The Origins of the California Cabernet Bubble

Jeff Bitter emoji urging grapes growers to pull out vinesCalifornia’s Cabernet Glut Deepens” is the title of W. Blake Gray’s recent Wine-Searcher column, reporting on the Vineyard Economics Symposium discussion of current market trends. It makes good reading, with its useful mixture of threatening dark clouds and potential silver linings.

California (and Washington, too) was over-supplied with wine in tanks and vines in the ground before the coronavirus crisis hit. The lock-down booze-buying surge in March and April made a dent in the wine lake (a net increase in U.S. sales after considering lost on-trade sales). But there is concern that overall sales will fall once the second shoe drops and the impact of the recession is fully felt despite the eventual return of bar and restaurant activity.

Cabernet was the focus of a boom because it is the most popular red wine variety and can sell for a premium, especially in the Napa Valley.  It seemed like it was impossible to go wrong planting a few more acres of Cabernet, so plant we did. Economists see moral hazard in situations like this. Moral hazard is the notion that if you don’t think that an otherwise risky bet can fail, you will take more risk and make bigger bets.

Gray reports that there are rising bulk wine surpluses and falling prices. That sure thing turned out to be a fallacy of composition. What was true for an individual grower (profitable to plant more acres of Cab so long as everyone else holds steady) was not true when everyone planted more Cab. No wonder Allied Grape Growers President Jeff Bitter (that’s Jeff in the cartoon image above) told growers at this year’s Unified Wine & Grape Symposium meetings that it is time to pull out marginal vines.

But the fallacy of composition can apply to grubbing up, too. If everyone else is going to pull out Cab vines, the logic goes, then I’m better off keeping mine in the ground. But if no one pulls vines, the bust gets deeper. Fortunately there is evidence that some vines are coming out. But, as Gray’s report suggests, the problem persists.

Agricultural markets (and sometimes financial markets, too) go through cycles of boom and bust. The Turrentine Wine Wheel of Fortune captures very well the cycles in wine. People are often surprised  by the cycles because moral hazard or the fallacy of composition blinds them to the evidence that was always hidden in plain sight.

With this is mind we re-print below two Wine Economist columns,  a nervous report on the emerging Cabernet boom (August 2018)  and suggestions (some a bit tongue-in-cheek) about what to do with surplus Cabernet grapes (July 2019).

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The Cabernet Boom and Its Discontents

August 2018

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.

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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).

 

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Six Things to Do with Surplus Cabernet Sauvignon Grapes

July 2019

The wine grape harvest is just around the corner in California and Washington State and, while that’s a great time of the year, it will present economic challenges to some winegrowers. There’s going to be an awful lot of Cabernet Sauvignon harvested this year. Most of these grapes are contracted, but some will be looking for buyers and it might not be so easy.

Cabernet has been the top choice for new plantings for the last several years and it is easy to understand why. It is a noble grape and can make terrific wine. Consumers love it, so growers have responded enthusiastically. The problem, as has been noted here before, is that wine demand generally has slackened just as new supply is reaching the market. For a few years at least there is likely to be a surplus of Cabernet Sauvignon in many regions.

In fact, the surplus is already here, or at least that’s how I read the recent reports from Turrentine Brokerage. Turrentine data show the highest level of Cabernet on the bulk market for many years. Add the 2019 harvest to the current market and you have a problem — not for everyone, but for those who are left with unsold grapes or wine.

Econ 101 Meets Yao Ming

What do you do when you have too much Cabernet? Econ 101 suggests price adjustment — cheaper grapes, cheaper wine, and so on. But there are limits to this strategy, especially since the lower price tiers of the retail market are in decline.

Export sales are another Econ 101 solution and certainly there is an opportunity here, especially if President Trump succeeds in talking the dollar’s exchange value down. But the president’s trade wars have had an offsetting impact on wine exports.

Countries that compete with us in the export markets, notably Australia and Chile, have aggressively sought out free trade agreements to boost sales. The U.S. has recently taken the opposite strategy. U.S. wines are therefore a tough sale today in many export markets including especially China, where Australian and Chilean wines find great success.

Yao Ming, the Chinese basketball legend, has trouble selling his signature Napa Cab back home because of 93% tariffs imposed in response to the Trump administration’s policies. If Yao can’t sell Cab in China, there is not much hope for the rest of us. Export markets are unlikely to absorb very much of the surplus Cab. Other options?

Searching for alternatives, I consulted the most recent Nielsen market figures in the current issue of Wine Business Monthly and found a few ideas to consider if you find yourself holding excess Cabernet this year.

#6 Two Words: Red Blends

Red blends are a useful market category because you can blend away unfashionable or surplus grape varieties without consumers necessarily noticing what’s up. Syrah and Merlot are not as popular as they once were as varietal wines, for example, but blend them together, call the result a Red Blend, and consumers snap them up. Cabernet blends would be very competitive at the right price. This market segment is fairly large but, unfortunately according to the Nielsen data, its growth has stalled a bit this year. That means we need to think about …

#5 Three Words: Sweet Red Blends

See “Red Blends” above but add some residual sugar.  I don’t have a lot of personal experience with these wines, but I see them everywhere. 19 Crimes, which tastes sweet to me, has a successful varietal Cabernet Sauvignon, so this is not uncharted territory. Even better, why not try …

#4 Rosé of Cabernet

Rosé is the fastest growing market segment in the Nielsen table. A lot of that Rosé comes from France, to be sure, but the market is large and fluid.  Picked at the right time, Cabernet makes a nice Rosé and in fact there are a great many produced both here in the U.S. and around the world.

