The Three Horsemen of the Grapepocalypse, Part 1: Revenge of the Grape Market Cycle

Lately, there has been a lot of talk about how we’re due to see a downturn in the wine market. As those of you who have gotten a glass of wine with me anytime since 2012 probably know, I’ve been predicting a peak in wine grape prices in 2018.

Over the past 6 years, I’ve refined and softened that prediction. We have not seen over-planting on the same scale as we have in past grape market cycles. In 2017, I changed my tune a bit to state that (a) the peak will occur in 2018/2019; (b) it may not be a blanket downturn, with some region-variety combinations seeing worse conditions than others; and (c) clarifying that I’m mostly talking about coastal regions (Pricing Districts 1-8) and not focusing much on Districts 12-16. I see Districts 9-11 and 17 as being somewhere in between and/or differentiated from coastal and non-coastal, in terms of market behavior. That being said, Districts 12-16 are by no means insulated from trouble ahead - I'm just not as familiar with the evidence.

For me, this prediction has been wholly-focused on the market for wine grapes. I follow wine grape prices as closely as anyone. When looking at the broader wine market, however, you can find much better analysts than myself. For one, I would recommend taking a look at Rob McMillan’s recent blog post. Sales growth has also slowed, according to Shanken (and many other sources). Finally, both Turrentine and Ciatti are reporting some stagnation in bulk wine sales and reduced interest in excess grape purchases. These two issues are likely to self-exacerbate - can I write that? – as storage space starts to fill up.

This is the first post in a four-part series, “The Three Horsemen of the Grapepocalypse.” Today, I will focus on where we are in the grape market cycle. The next post will discuss the probability of a coming recession. The third will look at the possible stickiness of increases in our costs of doing business. The final post will then look at some possible solutions.

A Watershed Year

In the August 2017 issue of Wine Business Monthly I was quoted as saying, “… Most likely 2018 will be a watershed year for coastal grapes…I think the industry should be prepared for our highest prices yet in 2018 for grapes that have strong demand. Many of those grapes are likely to see prices soften sometime soon after that.” Why do I think this? This is the point at which my more regular readers know that some charts are going to follow.

Take a look at the charts below and keep in mind that these are inflation-adjusted prices:

The solid blue line is the actual price, while the dotted line is the trend line. This chart shows a cyclical, very slightly downward pattern for Sonomarin Chardonnay price movement. Prices hit a trough in 1994, peaked 6 years later and then bottomed-out again after 5 years. Prices were then due for a rise to a peak around 2010, but the Great Recession took its toll earlier. We are now back on track and rising, but for how long? Judging by the past cycles, we’re due for a price crest in 2019 or 2020 and I think it may come earlier. I have heard of pretty large lots of excess Sonoma County Chardonnay with no home this year.

This chart illustrates well that coastal grape price cycles are correlated, but far from identical. Lake County Cabernet Sauvignon also hit a bottom in 1994, but prices kept rising until 2001. This was followed by a long descent until 2010. From those shifts, one might guess that a peak would come in 2018. In actuality, it may have begun earlier, in 2017. In any case, it seems a good bet that the next several years will see prices fall, unless knock-on effects from the shortage of Napa Cabernet Sauvignon can keep prices afloat (a BIG question mark, with large reserves of bulk Napa Cab in tank). I’m happy to see, by the way, that the past few decades have been good (though volatile) for Lake County growers.

Finally, let’s look back at Sonoma County more broadly. The overall market for Sonoma County wine grapes tanked in 1993, a bit earlier than for Chardonnay alone. The subsequent peak occurred in 2001, as with Lake County Cabernet Sauvignon, suggesting a longer cycle than for Chardonnay alone. Again, as with Lake County Cabernet Sauvignon, you see a trough in 2010, albeit propped up by the general, upward trend line. One might extrapolate that the next peak would come in 2019.

One major worry for me is that, if we are seeing the peak approaching, many coastal grape categories really didn’t gain too much over the trend line before the downturn. On the other hand, for the Sonoma County examples, at least, the dips weren’t too bad. It may be that farmers’ collective memory of previous overplanting is reducing price volatility over time.

