a need for growers to take measures simply for us to be able to survive economically.
Certainly there are issues that we must deal with. Most critically, we must strive for near 100 percent compliance by all eligible growers. If we don’t, while the alliance may be of some help by supporting its members, we will not achieve the more important goal of preventing wineries from buying fruit at non-sustainable prices, which drives all prices down.
Other difficult but critical problems will be:
— To determine fair minimums to allow sustainable operations;
— To establish acceptable assessment levels for participating growers;
— To define minimum quality standards for vineyards in each alliance;
— To ensure that only growers who adhere to those quality standards receive support if they are offered prices that are below the alliance’s minimum, and;
— To structure the alliance to achieve impartiality and operational efficiency.
Each of us has a personal stake in assuring that North Coast grape growing remains vibrant and profitable for all of us. If we don’t take the necessary pro-active steps to accomplish this, no one else will. On the contrary, we will see market forces geared to cause just the opposite to happen.