As I noted here earlier this year, there are tricks to the Rosé trade to consider. Rosé is not that easy to make, since color is a concern, and can be tricky to sell because consumers prefer the most recent vintage and demand seasonality is a factor, too. If you like the idea of Rosé of Cabernet, then I think you will also like …

#3 Sparkling Rosé of Cabernet 

Take two fast-growing categories — sparkling and Rosé — make the wines from Cabernet  and you are ready to go. The only thing that could be better is …

#2 Canned Sparkling Rosé of Cabernet 

… because canned wine is also a thing (watch for a report here in the near future) and it is growing fast. Have you seen all the new canned wine displays in the supermarkets? Don’t dismiss canned wine too quickly.

Canned sparkling Rosé of Cabernet leverages three hot trends to use up your excess Cab. It is a perfect storm of wine. What could be better? And while you have the mobile canning equipment hooked up, you might consider …

#1 Canned Sparkling Cabernet + Black Currant Spritz

Seriously!

I am paying more attention to the canned wine displays and one thing I note is that canned wine spritz is generally right beside the other canned wines. These seem generally to be mixtures of wine, fruit flavors, and carbonated water. They sound refreshing and they have less than half the alcohol of regular wine. A Cabernet and Black Currant spritz sounds drinkable to me on a hot day, but you might prefer blackberry or some other fruit flavor.

Since the consumer segment that is interested in low alcohol products is growing, I can see how this trend might persist.  Something to consider.

Seems Like a Stretch?

Bottom line. The U.S. industry is going to need to find uses for its  excess Cabernet Sauvignon if the potential surplus materializes. These examples are ways to take advantage of the small number of growing wine market segments. If it seems like getting Cab products into these segments is a stretch, then it shows how much more pressure there will be on the traditional product markets.

I hope the market can absorb all the Cabernet that’s coming its way. Fingers crossed.

It’s Going to be Huge: 2020 Unified Wine & Grape Symposium

 

The Unified Wine & Grape Symposium is just a few weeks away (February 4-6 in Sacramento) and I am already excited. The Unified is North America’s largest wine industry event with about 14,000 in attendance for the trade show and seminars.

Bursting at the Seams

The 2020 Unified promises to be bigger and maybe even betterthan ever before. The event has been moved out to the Cal Expo fairgrounds for 2020 while the Sacramento Convention Center is expanded and remodeled — the Unified  simply outgrew the old facilities. The one-year move means even more room than in the past for trade show exhibitors, including outdoor space for big machines and equipment. It’s going to be huge — literally!

And the program organizers have gone to some trouble to expand seminar offerings, too, with 110 speakers divided among about 30 sessions. Something for every need and interest with programs for growers and winemakers, marketing and business management. As has been the case for several years, some of the technical sessions are offered in both English and Spanish.

Labor cost and availability is an important issue in the wine business, so I am interested in one session that examines mechanization in the vineyard and includes a wine tasting. I’m guessing that the audience will be offered the opportunity to see if they can taste the difference between wines made with machine-harvested versus hand-picked grapes. Should be interesting.

State of the Industry

I’ll be moderating and speaking at the “State of the Industry   general session on Wednesday morning. Danny Brager (Nielsen), Steve Fredricks (Turrentine Brokerage), Jean-Marie Cardebot (University of Bordeaux), and Jeff Bitter (Allied Grape Growers) will be joining me on the big stage. A great team with deep understanding of the wine market.

Jeff O’Neill of O’Neill Vintners and Distillers is giving the Tuesday luncheon keynote speech this year and I am looking forward to hearing what he has to say. These are uncertain times for wine in the United States and it is easy to be pessimistic about the future. O’Neill’s company has been remarkably successful in navigating the treacherous seas, taking advantage of favorable winds. Everyone will be looking for lessons and insights they can take back to their businesses.

This is important because one cloud hanging over the meetings is a structural surplus of grapes and wine in some categories. U.S. wine demand is plateauing, which is better than some countries where demand has been falling for years. Overall wine expenditures are still rising even if overall volumes have declined.

The surplus creates a problem that may take years to correct through a combination of rising sales in old markets, development of new markets, and adjusting production capacity. Heidi Scheid is leading a session that will address the issues directly titled Strategies for Managing Through Over-Supply. Should be a standing room crowd.

Trade Wars Shrink the Pie

Trade wars are another concern. President Trump has said that trade wars are good and they are easy to win, but the wine industry has found little to celebrate about being in the center of the battlefield. Having invested years of effort and lots of dollars opening up Chinese markets, for example, many wineries have watched hoped-for opportunities disappear with retaliatory Chinese tariffs on U.S. wines.

It looks like French wine producers have dodged a bullet, avoiding sky-high U.S. tariffs that were threatened as retaliation for France’s digital tax scheme. You might have expected U.S. wine producers to celebrate tariffs on wine imports because some buyers are likely to shift from imports to domestic wines. But this substitution effect is not the only impact the tariffs have.

Prohibitive tariffs on imported wine are more likely to shrink the wine market pie at every stage of the product chain. It is hard to see how retailers or distributors can justify investment in the wine category when overall sales fall and uncertainty about future conditions is high. The uncertainty effect looms especially large, despite the recent wine tariff trade truce. If wine was caught in the trade war cross-fire before, there’s no reason it couldn’t happen again. And truces are by their nature temporary and fragile.