Next, let’s take a look at acreage numbers. These acreage numbers are straight from the USDA-NASS Crush Report, unadjusted for outside data. I’m using unadjusted data because I’d like to keep my adjusted numbers proprietary. As many of you know by now, the NASS price numbers are pretty darn good, but the acreage numbers do have room for improvement.

It’s hard to see, but there is a general pattern here. Let’s first look at District 3 All Wine Varieties. Remember that prices rose from 1993 to 2001. Bearing acreage began rising slightly in response to leading price indications in 1995. As prices began to rise more broadly, this accelerated and didn’t taper off until 2005. Though prices began falling after 2001, more vineyards were already planned and planted and supply continued to come on line and drive down prices. Remember that prices continued to taper off until 2010. New plantings have been less aggressive this time around.

I won’t belabor this point with the other two chart pairings, but instead sum them up. We see continued planting of Sonoma County Chardonnay, but in relative moderation, which likely explains the moderation in long-term price volatility. Lake County Cabernet Sauvignon numbers, however, are actually rising quite fast. This may be the cause of the possible peak in prices occurring early, in 2016.

Why did I pick these variety-region combinations? I don’t know. It was arbitrary. I didn’t cherry-pick the data. The point is, most coastal variety-region combinations have similar dynamics. And for most, the indications are that we might be at the point of the grape market cycle where we’re looking at falling prices for several years, in inflation-adjusted terms.

Are We In a Bubble?

Some have worried for years now that prices are unsustainable, in terms of producers’ ability to buy at such prices and continue to profit. On this point, I have some good news for growers: It’s not quite true. While cyclical indicators are worrying, producers are not being unduly squeezed.

The blue line is the total value of California grape sales, divided by the total value of all US wine consumption; the yellow line is the trend line. As you can see from the above chart, total California grape sales are just over 5% of total US wine spending. The range since 2002 has been from 4% to over 6%. We’re somewhere around the middle right now. By the way, this is based upon USDA-NASS yield and price numbers and Wine Institute figures.

If we look at the grape sales figures divided by California wine retail value, probably a stronger indicator than the previous one, we see a similar picture. Historically, the ratio has fluctuated between roughly 7% and 11%. Right now, it’s around 9%. Right in the middle. So, while we should be worried about the market cycle, we are not in a bubble, in terms of grapes’ costs for producers.

Short-Term Supply Pressure and Current Indications

I am hearing many anecdotal reports of heavy harvests and excess crops attracting little interest from potential buyers. This harvest is predicted by many industry players to be a record-breaker. According to Ciatti, it may come in at 4.2M tons. Ciatti is also reporting that nearly every major global region is expecting a heavy harvest. I believe that we often over-emphasize the importance of a single, big harvest. But this feels to me like it’s about more than just this one big harvest: it may be the start of a trend.

And here is a look at an excerpt from Turrentine’s latest newsletter:

Lots of wine that needs to be sold and not enough space to process and store it. That means falling prices. Interestingly, even Napa Valley Cabernet Sauvignon may be long. For years, Napa Valley Cabernet Sauvignon has been seen as bullet-proof. Soon, we’ll find out how true that is.

So, What Does It All Mean?

Well, what this all means depends on what variety-region combination you’re looking at. If you really want some help with that question, get in touch with the country’s top forecaster of grape prices and I’ll help you figure that out. In broad terms, though, it means that inflation-adjusted prices for coastal California wine grapes are probably going to stall. Some strong categories may continue to chug along, but more slowly than before. Some may see prices plateau for a while. Many will see prices fall.

Keep in mind a few bits of nuance. First, nominal prices may rise, but this may obscure prices giving ground to inflation. Second, while I did mention that different variety-region combinations will behave differently, I didn’t even touch on different price segments. As I’ve shown in the past, grapes at different price levels may also see prices move divergently. Finally, the grape market cycle is just one factor in determining price. Which is why I will be back with more doom and gloom soon: the coming recession and the stickiness of recent cost increases. I'm not sure when exactly I will have the next installment. With the legalization of cannabis, I've had work come in from that sector and this "green rush" is putting some extra burdens on my work schedule.

#grapeprices #grapecycle #Chardonnay #sonomacounty #lakecounty #cabernetsauvignon #Napa #data #napavalley #grapepocalypse

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