Unsustainable? Anatomy of California Vineyard Economics

The April 2023 “Vineyard Issue” of Wine Business Monthly features articles that address many different important winegrower issues. I find W. Blake Gray’s analysis of “Prices Don’t Pencil Out for Growers Who Saw Production Costs Double” particularly interesting because it deals with a problem that I wrote about earlier this year in a Wine Economist column titled “Margins? What Margins? The Big Squeeze in Winegrowing 2023.”

Red Ink Harvest

The Wine Economist column was provoked by a conversation with some California growers at this year’s Unified Wine & Grape Symposium and connected the dots linking their observations with Vinpro data presented a few weeks earlier for South Africa. Only 9 percent of South African winegrowers earn a sustainable return on their vineyard investment.  A little more than half break even or earn small nominal profits, but not enough to sustain continuing investment. And almost 40 percent reported losses. And the margin gap is getting wider.

My California grower friends said their situation was not much different from the South Africans and, indeed, this is a problem I have seen around the world, although not typically backed by the sort of data that Vinpro collects for the South African industry.

The two simple strategies to claw back margins are to reduce yields to try to raise quality and therefore price or to reduce unit cost by increasing yields. South African growers have found it difficult to raise prices enough to make the first strategy work, so many are focusing on higher yields. But it is not as simple as that, the California growers told me, because sometimes buyers won’t allow higher yields and, in any case, some older vineyards just aren’t set up to make high yields possible.

Losing in Lodi

W. Blake Gray’s article digs deeper into the California situation, specifically for District 11, the San Joaquin Valley North, which includes Lodi. He quotes Aaron Lange of Lange Twins Family Winery and Vineyards in Lodi, for example, who explains that average grape prices are lower now than they were 25 years ago (despite higher costs throughout the production chain). Lodi Cabernet Sauvignon, for example, sold for an average of $695 per ton in 2022 according to the UDSA grape crush report. It sold for an average of $794 in 1997. The figures for Chardonnay grapes are $627 in 2022 versus $774 in 1997. That, my friends, is a big squeeze.

Is it possible to increase yields enough to break out of the big squeeze? Gray provides data from a 2021 UC/Davis study of the District 11 situation that suggests that higher yields can sometimes, but not always, solve the problem. At a price of $650 per ton (which is close to the average current Chardonnay and Cabernet prices), for example, the Davis study calculates a $156 per acre profit at 12 tons per ace and a $780 per acre product at a yield of 13 tons, but losses at lower per-acre yields.

The situation is only a little different at a price of $750 per ton. Profits ($633 per acre) appear at a yield of 11 tons per acre, rising to $2080 at a yield of 13 tons. But yields below 11 tons per acre still generate red ink even with the higher price.

Lower prices make things much worse. At a price of $550 per ton, no level of yield between 7 tons and 13 tons generates a profit. It’s red ink all the way down.

Unsustainable Yields

These data and reports make me wonder if winegrape growing is economically sustainable for many producers in District 11 and similar regions and these doubts are heightened by Gray’s interview with Jeff Bitter, the President of Allied Grape Growers (and a grower himself). Bitter notes that the economics of winegrape growing have made it difficult or impossible to focus solely on grape production.

Why continue to farm grapes? Some farm winegrapes because it is what they want to do (a “lifestyle” choice), Bitter suggests at one point, or because the alternatives are unattractive. There are a lot of factors that define the situation, including market conditions in different regions (Central Valley, Central Coast, North Coast) and farm size. There is money to be made in winegrapes under the right circumstances, but there are plenty of losses, too, and it is easy to understand why generational transitiions among growers are often in doubt.

When we talk about sustainable winegrowing, we usually focus on the environmental impacts, but Gray’s article suggests that we need to take the issue of economic sustainably more seriously, too.

Thanks to Wine Business Monthly for all the great articles in this issue and to W. Blake Gray for his focused report on the vineyard margin problem and the economic issues facing growers generally.

9 responses

  1. Mike, this is so interesting. There are just a lot of implications of this, and not just in the wine world. Years ago, I was in the restaurant business and I had a lot of doubts about the sustainability of that industry from an economic perspective. Many positions were paid very low wages and we felt we were maxed out on the prices customers would pay but still struggled to make a profit. As in the wine industry, many more restaurants than one would imagine bump along at break-even or worse. From an economic perspective, one question: What would happen if vineyards and restaurants set prices based on what it actually costs to produce the product plus a reasonable margin? In the restaurant industry, we are seeing this in some places and I guess the answer is that affluent customers can (and in some places, will) pay the price. Others would probably be priced out.

  2. it is simply fundamental that sustainability must start with profitability, a concept often ignored/rejected by many many who advocate solely the esg side of the sustainability discussion. Without profitability you cannot pay for things.

  3. The industry is over planted with no clear picture of the next consumer, post baby boomer generation. Ag has always corrected with a shift in crop. Add to that climate change, water scarcity and the ultimate fact that industrial mono crops are never long term. Wine industry and ag in general is responsible for more land conversion and loss of biodiversity than any other activity humans pursue. Time to acknowledge and change how, where and what we grow.

  4. The concerns are real, but I will note that in 1967 when I made $2.00 an hour, gas was $.23 (23 cents) a gallon and cheap wine was $2.50 per gallon. Today a comparable wage would be about $16.00, gas is now $3.50 (where I live) and cheap wine is $25,00 per gallon. It doesn’t take a math whiz to see that inflation has not kept wages up relative to prices of goods and services.

  5. Said a different way, a California vineyard whose revenue is less than $7,700/acre is unprofitable.
    The article implies that this is before accounting for Return on Capital for the land and CapEx.

  6. The solution, in my view, is a fundamental economic principle: too many participants ( growers) in the market. The numbers in your article indicate that growing grapes is an exercise in economies of scale. It may be harsh but the best action for an unprofitable grower is to throw in the towel, sell to a profitable grower and accept that they may not be cut out for this business.

  7. It has been mentioned, but what are the impacts of land costs on all of this? It has somewhat seemed to likely many of us, that land costs rose far beyond what rational returns were likely to bring.

  8. Great article Mike. As a winegrower close to the coal face – I see this in Bordeaux too. Another element that should be added to the debate is the cost of intensive farming to the environment. Going the high yield conventional farming route could look good on paper (and for lower consumer prices) short term but long term would cost society in many more ways – polluted water, pesticide residues, dead soil etc.

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