On May 8, 2019 the 24th annual Vineyard economic symposium was held at the Culinary Institute of American at Copia in downtown Napa. The resounding message that came out of the conference was the following: The wine industry is changing, and the grower is not immune to the impacts. With change comes challenge, and with challenge comes opportunity.
The program included topics spanning from sustainability, trends in grape contracts, mechanization, growers becoming winemakers, and more. Each topic was discussed by leaders within the industry and provided analysis of the current state of the industry and the trends they predict for the future.
Consumer demand and buying habits flow back to growers with pressure being added along the way. Imagine a bottle of champagne being shaken as handed from the consumer, to the distributer, to the winemaker, and finally to the grower who is expected to now pour everyone a glass.
As consumer preferences change, growers plant or develop to meet those needs. As the supply for grapes tightens, more vines are being planted and vineyards redeveloped. The result of these inputs became clear with the 2018 harvest: the highest ever total yield of wine grapes in California. Many grapes didn’t have a buyer and many buyers didn’t have capacity even if they wanted to buy more fruit. Many of those who did have the capacity are now offering large quantities of bulk wine for sale.
Grape pricing continues to be a major concern, and the release of the 2018 California Grape Crush Report supports the industry’s unease. Nearly 9,000 tons of cabernet sauvignon grapes in district 8, which encompasses San Luis Obispo, Santa Barbara, Ventura Counties, sold at $500/ton or less. That is over 10% of the total cabernet sauvignon harvest sold in District 8 during 2018. In 2017 there were less than 600 tons sold at those prices. Despite all this, we are still seeing strong demand for quality fruit and pricing as a whole didn’t see dramatic decreases in 2018.
With changing grape prices, the opportunity I don’t hear discussed are relationships that can be developed through the spot market. A smaller producer or up-and-coming winemaker might be the right home for some excess fruit. For the buyer it may be an opportunity to source some very high-quality fruit at prices you can work into your portfolio. I work with a number of smaller wineries that see increasing production as the quickest way to a viable business model and the availability of high-quality fruit at reasonable prices allow them to be a little bit more nimble in their choices when developing their brand.
In addition to grape prices, the dwindling labor supply was the top concern for growers. Much of the discussion focused on the need for increased mechanization within the vineyard. As labor becomes more expensive and harder to secure, mechanization at some level can help solve that problem. Although the initial investment in retrofitting or redeveloping a vineyard is significant, plus the specialized tractors and implements are expensive, the cost savings can be dramatic. UC Davis has a 40 acres experimental vineyard north of Napa that has been converted to a no-touch, fully mechanized vineyard. They report costs of 7 cents per plant in their vineyard as compared to $1 per plant for a conventional vineyard. A fully mechanized vineyard may seem utopic at this time, but a move to partial mechanization is practically inevitable.
I foresee this movement to partial mechanization on a large scale much sooner. One example they gave was a crew that did hand pruning and had an implement to gather and dispose of the brush left by the pruning. By focusing the time the crew spends on the tasks that need judgement and experience, you are able to increase the speed at which they can get through the vineyard. The size of the crew decreases, the speed of the crew increases, and the end result of the machine/human collaboration is indistinguishable from an all human crew. As the labor supply tightens, we will see more creativity in this area to allow for quality to remain high and labor hours to decrease.
Another subject that was discussed was sustainability. Many times, sustainability is discussed in the sense of consumer demands for ethical business practices. This session also focused on the cost savings for movements towards sustainability. Every input in the process of winemaking has a cost and by focusing on reducing those inputs you generally move towards sustainability while also reducing costs. One example was given of a large-scale producer that reduced their bottle weight by 2 ounces on their chardonnay. They tracked no change in consumer buying habits due to the reduced bottle weight, reduced their emissions related to the purchased bottles significantly, and saved millions of dollars. The mindset of sustainability as altruistic, as well as cost effective, opens areas for wineries of all size to increase sustainability.
The 2018 harvest ushered in a correction in the grape market. New plantings and redevelopment of older vineyards, paired with ideal growing conditions in 2018, led to a record harvest that made the excess supply impossible to ignore. It is too early to tell what 2019 will look like in the vineyard, but most are reporting positive indicators at this point.
With any market correction comes opportunities. Vineyard owners with the capital to invest in their vineyards during a time of declining prices will be better positioned when the market corrects, and prices increase. Those in the market to acquire more vineyard land will see favorable pricing until the grape prices rebound.
Wineries have the opportunity to build relationships with their current and future growers. They can try to renegotiate contracts to give the grower some security, and the winery some savings, by extending contracts at prices that more realistically reflect the current market. Wineries might also want to build new relationships. Knowing that many growers have excess fruit, this is the opportunity to get started buying some of that fruit that you might want to secure under contract in larger quantities later.
Our winery and vineyard team has deep knowledge in the wine industry, and we work with our clients to understand the impacts of changes in the industry and bring perspective on opportunities within the industry. We work with our clients to understand the impact of any opportunities and provide information to allow for confident decision making. Faced with the changes seen in the industry, now is the right time to lean on your advisors for insight.