Today’s grape price projection is Napa Merlot. To me, it’s a grape that is playing tug-of-war with itself, in a statistical sense. On the one hand, it works as a blending grape for Napa Cabernet and Meritage. On the other hand, it works as a varietally-bottled wine. On the one hand, it is a Napa grape and therefore the market is strong. On the other hand, an off-hand, drunken comment from a fictional character played by Paul Giamatti has destroyed the market for Merlot. Before I get to the projection, let’s take a look at a chart that plots average price (blue line) against reported, bearing acreage for Napa Merlot:
As you can see, we had a strong upward trend in bearing acreage between 1992 and 2004. This indicates a great deal of planting between 1988 and 2000. Growers slowed plantings as the market became saturated around 2001, when prices flatten out. Putting aside cyclical effects for a moment and speaking in the longer term, flat bearing acreage of a winegrape that is in demand should translate into prices rising in Napa at a rate that beats inflation. Instead, we see flat prices in nominal terms and negative prices in real (inflation-adjusted) terms. By the way, this chart exemplifies exactly what growers should not do: fail to anticipate weakening markets and only slow planting once the price signals have already arrived.
As we all know, the Merlot market was buried in the landslide that was the movie “Sideways,” in 2004. But the data shows that the Sideways effect was exacerbated by previous over-planting. Planting slowed down rapidly and bearing acreage began dropping rapidly after that 2004 landslide. Not a single acre of Merlot has been reported as planted in Napa since 2010. At least Napa Merlot growers can consider themselves lucky, as prices have at least held steady. So, where is Napa Merlot going to be at next year?
Napa Merlot Prices Will Likely be Flat in 2014
VFA’s models are predicting a price of $2812.71/ton for 2014 Napa Merlot grapes. This represents an increase of 0.74%, essentially indicating a flat market. I have not modeled out into the future, but I would conjecture that Napa merlot may start rising in a few years, as the Sideways effect continues to weaken and supply continues to drop, due to the continuing decrease in bearing acreage.
The probability of a drop in prices, however, is 41.36%, which is significant. Of course, the chances that prices will come in significantly lower than 2013 are commensurately lower.
How Strong is the Model?
When I back-fit this model to the 1992-2013 time period, I get a correlation of .9839, which means the model explains over 98% of price variance for merlot. During that time period, the model was off by 2.7% on average and 6.49% during the year it performed worst (2004, the year Sideways came out). I used a dummy variable for measuring the Sideways effect. This variable has a p-value of .1398. Remember that a p-value, simply put is the percentage chance that the variable is worthless in the model being used. That p-value is in a range acceptable for business applications, but not academic research. VFA generally discards such variables, preferring the more rigorous, academic standards to those found acceptable to marketing managers. In this case, however, the reason for the low p-value is clearly the small sample size afforded us in the 9 years of data since Sideways came out. The variable, therefore, is included in the model, as it seems to clearly have worth. The p-values for all variables are included below, with the variable’s identity left out:
Grape Market A
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