When tariffs work to protect an industry they tend to do so only temporarily and at high cost (struggling Harley-Davidson is a good example of this). But they more often backfire. The recent tariffs meant to protect manufacturing jobs in the U.S., for example, seem to have only accelerated the decline of the manufacturing sector generally because of the complex international interweaving of manufacturing chains and other factors.

Food (and Drink) for Thought

There a lot to think about as the wine industry moves into 2020, so I encourage readers to check out the Unified’s seminar programs and start working on a strategy for the trade show.

I’ve been to a lot of wine meetings both here and abroad, but there’s nothing like the Unified. Hope to see you there.

Six Things to Do With Surplus Cabernet Sauvignon Grapes

cabThe wine grape harvest is just around the corner in California and Washington State and, while that’s a great time of the year, it will present economic challenges to some winegrowers. There’s going to be an awful lot of Cabernet Sauvignon harvested this year. Most of these grapes are contracted, but some will be looking for buyers and it might not be so easy.

Cabernet has been the top choice for new plantings for the last several years and it is easy to understand why. It is a noble grape and can make terrific wine. Consumers love it, so growers have responded enthusiastically. The problem, as has been noted here before, is that wine demand generally has slackened just as new supply is reaching the market. For a few years at least there is likely to be a surplus of Cabernet Sauvignon in many regions.

In fact, the surplus is already here, or at least that’s how I read the recent reports from Turrentine Brokerage. Turrentine data show the highest level of Cabernet on the bulk market for many years. Add the 2019 harvest to the current market and you have a problem — not for everyone, but for those who are left with unsold grapes or wine.

Econ 101 Meets Yao Ming

What do you do when you have too much Cabernet? Econ 101 suggests price adjustment — cheaper grapes, cheaper wine, and so on. But there are limits to this strategy, especially since the lower price tiers of the retail market are in decline.

Export sales are another Econ 101 solution and certainly there is an opportunity here, especially if President Trump succeeds in talking the dollar’s exchange value down. But the president’s trade wars have had an offsetting impact on wine exports.

Countries that compete with us in the export markets, notably Australia and Chile, have aggressively sought out free trade agreements to boost sales. The U.S. has recently taken the opposite strategy. U.S. wines are therefore a tough sale today in many export markets including especially China, where Australian and Chilean wines find great success.

Yao Ming, the Chinese basketball legend, has trouble selling his signature Napa Cab back home because of 93% tariffs imposed in response to the Trump administration’s policies. If Yao can’t sell Cab in China, there is not much hope for the rest of us. Export markets are unlikely to absorb very much of the surplus Cab. Other options?

Searching for alternatives, I consulted the most recent Nielsen market figures in the current issue of Wine Business Monthly and found a few ideas to consider if you find yourself holding excess Cabernet this year.

#6 Two Words: Red Blends

Red blends are a useful market category because you can blend away unfashionable or surplus grape varieties without consumers necessarily noticing what’s up. Syrah and Merlot are not as popular as they once were as varietal wines, for example, but blend them together, call the result a Red Blend, and consumers snap them up. Cabernet blends would be very competitive at the right price. This market segment is fairly large but, unfortunately according to the Nielsen data, its growth has stalled a bit this year. That means we need to think about …

#5 Three Words: Sweet Red Blends

See “Red Blends” above but add some residual sugar.  I don’t have a lot of personal experience with these wines, but I see them everywhere. 19 Crimes, which tastes sweet to me, has a successful varietal Cabernet Sauvignon, so this is not uncharted territory. Even better, why not try …

#4 Rosé of Cabernet

Rosé is the fastest growing market segment in the Nielsen table. A lot of that Rosé comes from France, to be sure, but the market is large and fluid.  Picked at the right time, Cabernet makes a nice Rosé and in fact there are a great many produced both here in the U.S. and around the world.

As I noted here earlier this year, there are tricks to the Rosé trade to consider. Rosé is not that easy to make, since color is a concern, and can be tricky to sell because consumers prefer the most recent vintage and demand seasonality is a factor, too. If you like the idea of Rosé of Cabernet, then I think you will also like …

#3 Sparkling Rosé of Cabernet 

Take two fast-growing categories — sparkling and Rosé — make the wines from Cabernet  and you are ready to go. The only thing that could be better is …

#2 Canned Sparkling Rosé of Cabernet 

… because canned wine is also a thing (watch for a report here in the near future) and it is growing fast. Have you seen all the new canned wine displays in the supermarkets? Don’t dismiss canned wine too quickly.

Canned sparkling Rosé of Cabernet leverages three hot trends to use up your excess Cab. It is a perfect storm of wine. What could be better? And while you have the mobile canning equipment hooked up, you might consider …

#1 Canned Sparkling Cabernet + Black Currant Spritz

Seriously!

I am paying more attention to the canned wine displays and one thing I note is that canned wine spritz is generally right beside the other canned wines. These seem generally to be mixtures of wine, fruit flavors, and carbonated water. They sound refreshing and they have less than half the alcohol of regular wine. A Cabernet and Black Currant spritz sounds drinkable to me on a hot day, but you might prefer blackberry or some other fruit flavor.

Since the consumer segment that is interested in low alcohol products is growing, I can see how this trend might persist.  Something to consider.

Seems Like a Stretch?

Bottom line. The U.S. industry is going to need to find uses for its  excess Cabernet Sauvignon if the potential surplus materializes. These examples are ways to take advantage of the small number of growing wine market segments. If it seems like getting Cab products into these segments is a stretch, then it shows how much more pressure there will be on the traditional product markets.

