The Cabernet Boom and Its Discontents

Our recent trip to the Napa Valley provokes two columns: this one about the Cabernet Sauvignon boom and next’s week’s about Zinfandel’s uncertain future.

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What winegrape variety comes to mind when I say “Napa Valley …”? There are lots of possibilities. Chardonnay. Merlot. Sauvignon Blanc, of course! Hey, Larkmead makes a tasty Tocai Friuliano.

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But I’ll bet that your “fill in the blank” answer was Cabernet Sauvignon and there are several good reasons for this. Cabernet is a noble grape and many of the world’s great wines are made from it or with it. American consumers are in love with this winegrape variety. Cabernet Sauvignon has recently overtaken Chardonnay as America’s #1 favorite.

Cabernet is #1

According to recent Nielsen data taken from the August 2018 issue of Wine Business Monthly, sales of Cab wines totaled more than $201 million in the most recent 4-week period, up 3.9% from the previous year. That compares with $190 million and 0.5% growth for Chardonnay, which has for years topped the league table.  Next in line but far behind, is Pinot Gris/Grigio ($96 million / 1.3% growth) and Pinot Noir ($82 million / 2.6%). The fastest-growing category is Rosé, as you might have guessed, with 67% growth on a relatively small $22 million sales base.

Consumers love Cabernet Sauvignon and growers love it, too, because they see it as a potential solution to the their financial squeeze. The costs of land, labor, equipment, and supplies keep rising, but the prices of many grape varieties have been stagnant, putting pressure on profits and, in some cases, generating rivers of red ink.

The Cabernet grape price premium can be substantial according to the 2017 California Grape Crush Report. Cabernet grapes fetched $700 per ton on average in Lodi, for example, compared with $552 for Merlot and Chardonnay. A ton of Cabernet sold for $2209 on average in Mendocino county, $2352 in Lake Country, and about $3000 in Sonoma County.

Premium Prices

Napa county topped the list with an average Cab price of $7,421 per ton. That average translates into a $70+ bottle price using the one-percent rule of thumb. And that’s the average. The very best Napa Cab grapes from exceptional sites sold for $10,000 per ton and more. Lesser Cab grapes sold for less, of course, but still generally for more than other grape varieties. Cab Rules.

And it’s not just a California thing. Cabernet is now the most-planted winegrape variety in Washington state, too, with 62,200 tons harvested in 2017 compated with #2 Chardonnay’s 39,300 tons.  The overall average price of Washington winegrapes was $1200 per ton, with Cabernet selling at a significant premium at $1500-$1600 per ton.

No wonder more and more Cabernet is being planted wherever it might possibly grow successfully. Jeff Bitter, recently appointed President of Allied Grape Growers, presented the results of the 2017 California Nursery Report at the Unified Wine & Grape Symposium meetings in January. Bottom line: Cabernet is big and getting bigger.

The Nursery Report provides insights about what grape varieties are being planted or grafted, which foretells shifts in winegrape production a few years from now when the vines are productive. The 2017 report showed that 72% of new vines were red varieties with only 28% white. Cabernet vines accounted for an incredible 37.4% of all new vines followed by 19.5% for Pinot Noir and 16.7% for Chardonnay.

Cab Pipeline is Full

If you combine Cabernet with other varieties that are often blended with it (such as Merlot, Malbec, Cabernet Franc, and Petit Verdot), they account for over 42 percent of all new California vines. I am not sure what the composition is of the vines they may have replaced, but I suspect the disproportionate emphasis on Cab and Cab blending grapes represents a significant net increase in future production.

Cabernet’s dominance is noteworthy, but the upward trend in Cab plantings is part of the long term trend that Benjamin Lewin MW described in his 2013 book Claret & Cabs: The Story of Cabernet Sauvignon. Zinfandel, not Cabernet, was the most-planted winegrape variety in the Napa Valley in the decades following Prohibition.

