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Wine Grape Sales as a Percentage of Retail Wine Sales: The Grape Prices are All Right

The other day, I was having a conversation with Natalie Collins from the California Association of Winegrape Growers (CAWG). We were talking about producers pushing back on growers trying to raise prices to keep up with costs. According to many producers, they are seeing margin compression and need growers to take on some of the pain. Of course, it's always hard to be profitable and I shared with her my feeling that this is just the normal tension we see along the supply chain, exacerbated by inflationary pressures.

I actually do track this tension - though the data is not as current as I'd like it to be. I regularly calculate total reported winegrape sales as a percentage of the total estimated retail value of California wine shipped to US markets. Specifically, I use the Grape Data Tool to pull the total of all winegrape sales reported in Table 6 of the Crush Report (this excludes table grapes used for wine). Then I divide by the retail value reported by the Wine Institute. Though I exclude table grapes used for wine, the Wine Institute excludes wine exports. The number is likely pretty accurate. In any case, the level isn't important. I care about how it moves. Let's call this ratio the Value Captured by Growers Index (VCGI).

Keep in mind that this chart is matching up cash flow, not vintage. That is, the retail value reflects sales of wine for the calendar year in which the grape-purchasing expense is incurred. I will address this in more detail later, but for now I will just argue that I suspect downward price pressure from producers has more to do with acute cash flow issues than with profit margins.

The takeaway is that, in 2021, the VCGI was 7.14%, the median value for the 19-year period studied and below the average for the period.

Looking at the above graph of the same data, we see that there is no significant trendline here. The movement in the ratio looks like it is dictated largely by macroeconomic and one-off events, perhaps with some cyclical effect.

Right now, even if the VCGI rose in 2022 - and I see no reason to assume that happened - we are just getting back to normal after a dip in the index during the Covid pandemic / wildfire disasters.

But what if we try to match vintage wine sales to vintage grape purchases? We cannot do that with perfect precision, as we would have to track tens of thousands of wine SKUs. We can, however, run some decent approximations. First, take a look at the column on the chart that shows the index when it's offset by 3 years. The 2021 number is 7.47%, which is below both the average and median for that measure. We can also divide 2021 grape sales by the 3- and 5-year rolling average retail sales, giving us 7.56% and 7.72%. Again, normal levels, if not a bit low.

What can we conclude from these figures? Growers are not capturing an historically inordinate slice of the pie. Unless there is some historical shift going on that is not yet reflected in the data, they should not have to forgo price hikes.

On the whole, there is no reason to think that growers shouldn't be able to increase prices, when labor rates are rising and producers are increasing their price points.

Have a question or want to share your thoughts? Go ahead and reach out.

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