I hope the market can absorb all the Cabernet that’s coming its way. Fingers crossed.

What’s Ahead for 2019? Wine Economist World Tour Update

51ppzy7bwzl-_sx332_bo1204203200_The Wine Economist World tour continues in 2019 and I thought you might  be interested in the who/what/when/where because I think my speaking schedule reflects some important issues and concerns in the  global wine business. Here’s an annotated itinerary.

Unified Wine and Grape Symposium

The Unified Wine & Grape Symposium is the Big Show, the largest wine industry gathering in the hemisphere. About 14,000 people will come to Sacramento for the sessions, trade show, and networking opportunities. The Wednesday morning State of the Industry session draws a huge standing-room-only audience that will be anxious to hear about this year’s special challenges: slowing economy, plateauing demand, surplus stocks, and useful strategies to deal with these problems.

I will moderate the session and present, too, along with Jeff Bitter, Allied Grape Growers, Danny Brager, The Nielsen Company, Marissa Lange, LangeTwins Family Winery and Vineyards, and Glenn Proctor, Ciatti Company. This is a fantastic lineup of speakers with much to say about the industry today and in the future. Not to be missed.

I will be busy again on Thursday morning as co-moderator with L. Federico Casassa, California Polytechnic State University, of “Technology Thursday: From Drones to Chatbots; How the Wine Industry is Embracing Digitalization.”  The speakers will examine digital technology in the vineyard, cellar, and beyond, revealing what’s already available, what is coming soon, and what the  distant future holds. The distant future, by the way, is only ten years away — the pace of technological change is that fast.

There is much to discuss, so there will be about a dozen speakers including Bob Coleman, Treasury Wine Estates, Nick Dokoozlian, E. & J. Gallo Winery, David S. Ebert, Purdue University, Nick Goldschmidt, Goldschmidt Vineyards, Liz Mercer, WISE Academy,  Miguel Pedroza, California State University, Fresno. and Will Thomas, Ridge Vineyards, California. . Each speaker will have just ten “Ted Talk” minutes, so hold onto your hats!

Washington Winegrowers Convention

I will be a busy guy at the Washington Winegrowers Convention & Trade Show in Kennewick, Washington, February 11-14, 2019. I’ll begin early on the morning of the 12th moderating and presenting at the State of the Industry session, which will deal with some of the economic challenges facing the region’s wine businesses today.

Joining me will be Wade Wolfe, Thurston Wolfe Winery, Chris Bitter, Vintage Economics, Steve Fredricks, Turrentine Brokerage, and Jim Mortensen, President & CEO,  Ste. Michelle Wine Estates.

In the afternoon I will be part of a session on “Intentional Rosé.”Rosé is the hottest category in wine and so it is no surprise that it gets a full session here and also at the Unified.

I will talk about the global market dynamic and be joined by Megan Hughes, Barnard Griffin winery, Rob Griffin, founder of Barnard Griffin winery, Lacey Lybeck , Vineyard Manager at Sagemoor Vineyards, and Vincent Garge, Maison Henri Garde, Bordeaux. Fred Dex with lead a tasting of Rosé from around the world.

Porto Climate Change and Wine Conference

Sue and I are looking forward to the discussion at Climate Change: Solutions for the Wine Industry in Porto on March 6-7. The focus will be on action, not just talk, which is much appreciated. Al Gore is giving the closing address and a host of wine industry leaders will speak on their concrete efforts to address the challenge of climate change. Climate change is such an obvious risk to the wine industry. It is great to see so many rise to meet the challenge.

I will be moderating and presenting at a session called “Efficiency & Economics: Call to Action,” which I assure you will be more interesting than it sounds. Joining me on the panel are Stephen Rannekleiv, Executive Director, Food & Agribusiness Research at Rabobank, and Malcom Preston, Global Head of Sustainability Services at PricewaterhouseCoopers.

Chile’s National Wine Fair

Sue and I are looking forward to being at Viña Viñamar, Chile on May 15-16 for the Feira Nacional Vitivinicola.  I will be speaking about Chilean wine on the global stage, which is appropriate given that Chile is such an important wine exporting nation. Chile is hosting the Asia Pacific Economic Cooperation (APEC) meetings in 2019 and I expect that the National Wine Fair will take full advantage of this opportunity. The U.K. and U.S. have long been Chile’s top export markets, but China became #1 in 2017.

British Columbia Winegrape Council Conference

I’ve been invited to speak about the economics of sustainable winegrowing at the BC Winegrape Council Enology & Viticulture Conference and Tradeshow in Penticton, British Columbia in July  Sustainability is on everyone’s lips (see climate change conference above), but the transition from theory to practice or talk to action is a challenge. Looking forward to discussing this issue with my BC friends and colleagues.

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Change is the common feature of all these programs. Changing economic conditions, changing market focus (who would have guessed that everyone would be talking about Rosé?), climate change and sustainable practices, and technological change, too. Change is always disruptive and always interesting, too. Hope to see you somewhere along the wine road in 2019.

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

65

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.

What Next for U.S. Wine? Unified Symposium’s “State of the Industry”

whatnextSue and I are in Sacramento for the annual Unified Wine & Grape Symposium trade show and meetings that start today and run through Thursday. This is the Western Hemisphere’s largest wine industry gathering and there is a lot going on this year, both on the trade show floor and in the ambitious seminar program.

