The other day I posted to this blog claiming that, though grape prices have been rising faster than bottle prices in recent years, they are just making up for lost ground. Ergo, I concluded the rise in grape prices over the past 4 years has been sustainable. This is contrary to the concerns voiced by people in this industry who are much more experienced and successful than I, including David Freed, Rob McMillan and anyone whose name or employer is Ciatti. I wanted to research this further, as it seemed relevant to my quest for the Holy Grail of wine finance: Can I improve my method for predicting shifts in the grape market pricing cycle? I can’t share all of the details of course, but here is what I did and what I learned.
First, I created a variety of metrics measuring relationships between grape prices and average retail price per bottle. What I was hoping to see was that rises in the ratio between the former and the latter would predict blunting of grape price rise momentum. Simply put, if grape prices rise too high without bottle prices keeping up, will that slow down the rise in grape prices?
After creating a plethora of metrics I ran some multivariate regression analysis to see if they could be used to build out a statistically significant predictive model for average statewide grape prices, in either nominal or inflation-adjusted terms. They cannot be used that way. Though the quest failed, statistically significant correlations were found.
Increases in the amount of wine sales revenue that has to be dedicated to grape purchases do not blunt grape price rises, but instead the correlation looks to be that rises in grape costs per bottle push retail bottle prices up. No surprise there, but still no verdict on whether or not there is a breaking point and, if so, where is it? One of the problems is the data I have only looks back over about 17 years of history, too short of a period to reach statistical significance for an holistic model.
So, let’s take a simpler look. What has the ratio of grape prices to bottle prices been over time?
As you can see, grape price as a ratio to average per bottle revenue (second column from the left), moves in tandem with inflation-adjusted price per ton of grapes (rightmost column). We can read this two ways. The first is that grape prices are agnostic to bottle prices. They are on their own cycle. If that’s the case, then of course grape price per bottle and grape prices move in tandem, as one is just a proxy for the other. In that case, it is the grape cycle itself that determines both grape prices and grape prices as a ratio to average retail revenue per bottle.
The other way to read this chart is to say that the cost of grapes per dollar of revenue per bottle can only reach so high. If that is the case, then we are moving toward a peak. Of course, we can’t know how soon we will hit that peak, since the highest point on this chart is 1998 and a past year may have been the real peak. And, again, we do not know if the grape cycle determines grape cost as a percentage of retail revenue or vice-versa. Any thoughts?
Soundtrack for this Post:
"A Tribute to Guns and Roses," an album by Vitamin String Quartet