Historically, our industry has been cyclical. Prices rise, we start planting. Then the new vines start producing. Prices fall, we stop planting. Consumer demand continues to grow, while vineyards age and yields fall and then prices rise. Rinse. Repeat.
This cycle continues to describe our industry rather well, with four caveats/exceptions. First, the prices of very top-end of the market, grapes like Napa Cabernet Sauvignon and the top five percent or so of Sonoma County fruit, move in a much more linear fashion, where the long-term trend is upward and the grape market cycle exerts less influence. Second, some peripheral areas and minor varieties do not see prices move in this manner for a variety of reasons I will not go into in this blog post. Third, in core growing areas our growers are slowly learning to make better planting decisions due to accumulated wisdom over time and/or better use of the data at hand.
Finally, over the past few decades, the correlation in prices between various regions has dropped. In particular, we have seen premium grape and bottom-shelf wine grape prices diverge in their movement patterns. For instance, District 13's correlations to the other major San Joaquin Valley districts, 12 and 14, are .94 and .97, respectively. The correlations to Districts 3 (Sonomarin) and 4 (Napa) are only .56 and .58.
For those reasons, discussion of where we are in the grape market cycle must always be taken with a grain of salt. But, we should have that discussion anyways. As the industry's #1 (read: only) independent forecaster of wine grape prices, I track the grape market cycle closely. Following is a basic discussion of a few of the simple metrics I look at for the grape market, in general.
I would like to follow these up with a series of analytical blog posts about sub-segments of the market. In fact, I would like to invite my readers to submit their requests as to what to look at. Napa Cab? All Mendocino reds? You tell me. Here are my only caveats in terms of sub-segment selection. First, the smaller the area you pick, the less likely I am to look at it. If it is a USDA Pricing District it is a shoo-in, depending on how many requests I get. If it is a county, then it's not quite as likely, but still a decent chance. If it's a sub-appellation, such as Russian River Valley or Spring Mountain District, then the chances are going to be low. Second, I won't put anything out about a region I'm already selling forecasts for. Though I will put out no quantitative forecasts, I still don't want to dilute the worth of subscriptions for the forecasts I'm already doing.
Metric 1: Trend in Bearing Acreage
As you can see, the replacement of bearing acreage has been anemic at best. We are below the 22-year trend line and the recent trend is downward, not upward as has been the long-term impetus. This trend has five drivers. First, the economics of making cheap wine are not as strong as they used to be, while other crops' economics are strengthening. This has resulted in vineyard removal in the San Joaquin Valley. Second, regulatory restraints in some areas, particularly those with the highest grape prices, have slowed bearing acreage growth in those areas. Third, labor shortages have increased the cost of planting and reduced our capacity to plant. Fourth, in the areas with the highest grape prices, the stock of properties suitable to new development is shrinking. There just are not that many great sites left. Finally, in intermediate areas, the economics are not quite strong enough to justify debt financing from the more reticent mainstream lenders.
This chart would indicate that prices will continue to rise. Bulls 1 - Bears 0.
Metric 2: Price Trends
This chart may take a second to understand. Solid lines are actual price, dotted lines are the trend lines. Orange is in 2016 dollars, blue is plain old, same-year dollars. As you can see, both price metrics are in line with historical trends and, though they look like they could be heading upward, they have been close to that trend line since 2012. In actuality, this is likely due to a balancing between the strongest regions and the weakest. Bulls 1 - Bears 0.
Metric 3: Price to Acreage Ratio
OK, same basics as the past chart, but here we're dividing price by planted acreage. It'll take a second, but think it through. It's a really useful metric. This chart seems to indicate that we've achieved in a balance in plantings vs. price. Well, a bear could say that we've been above historic norms since 2012, but it's not a significant amount. Bulls 1 - Bears 0. And, again, I think this is the result of offsetting trends in premium and mass-market plantings.
Metric 4: Grape Sales / Total Retail Wine Value
Wait, what's this line? I take the total value of all wine grapes sold for crushing in California and divide by the total retail value of California wine sold in the United States. The nominal ratio matters little. What matters is the movement. What I see in this chart is a re-balancing where grape growers as a whole are fighting to keep their share of the value chain.
First off, understand that none of my comments are meant to be predictive. They are descriptive. They describe where we are at this point in time. That description is not based on forecasting, so new information next year may contradict and obviate much of it. However, based on what I've shown above, if someone told me I had to bet on whether statewide wine grape prices will rise or drop next year, I think I'd tentatively bet on them to rise. Acreage is relatively stagnant and no major metric looks to be out of balance. But, that bet is irrelevant to most people in our industry. Few people or organizations have a portfolio of holdings that reflect overall plantings in the state. So send me your requests for specific parts of the market. Let's hone in on the varieties and regions that matter to you.
To request analysis for this series of blog posts, contact me:
Vineyard Financial Associates
17470 Healdsburg Ave, Healdsburg CA 95448
317-414-3421 (m) | 707-395-4301 (o)