Two of the most important reports for the Wine Industry come out this time of year. The Silicon Valley Bank’s State of the Wine Industry 2013 (to be found on their site sbv.com) presents economic statistics from last year and attempts to project forward into 2013. The second is the California Department of Food and Agriculture’s 2012 Grape Crush Report (to be found on the CDFA site) which is the most important summary of tonnage & prices of grapes processed in 2012. Many contract negotiations for 2013 grape contracts are based on those numbers. While overall winery strategies (volume to purchase and pricing) can be influenced by the SVB report.
Without getting too tedious, here are some general points I’ve noted.
- The OIV (Office Internationale de Vin et Vine) reported last fall that the world wide wine inventory is currently in balance. They estimate it to be at 6.56 billion gallons.
- California had a large harvest in 2012. Tonnage was up by 12% and Grape costs were up by 24% (2012 USDA Grape Crush Report published Feb 2013).
- Worldwide wine Sales growth is positive but slowing. SVB predicts 4-8% for the US in 2013. This is also considered positive but sluggish.
- Grape planting is expected to remain restrained, mainly due to the rise in land values.
The wine industry economics have in the past followed the Old Rule: a 8-10 year period of over-supply, followed by a Period of Balance and then 8-10 years of under-supply and back to oversupply.
Assumptions this time around are:
- The larger 2012 CA harvest and the modest sales growth may leave us in balance for a while longer but when the next shortage comes it is most likely to be filled by imports due to the cost of planting/growing.
- Winery Gross and net profits will be down due to increase in grape costs. However, because demand is not strong only the higher end producers will consider price increases.
- In last 8 years of over-supply, the under $20 category saw pricing compression and blending down of reserve wines by many fine wine producers. Negociants were able to produce a better quality of wine from the temporary market excess. The consumer in the value segment has learned what good wine tastes like. With the wine supply more in balance now, those producing wines in the reduced price range MAY have had to lower quality, making price increases difficult.
It remains to be seen if Consumers in the value segment will drink lesser quality domestic wines, or move to a higher price category to maintain their quaffing standards, or find foreign substitutes (not very eco…). For my perspective, I am glad when the American wine consumer elevates their standards and level of enjoyment. I believe in drinking less but better. So, we will continue to do our best to produce quality in challenging times. Naked Wines is a group to watch in this sector.