I will be moderating the “State of the Industry” panel on Wednesday and also speaking about the global wine market “big picture.” Nat DuBuduo of Allied Grape Growers will explain what’s happening in the vineyards (Allied’s most recent newsletter suggests Nat will have some dramatic statistics to reveal), Steve Fredricks of Turrentine Brokerage will examine bulk wine market dynamics and Jon Fredrikson of Gomberg, Fredrikson & Associates will break down the U.S wine market and name his Winery of the Year.

It will be a great session. There’s a lot happening in U.S. wine and this may be the best place to go to learn about it.

Uncertain Prospects

The Economist cover shown here captures the essence of my part of the program. The global economy faces uncertain prospects as we enter 2016. Where will economic growth come from in 2016? I will examine the usual suspects and come up with a surprising answer.

I will also highlight four global  trends that I think will be important for the U.S. wine industry  in 2016. (1) The slowdown in the Chinese economy, which is likely to have significant direct and especially indirect effects. (2) The possible renaissance of the Argentina wine export machine (I have written about this in my last two columns on The Wine Economist).

(3) The “Euro-Doillar Twist” that is taking place as U.S. interest rates rise slowly this year and European interest rates continue to move into negative territory. No one really knows how this will play out in terms of direct and indirect effects, which adds a major element of uncertainty to any economic forecast for 2016.

A Very Good Year?

Finally (4) I’ll talk briefly about the possibility of contagion as economic events in one part of the world cascade through the system. With some countries on the brink of crisis, it wouldn’t take much to set off a chain reaction.

I will conclude my very brief remarks by asking if 2016 will be a very good year for the U.S. wine industry? The answer? Maybe! (Which may come as an optimistic surprise after all the gloom and doom of my previous points.) There are definite positive prospects for U.S. wine this year, but lots of potential problems, too.

What next? Lots of uncertain possibilities. Get ready!

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A very good year? That calls for Sinatra. “I think of my life as vintage wine …”

Legendary Fred Franzia to Speak at Unified Symposium Luncheon

Sue and I will be at the Unified Wine & Grape Symposium in Sacramento on January 26-28, 2016 where I will once again moderate the State of the Industry session featuring presentations by Steve Fredricks of Turrentine Brokerage, Nat DuBuduo of Allied Grape Growers and Jon Fredrikson of Gomberg, Fredrikson & Associates.

I always look forward to the Wednesday “State of the Industry” panel because the speakers are so well-informed and the information so timely and interesting. But if I am honest, this year I am even more excited about the Tuesday luncheon gathering because that speaker will be the legendary Fred Franzia (a.k.a. Mr Two Buck Chuck) of Bronco Wine. Wouldn’t miss this for the world!

Bronco By the Numbers

Bronco Wine Company is a major force in the U.S. wine industry. According to the most recent Wine Business Monthly report, Bronco’s 20 million annual case volume makes it the fourth largest U.S. wine company after Gallo, The Wine Group, and Constellation Brands. Although Charles Shaw (a.k.a. Two Buck Chuck) is the best known Bronco label, the company has more than 50 brands. One of the products that Bronco does not make is Franzia, the popular box wine, which belongs to The Wine Group. Franzia doesn’t make Franzia? It’s a long story that I will tell another time.

Bronco’s history began in 1973, when Fred Franzia and his brother Joseph met with their cousin John and pledged to go all in to build a new wine company. Equipped with a tiny bank loan, their knowledge of the business side (Fred and Joseph) and of winemaking (John), plus a major measure of determination, they set out on the twisting road that has brought them to their current position.

Their accomplishment is quite breathtaking when you think about it.  Bronco today boasts impressive winemaking facilities, a packaging and distribution center in Napa and about 40,000 acres of vineyards. No, I didn’t make a mistake, the number is 40,000, making Bronco one of the largest vineyard owners in the world.P1100664

The Miracle of Two Buck Chuck

One of Bronco’s greatest achievements, of course, is the success of the Charles Shaw wines sold at Trader Joe’s stores. These clean, balanced, and affordable wines played an important role in the democratization of wine in the United States. So many previously intimidated consumers were drawn into the wine market by Two Buck Chuck and the other wines it inspired or provoked.

I wrote about “the miracle of Two Buck Chuck” in my 2011 book Wine Wars. The quality of these inexpensive wines forced other winemakers to raise their game and give better value, which in turn gave consumers more confidence and expanded the wine market’s reach. If you think about the U.S. wine world before 1973, well it really is a miracle that we have come so far. The Franzias played an important role.

The View from Bronco Wine

What will Fred Franzia talk about at the Unified Symposium luncheon? Obviously I don’t really know, but I hope that he will look back at some of the inspiring figures that he has known in his life in American wine and look ahead at some of the challenges he sees for the future. I’m hoping to be  informed, entertained, and inspired.P1100655

Sue and I had an opportunity to talk about the past, present, and future of American wine with Fred Franzia back in September. Fred invited us to come down to see what a large-scale grape harvest looks like. Fred’s son Joey took us to see the night harvest at a 4000-acre vineyard ranch near Lodi — quite an experience to see the big machines at work under the stars.

We also visited the Napa bottling and distribution center and the main winery in Ceres, where we had lunch with Fred, Joseph, and John Franzia. Then John took us through the working winery (he designed it and supervised its construction), which was receiving grapes picked the night before (more than 300 big truck loads a day at that time).

Big and Bigger

The scale of the Ceres operation got our attention, of course. We saw some tanks that held 350,000 gallons of wine each. Big as they are, they were dwarfed by other tanks that held twice as much. Amazing.