Zin was thought to  make the best Claret, according to Lewin, which of course is interesting because Claret is the name the British gave to Cab- and Merlot-based Bordeaux wines. Ridge made a “Claret”  in 1981, for example, from Zinfandel, Petite Sirah and Carignan and I’ll bet it was delicious!claret

Cabernet Sauvignon was a minor player on Napa’s wine scene, Lewin notes, although it made some historic wines including the great Beringer Cabs of the 1930s and the Beaulieu Georges de Latour Private Reserve wines that André Tchelistcheff made between 1938 and 1973.

The Napa Cab boom really picked up speed in the 1970s as new quality-driven wineries (think Robert Mondavi) focused on Cabernet. The Judgement of Paris in 1976 put Napa Cab firmly on the wine world’s radar.

No wonder new investment flooded into Napa Valley and Cabernet plantings expanded rapidly, both in Napa and California generally. Now the steady rise has accelerated, taking on some boom-time characteristics. The cycle of higher Cab prices, higher vineyard valuations, and increased Cabernet plantings continues.

Stein’s Law

Cycles and booms are a common characteristic of agricultural and financial markets, both of which I have studied. There are two things I have learned about the booms. First, they are driven by internal logic that seems bullet-proof from inside the cycle.  People (like me) who try to call turns often end up looking like Chicken Little fools. So don’t expect me to forecast a Cabernet bust!

The other thing I have learned is that Stein’s Law always applies in the long run. Named for the famous economist Herb Stein, Stein’s Law is says that if something cannot go on forever … it will end. And I think that Cabernet prices cannot go on going up forever (especially with new plantings on the rise) any more than housing prices could defy gravity forever a dozen years ago, no matter how how much rising prices might seem baked in the cake at any particular moment.

That doesn’t mean that the boom must inevitably be followed by a bust — there are many possible adjustment patterns as Kym Anderson’s analysis of Australia’s winegrape cycles shows. In the meantime, Cabernet is crowding out other grape varieties, including those Zinfandel vines that were once the pride of Napa Valley winemakers. That’s where we are going in the next column.

Sue and I came to the Napa Valley with Zinfandel on our minds. Circle back next week to find out what we learned.

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The Boom Varietal image above comes from a 2011 Sky Pinnick documentary of the same name about Malbec, which is sort of the Cabernet Sauvignon of Argentina. I was pleased to be part of the cast for this award-winning film. The film talks about the rise of Malbec in Argentina and the understandable concern that the boom could go bust (Argentina has a history of boom and bust).

 

4 responses

  1. Mike, as you may know, I am a recovering cyclist, but the cycle is working its magic again in Napa. If you get a chance, talk to Warren Winiarski about this latest Cab “Boom”. We are awash in mediocre “Napa Cab”, and many wineries are losing money on every bottle. Sure, all the cults and high-flyers are rocking out, but many more are struggling to match their bottle prices to their rapidly increasing COGs. We are seeing premium AVA grapes being sold at less than District average right now. We are also seeing more pending winery sales than I have ever seen before. Lots of folks taking the opportunity to exit stage left while the market is still hot and the veritable army of buyers is still here.

    Indexed contracts will continue to drive average grape prices higher which will only make things worse.

    I see Napa Valley as two distinct markets now, the uber-hi-end, where deals and prices continue towards the atmosphere, and everything else, where wineries struggle to squeeze profits out of those expensive grapes.

    As always, greatly enjoy your columns.

    “Let us be grateful to the people who make us happy; they are the charming gardeners who make our souls blossom.” – Marcel Proust

    Tony Correia

    707.933.9915

    The Correia Company

    *From:* The Wine Economist *Sent:* Tuesday, August 14, 2018 1:03 AM *To:* tony@correiaco.com *Subject:* [New post] The Cabernet Boom and Its Discontents

    Mike Veseth posted: “Our recent trip to the Napa Valley provokes two columns: this one about the Cabernet Sauvignon boom and next’s week’s about Zinfandel’s uncertain future. >>><<< What winegrape variety comes to mind when I say "Napa Valley …"? There are"

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