Mother Nature Strikes Back: The Big Wine Market Squeeze of 2018

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I’m busy getting ready for the Unified Wine & Grape Symposium, which takes place in Sacramento later this month. It is the biggest wine industry meeting and trade show in North America, with over 14,000 attendees expected for the event’s three-day run from January 23 to 25.

Sacramento Dreaming

There’s a lot to see and do at the Unified. The trade show itself is fantastic, with the full range of wine industry goods and services — from tractors to raptors to bottles and corks to finance and insurance — on display. The seminars are especially interesting this year. Gina Gallo will kick off the program with a much-anticipated keynote address at the luncheon on Tuesday.

Other sessions will look closely at wine-growing and wine-making issues, including a special program on Cabernet Sauvignon, which is the hottest thing there is in California wine these days. There are several parallel programs in English and Spanish, A very timely addition to the program this year is a series of seminars on preparing for and dealing with emergency conditions. Lots to see, hear, and learn.

I will be speaking at and moderating the “State of the Industry” general session on Wednesday morning. This will be a very intense session, featuring analysis by Danny Brager (The Nielsen Company), Steve Fredricks (Turrentine Brokerage), merger and acquisition expert Mario Zepponi (Zepponi & Company), and Allied Grape Growers’ Jeff Bitter. You really don’t want to miss this session — or any of the others.

Mother Nature Strikes Back

What’s ahead for the U.S. and global wine industries in 2018? Looking back at my notes from previous “State of the Industry” sessions, I see that in 2016 I suggested that the wine market looked very good … if the economic clouds on the horizon stayed away. They did and it was a good year for wine. In 2017 I proposed that the issue was more political than economic – lots of political uncertainty with the Brexit vote, Donald Trump’s new administration, and upcoming elections in France, Germany and elsewhere. If the political system can hold together, I speculated, it could be a good year for wine.

I might have been right at the time to focus on politics, but in retrospect it is clear that the real threat to the wine industry wasn’t economic or political … it was Mother Nature herself. 2017 (now extending into the 2018 harvest in the Southern Hemisphere) will be the smallest global wine grape harvest in a generation and, in some areas, the smallest since at least 1945.

Wildfires, both in California and in Portugal and Spain, are the iconic image of the year, but they are not the only or even the principal cause of the global grape squeeze. 2017 produced a perfect storm of different challenges in different places. Heat here, drought there, frost, freeze, hail. Sometimes it seemed like everything that could go wrong did. The impact on the global market will be significant. In fact, as I will explain next week, it could be game-changing.

Winegrowers are no strangers to bad weather or unfavorable conditions. What makes 2017 different is the fact that so many regions were affected during the same growing season – that’s what is causing the Big Squeeze. Typically small harvests in one region of the world are offset at least to some extent by abundant harvests elsewhere. This time was different – most of the world’s important wine growing regions were hit at once, albeit by different factors.oiv

The Biggest Losers

The biggest wine producers were also the biggest losers. OIV harvest estimates released on October showed a global reduction in wine production of about 8 percent compared with 2016 (see pdf here). Italy, France, and Spain – the three largest producers accounting for about half of global wine production – were down 23 percent, 19 percent, and 15 percent respectively.

There were only a few bright notes among major producers. Argentina’s 2017 harvest, for example, was 25 percent greater than in 2016. But the 2016 harvest, while good in terms of quality, was very small and not a really good point of comparison. In fact, Argentina’s 2017 crop was much lower than harvests in 2013, 2014, and 2015.

South Africa’s 2017 harvest was relatively good, up 2 percent from 2016, putting South Africa just ahead of Chile and behind Australia and China in the OIV wine league table. But the good news has not lasted. The 2018 harvest that will begin in just a few weeks looks to be the smallest in years due to very dry conditions through the growing cycle.

If you add the small 2018 southern hemisphere harvest to the northern hemisphere’s weak 2017, you get a dramatic shock to the global wine market environment – a sharp decline of 10 percent or more in global wine grape production.

What are the implications of this Big Squeeze? Your Econ 101 professor taught you that shortages cause prices to rise and that certainly in in the cards. But the wine economy is complicated, so it should be no surprise that the Big Squeeze will have complicated impacts. Come back next week for analysis.

9 responses

  1. OIV data is the view from 30,000 feet for me. Certainly prices will go up, but to a consumer such as myself my cellar remained topped up in 2017 principally due to abundance of discounted fine wines available. As I learned selling equipment in New York in the ’60’s, nobody in their right mind pays list price for anything.

  2. While obviously significant, the OIV data is the view from 30,000 feet for me. I certainly expect to see rising prices, yet my cellar has remained topped up in 2017 principally because of the wide selection of fine wines available at discounted prices. An adage I learned selling capital equipment in Manhattan in the late 60’s is nobody should pay list price for anything.

  3. Mike, I hope you aren’t a climate change denier because if you are, you are the only one in the industry. You totally avoided the word. If record fires in California, two extremely intense hurricanes, the earliest harvest on record in California, the worst snowstorm in history on the East Coast in the northern states and Florida’s freak storm are not enough, try talking to wine makers…especially about Merlot in Bordeaux. Please report on any discussions on this at the conference.
    Here is something else that should be a topic: on line wine sales vs post-prohibition three-tier laws which hurt the producers, provide outsized profits to distributors, and retailers are now being killed, first by Total Wine and it’s “Winery Direct” program which allows them to make huge mark-ups on wine.
    As for the internet, it is hurting both producers (except when they send wtso.com inventory they can’t sell).
    The Wine Till Sold Out model is this: send emails to viewers on a dozen or more wines every day. The positive side of this is that they sell out fast! Usually in 45 minutes or less. They are extremely reputable and I have talked to wineries that have sold pallet’s to them with favorable results.
    Prices are very attractive, depending on price if you buy 1-4 bottles shipping is free and prompt (you can instruct them to hold your lot for up to a year, especially useful in summer).
    Now for the downside: you see $100-150 or more wines discounted by as much as two-thirds. In the past month I have seen two premium Howell Mountain labels discounted that much!
    Here’s the rub: there is obviously a glut in top premium wines, and based on the prices, the ‘sweet spot’ for quality is now $30-50!!! This could foretell a big shakeout in the industry with vineyard land in Yountville going for 450k an acre!!! You cannot make a profit at that price. Period.
    So, I await your report and hope if you have a chance you add these to the discussion if they are not already on the agenda. They are critically important to the industry.
    Best,
    Bill

    • OOPS, scratch the comment on climate change…instead let it reinforce BOTH of our views on it vs. the Trumpistas.

    • Bill, I am certainly am not a climate change denier, as anyone who reads my work knows. There are two chapters dealing with climate change in Around the World in Eighty Days. I’m disappointed that you would make such a comment since I know you are a regular reader.

      • I meant I was wrong, you did see a problem due to climate change. It is the current administration that has its head in its…er, the sand…on anything related to science, and at the worst possible time. In his efforts to call attention to the problem unfortunately, Al Gore ended up politicizing it, but it at least called attention to the problem for those who believe in science.
        Next time I will read slower before commenting…hey, at least i didn’t tweet!

  4. As a fellow blogger, Mike, sometimes we feel like all-night DJ, wondering if anyone is listening. Eight comments today, but two were duplicates under different names…probably didn’t think it posted the first time. The rest were the banter between you and I.
    Don’t know how many hits you get, but mine are pretty low, and hardly any comments…mostly from the same readers. I hope you don’t mind me posting this but we, and other bloggers put in a lot of work doing this so if you have something you can add to the discussion…go for it. It is always appreciated.
    I am sure you agree, Mike.

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