Once we got used to the scale of the Bronco winery we began to appreciate the tremendous attention to detail, which was apparent in all of the other Bronco operations we visited. So many moving parts coordinated so efficiently. Very impressive. We enjoyed the opportunity to sit and chat with Fred in his modest trailer office and to hear some stories from the past and his vision of the future. I’m hoping to hear more along these lines when Fred gives his luncheon talk.

The Name is Shaw, Charlie Shaw

Let me share one story. Fred told us that he was making a call  at a Trader Joe’s store — he still handles that account himself — and struck up a conversation with a young man who was stocking a Charles Shaw display. Fred asked about how the wine was selling and what customers were saying and so on and the clerk asked who he was and why he wanted to know. Well, Fred replied, I’m one of the people who help make this wine — I work at the winery.

Wow, the clerk exclaimed. You’re Charles Shaw? You’re Charlie Shaw! No, no, my  name’s not Shaw, Fred tried to explain, but it was too late and a minute later the store PA system announced that Charles Shaw was visiting the wine aisle. Amazed customers surged to the Two Buck Chuck display to thank their hero and Fred spent the rest of his visit happily autographing wine bottles. A rock-star moment!

I hope I have the details of that story right (and I apologize if I’ve messed up) because it says a something about the pride and personal touch that we found everywhere at Bronco and about the warm enthusiasm that Charlie Shaw inspires in his fans.

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Sue’s photos above show the blur of the Charles Shaw bottling line at the Bronco Napa facility and a tractor driver during night harvest.

Wine’s Future: Tighten Up

“Tighten Up” was a big hit for a Archie Bell and the Drells back in 1968. If you aren’t familiar with this R&B tune and its trademark dance you might want to take a moment to learn it because Tighten Up is where the U.S. wine market is headed.

[This is the second in a series of articles on Tight, Fat and Uncorked, the three trends I see shaping the wine industry in the near future.]

Up and Down Economics

There is nothing new about tight wine markets (where shortages pull prices higher) or slack markets either. Wine is an agricultural product subject to the sort of persistent cycles that economists have long studied. Today’s high price encourages farmers to plant more even as it discourages growth in demand. Result: future surplus and falling price when the new crops hit the market. Low prices discourage production but encourage consumption growth, resulting in shortages and future price hikes.

Up and down — that’s happens in wine markets. The Turrentine Brokerage’s “Wine Business Wheel of Fortune” illustrates the U.S. wine cycle — click here to view a detailed pdf version that will be helpful in understanding what follows.

This Time Really Is Different

If tight and slack wine markets are not uncommon, what’s the big deal? The answer is that we are coming off an unusually long period of low prices and most likely headed into a long period of tight supply. It is the length of the cycle, not the fact of it, that is striking and important.

The current Turrentine Wine Wheel shows the most recent cycles. The figure shows that prices started falling in 1982, for example, hitting bottom in 1986. By 1989 prices were at their peak again, setting up the next cycle, which ran from 1990 until 1999.  It took seven years for the first cycle to work itself out and nine years for the second cycle.

Now let’s look at the current wine cycle, which Turrentine says began in 2000 and that they project will last an incredible 18 years!  The slack side of the cycle was exceptionally long — 2000 to 2011 — because it combined several factors. First was the typical domestic surplus that results as vineyards planted at the previous cycle’s peak begin to bear fruit. The second factor was increased global wine production, which served to keep prices low even as some domestic producers cut back. This extended the period of falling price.

The Great Recession is the final factor, depressing prices and further extending the slack side of the cycle past 2010. As you can see from the figure, Turrentine originally expected the down side to last only through 2006, but a “perfect storm” kept prices low through 2010 as demand and supply slowly moved into balance.

Ebb Tide

Now we have finally entered the tight market phase where demand exceeds available supply at the current price  and this part of the cycle is likely to be extended as well.  Vineyard capacity did not expand sufficiently during the long down cycle and in fact it contracted dramatically in particular places. The EU wine market reforms removed some capacity in Europe and the collapse of part of the Australian industry has done the same there. In the U.S. some Central Valley producers, tired of low or negative margins, switched from wine grapes to more consistently profitable crops like tree nuts.

In theory it should take only a few years to rebuild vineyard capacity but in practice it will take longer for several reasons. First, the length and severity of the slack part of the cycle will naturally make some who have left the market in the U.S. and elsewhere hesitate to reenter it. The supply response in the U.S. will be delayed for this reason and also because of what I am told is a shortage of nursery stock needed to establish new vineyards and renew old ones.  It will take a few years to rebuild stocks needed to rebuild vineyard capacity.

Prices for grape contracts and bulk wine have already risen (dramatically in some specific cases) as they must do to eventually bring the market back into balance, but this will be a slow adjustment process. Domestic wines must compete with imports, which act to limit price increases in some segments of the market. And of course consumers have become accustomed to lower prices and are not generally expected to “trade up” (except in response to bargain pricing) as much as they may have previously traded down.

Hysteresis: Winding and Unwinding

Rising grape costs are good news for growers, who have borne the brunt of adjustment costs during the long slack cycle. Now the big squeeze will move up the supply chain in the form of tighter margins and the effects are expected to be substantial precisely because the length of the tight market cycle will be so long.

What will the wine industry look like when we get back to the top of the cycle? One thing we can be sure about is that it won’t look the same as it did back in 2000. Economic adjustments are not necessarily symmetrical — they don’t wind up the way they unwound. (Economists have a name for this property: hysteresis.) The history that unfolds in the intervening years matters a lot and there has been a lot of time for things to change since the last market cycle began.

In particular, the long slack tide brought new products, new consumers and new consumer behavior into the market. This doesn’t change everything, but it changes a lot — as I’ll explain in next week’s post.

Wine’s Future: Tight, Fat, and Uncorked

Hot, Flat, and Crowded was the title of New York Times columnist Thomas Friedman’s bestselling 2008 book about the future of globalization (Friedman released an upgraded 2.0 version of the book in 2009 — times change, I guess).

Global climate change, the rising global middle class and population growth were the three key issues that he identified in the book, which advocated a “green revolution” that would renew America.

In an interview with Fareed Zakaria (excerpted on the book’s Amazon.com home page), Friedman exlains that

There is a convergence of basically three large forces: one is global warming, which has been going on at a very slow pace since the industrial revolution; the second–what I call the flattening of the world–is a metaphor for the rise of middle-class citizens, from China to India to Brazil to Russia to Eastern Europe, who are beginning to consume like Americans. That’s a blessing in so many ways–it’s a blessing for global stability and for global growth. But it has enormous resource complications …

And lastly, global population growth simply refers to the steady growth of population in general, but at the same time the growth of more and more people able to live this middle-class lifestyle. Between now and 2020, the world’s going to add another billion people. And their resource demands–at every level–are going to be enormous. I tell the story in the book how, if we give each one of the next billion people on the planet just one sixty-watt incandescent light bulb, what it will mean: the answer is that it will require about 20 new 500-megawatt coal-burning power plants. That’s so they can each turn on just one light bulb!

Recently I’ve been thinking about the “big picture forces” that are shaping the future of wine and Friedman’s unholy trinity keeps coming to mind. If the world is becoming hot, flat and crowded, then obviously these forces will affect the world of wine, too. But what other forces are involved? What are the key wine-specific factors that should be considered when looking to the future?

After giving this question some thought, I’ve settled on a trio of trends that are inspired by Friedman’s book and in fact overlap with his list just a bit. Over the next few weeks I’ll explore the the implications of a wine world that is Tight, Fat, and Uncorked. Here is a brief introduction.

Tight [Markets]

Wine markets go through the sorts of cycles that are so common with agricultural products. The Turrentine wine brokerage firm has formalized wine’s particular cycle in its famous “Wine Business Wheel of Fortune.”

The period of low and falling wine prices, which brought so many consumers into the wine market (and pushed some growers and makers out of it) has come to an end here in the U.S. and prices are on the way up. Markets have already started to tighten up and some are close to seizing up. The low price part of the cycle was unusually long (for reasons I’ll discuss in my next post) and the cycle’s tight turn may be long, too.

Tight markets will affect the whole wine supply chain and impact different parts of the market differently. We haven’t seen wine markets this tight in a while and it’s going to be interesting to see what happens.

Thick Around the Middle

The World is Flat is the title of another Thomas Friedman book and when it came out I boldly declared it Globaloney (which is the title of one of my earlier books).

Friedman’s “flat” back then referred to global competition and the mythical “level playing field” where everyone competes with everyone else. Geography didn’t matter any more, Friedman seemed to suggest, because some smart guy in Bangalore could take your job in an instant by offering to do it better or cheaper or while you are asleep. The book was really a call for America to invest in itself — in education and technology — and the flatland analogy was supposed to motivate politicians and policymakers to take action.

When Friedman says the world is flat today, he means it in the sense of flat organizations. He specifically argues that the rising middle class around the world is a powerful force for change and this I believe is not globaloney, although I wonder if he would say exactly the same thing today, with the “occupy” movement still active and the gap between the 1% and the 99% so prominent in the public mind.

The world wine market isn’t getting flat so much as fat.  Even though the prices of some “1%” wines have fallen, there is still a gap big enough for the 99% to want to “occupy.” The impact of the growing global middle class will be very important in the long run. The wine market is becoming “fat” in the sense of being “thick around the middle” — middle class, middle market, middlebrow. That’s global trend #2.

Now Lose the Cork

The cork in question is a symbol of the practices and traditions associated with an aristocratic view of wine that will not be swept away but that will be joined by many other, more “democratic” practices as the era of tight and fat unfolds.

Generational transition, the adoption of wine by new global middle class consumers, the lingering impact of the economic crisis and America’s continuing recover from its Prohibition hangover will all play a part in this story.

Tight, Fat and Uncorked: if this sounds terrible for the future of wine, please relax. It’s not all bad (or good either), it won’t all happen at once or in the same way and it it’s not [just] about the wine.

I invite you to read along over the next few weeks as I try to work out these ideas in Friedman-esque style. I hope to benefit as I usually do from the comments, critiques and creative ideas of my readers.

State of the Wine Industry: Global Perspectives

I’m back from Sacramento where I moderated two panels at the Unified Wine and Grape Symposium, North America’s largest wine industry gathering.  I chaired the morning “State of the Industry” session (estimated audience = 2200 according to one news report) and a smaller afternoon break-out on “Leveraging Global Supply.”

You can find a list of the session speakers at the end of this post and you can read a comprehensive  news report here. I thought I would use this space to outline what I said   in the morning session. My job was to try to provide a global frame for the speakers who followed.

Silver Linings and Dark Clouds

Global Perspective. Wine is a global business. When David Ricardo wrote his economics textbook almost 300 years ago the example he used to illustrate international trade was the wine trade between Britain and Portugal. It has always been important to have a global view of wine, but now more than ever as the wine world gets smaller and more tightly connected.

Silver Linings. This is a year with much good news for the wine industry, especially for winegrape growers as the shortage phase of the wine cycle unfolds and prices rise after years of structural surplus.

But as an economist, it is my responsibility to channel Alan Greenspan and to caution growers to avoid irrational exuberance. Silver linings don’t always come wrapped in dark clouds, but sometimes they do. There are dark clouds a plenty for the global economy and some of them will affect the wine industry.

A Dangerous Phase

A Dangerous Phase. The global economy has entered a “dangerous phase” according to the International Monetary Fund. It is a time of great uncertainty and risk because global growth is slowing, albeit unevenly, at a very inconvenient time.

The problem, of course, is the debt crisis. And while each country has built “mountains of debt” in its own way, there is only one route down from the summit: stop adding to the debt and then try to outgrow the debt burden.

Europe, the U.S. and Japan are all struggling to contain growing debt. Stopping the bleeding is the first priority, of course, but no one seriously expects the debt to be paid off. The only solution is for debtor countries to grow faster than their  compound interest bills and to slowly make the debt and its burden a smaller and smaller proportion of GDP.

Catch 22: Slowing growth (and the probability of recession in Europe) means that even more emphasis must be put on cutting budgets, which unfortunately makes it even more difficult to generate growth.

The Growth Squeeze. So everyone will be desperate for growth, but where will they find it? Consumer spending? Not likely with unemployment high and the housing crisis still unresolved. Business investment? Not with credit so tight and business confidence so low. Goverment spending? Please! The pressure is on to cut government outlays, not expand them.

This leaves only international trade and it seems likely that many countries will try to stimulate exports through currency depreciation to get the growth they so desperately need. This has worked for the U.S., which has had a secret “weak dollar” policy. Look for currency wars as many countries try to follow suit by depressing their exchange rates.

Wild Cards. There are many “wild cards” in the global economic scenario — factors that could change everything. The Euro is probably the biggest wild card, since a collapse of the single currency would be a financial earthquake with global repercussions. The U.S. economy is another wild card, especially in an election year.

A Tight Squeeze for Wine

A Tight Squeeze. The wine industry is connected to the global economy but not perfectly synchronized with it. The wine industry is in for a tight squeeze in the coming year. There will be increased competition on both ends of the market — for wine grapes (and bulk wine) and for wine drinking customers and retail accounts.

[The intensity of the squeeze, as detailed by the other speakers in this session, was probably the biggest news to come out of the State of the Industry panel. Vineyard plantings have been stagnant for several years, so there is not enough supply to meet rising demand in many market categories.]

The shortage of grapes and bulk wine will force wineries to search high and low for product to sell. The higher costs that result will put even more pressure on margins and this may be the biggest squeeze of all since buyers are now accustomed to discounts and, having reset once down to lower prices, will be not quickly reset back up again across the board.  The pressure on margins will increase because of rising competition for market share.

Currency Wars. Exchange rate shifts will make this situation more complex. The U.S. has enjoyed a weak dollar for several years — this stimulated wine exports and kept the price of import competition high. The dollar strengthened in 2011 and  is likely to continue to strengthen in 2012 and this will reverse some of those effects, making the U.S. wine market more attractive to foreign wine firms. These effects will loosen the big squeeze in some places and tighten it in others, creating both dark clouds and silver linings.

Wild Cards. There are lots of  wild cards, but the most interesting one for me is China. We expect China’s growth to slow in 2012  — perhaps to 8% or less — if Europe’s recession is more serious than projected and if U.S. growth stalls.

The “bicycle theory” of Chinese economic growth holds that China must grow by at least 8% in order to overcome structural weaknesses and social instability. If growth falls below 8%, the theory holds, a “tipping point” effect might cause rapid deceleration.

No one knows if the bicycle theory really holds for China, no one knows if 8% is the tipping point number. And no one wants to find out.

A Chinese slump would have some direct effect on wine sales there, but the biggest impact on global wine would be indirect, spread through trade flows and financial flows. The Chilean Peso, Australian dollar and South African rand would all likely fall in value dramatically altering the competitive structure of global wine trade.

All this could happen, but of course it might not. That’s the biggest squeeze this year — uncertainty.

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Thanks to the Unified Symposium’s organizers for inviting me to take part. Special thanks to my fellow panelists, who helped me so much, and to Jenny and Lisa for their guidance and support. Here are the details of the two sessions.

State of the Industry

The State of the Industry session will provide a comprehensive look at every aspect of the wine industry, from what’s being planted to what is selling. This 2½ hour session features highly regarded speakers and will offer incredible value for attendees who need to understand the market dynamics of the past year and are seeking insight into the market trends that will define the year ahead.

Moderator:
Mike Veseth, The Wine Economist Blog/University of Puget Sound

Speakers:
Nat DiBuduo, Allied Grape Growers, California
Steve Fredricks, Turrentine Brokerage, California
Jon Fredrikson, Gomberg, Fredrikson & Associates, California

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Leveraging the Supply Side of the Global Wine Market

This session will focus on supply to Brazil, Russia, India and China (BRIC) as well as to Chile and Argentina.

Moderator:
Mike Veseth, The Wine Economist Blog/University of Puget Sound

Speakers:
Steve Dorfman, The Ciatti Company, California
Liz Thach, Sonoma State University, California