Oversupply in the Grape and Bulk Wine Market - And What This May Mean . . .

Good post this morning from Rob McMillan at Silicon Valley Bank about the current oversupply of grapes and bulk wine in the market - and where this may lead us. As we all know, the industry is cyclical - and we all ‘expect’ it to work as it always has. But the question is whether that will the case now - with increased competition for the general consumer by craft beers and ciders, hard seltzers and craft distillation products and cocktails.

Thoughts?

I notice it with many of the growers - they’re desperate to get rid of their fruit. If I had the capacity and sales channels to shift it, I could pick up tons of great fruit at very low prices. Last year one of them in Lodi had to leave 100 tons of Petit Sirah hanging. And that was just one grower. How many more have had to do the same?

In any case - and this is one of my soapboxes - but California needs to shift focus from super premium pricing. On a global stage, CA wine is just not competitive. Almost any other New World nation will deliver better wine at lower prices. I’m not saying CA wine isn’t as good, it certainly is, it’s just priced too damn high. I go to South Africa for business quite often and the wines there are fantastic quality costing half of ours. What I always then hear is: “well, they don’t have the same labour laws we have and can basically use very cheap indentured labour”. Yeah that’s true, but how come AUS/NZ can produce much cheaper wines than CA can when they have virtually the same labor costs? Doesn’t pass the sniff test. We could be exporting our wines just like these nations do and - voila! - surplus gone.

I want everyone to make as much money as they can, I believe in capitalism, but dare I say it, has the ex-Wall St-buy-a-winery-to-show-off-for-my-friends-on-the-golf-course culture finally caught up with CA wine? I’m personally sick of $60-300/bottle prices. It’s an affront. And it’s killing CA wine and making it even more elitist than it already is. Which young millennial is gonna get excited by an industry that only caters to rich middle aged people and treats the consumer like suckers you can highway rob?

Vineyards will move to the next cash crop…pot.

About it in a nutshell. Americans have this idea that their high=priced vineyard lifestyle needs to be subsidized by the consumer. Millennials are already shifting their focus. Can’t see them buying wines with bloated prices even if they could afford them.

I see many anecdotes of millennials who do not drink, who do not date, who are vegan, who do intermittent fasting etc.

…same as golf and Corvette demographics. Old white guy thing. We’re doomed.

Gentlemen: with all due respect, the anti-high-end, eat the rich sentiment is great and all, but the oversupply hurts the lower to middle tier grapegrowers far, far more. They are the ones who will be held to exact contract specs in a big year by their buyer, negating the bounty of a good yield, or have their year-to-year contract not renewed, or be unable to find a buyer on the spot market. If your desire is for wineries to feel the pain, at the moment, it’s only the growers. Wineries feel it in the upward cycle on the other end of the wheel. Right now, it’s a grape and bulk wine buyer’s market.

I hate to say it, Larry, but it’s cyclical. A couple really big years alongside some larger economic headwinds for wine will do it. A small to average crop or two will bring things back into balance. The dead waters of the bulk market have been interesting. I suspect there just isn’t as big a private-label market for negociants as there has been.

Adam, AUS and NZ don’t have the same labor costs. They’ve adapted and mechanized. They also have historically export-friendly currencies. We’ve done so on the low end but have been slow to adopt on the mid to high tier. And, quite honestly, CA is a tough state to operate in. There is a lot of cost associated with doing business here. IMHO, it’s worth the price to be able to live and work here, but it’s true.

Which will then crash and burn, even harder than grapes, as the supply far outgrows demand - unless enough gets siphoned off to the black market. Watch for increases in arrests on this front in the coming decade.

Adam’s 100 tons of unpicked Lodi Petit more or less backs up Nate’s comments.

Pot pricing has been steadily crashing, which isn’t a surprise as the barriers to entry for ag aren’t really as high as the IPOs want you to believe… wait till the bioengineered CBD/THC hits the market from companies like Amyris, Gingko Bioworks, etc…

Living in Colorado I see some folks making money beyond belief from THC and CBD products. Way more more than from grape juice.

Michael,

Talk to the folks in OR and WA - different story there for sure.

And Nate, yep, things are cyclical - but there are other factors at play here that were not there during the last glut - namely the rise in ‘other alcoholic products’ that are fighting for the same $$$$ . . . I hope you’re right, my friend . . .

Cheers!

WA is going thru the same grape issues, but keeps it quieter than CA, but there is plenty of wine to be had at great prices. OR hasn’t run into it late due to smaller plantings, higher prices, and higher demand vs. supply.

To Nate and Larry, I’m sure there is some nice wine available, but I’d assume most of the glut is at the low end from the massive vineyard that is Central Coast.

All in all, there will be some short vintages and this will right itself, but it puts a massive strain on family growers, many of whom can’t make it if the glut lasts 4 or 5 vintages and CA hs had 5 straight strong vintages with 2012-2016, a break in 2017, then another vintage of century in 2018.

I feel for the little owners who really get hurt, not the Beckstoffers and what not who may just make a few less millions.

Larry, it kind of sounds like you’re saying “this time it’s different” because there are, uniquely, substitutes for wine this time around. I don’t find that to be unique, just that the substitutes are different. But “this time” they’re really gonna last!

I hate to be the “invisible hand” guy, but demand decreases (which it has in the wine market at large), market prices go down (for grapes and bulk wine to start and, eventually, wine), supply adjusts (smaller crop in '20 [hopefully], maybe some vineyard owners selling to wineries looking to shore up supply, growers who can moving to alternative crops) or we increase demand, voila, prices recover. Although we don’t like to admit it, on the aggregate, grapes and wine can act like a commodity.

Look at Table 8 of the crush report. There were probably 1,200 tons of District 4 (Napa) Cabernet sold at $2,000 or less per ton. These are “on the spot, I have a gondola attached to my pickup truck and have been held to contract, what will you pay me to drop it off at your winery?” prices. Elastic. These are the people hurt by oversupply. There were also 25ish tons sold at $50,000 per ton. I assure you, these are the inelastic sort and the people buying and selling give two sh!ts about the overall market. Not affected by the oversupply at large.

I was working for Piero Antinori a decade ago. I was lamenting the Great Recession and the effect it was having on sales and grape and wine prices. He looked at me and said “my family’s business has survived the Black Death, many wars among the city-states, the French Revolution, the Bolshevik Revolution, two world wars in western Europe, and the reign of Mussolini. I think we can handle a recession.”

My point being, I’m not saying we bury our head in the sand or that this time, it isn’t different. Businesses need to adapt, tighten their belts, develop new ways of increasing demand and new customers. Shoot, a few wineries in CA thrived 100 years ago while their product was deemed illegal by a constitutional amendment!

But, this does strike me as part of the normal cycle. Barring any unforeseen larger world events.

You… must not like Burgundy very much… :wink: flirtysmile

I know, CA is a tough state to do business in. They’re not business friendly and costs are high.

Sorry, I don’t want class warfare or to spout working-class-hero-is-something-to-be nonsense, but high pricing for no good reason just irks me. I get that a To Kalon Cab will cost a lot of money. But there’s no reason a Santa Maria Syrah should cost $90+ (yeah, I’m looking at you Paul Lato). [cheers.gif]

That really puts things in perspective!

Nate,

I hope you’re right for the sake of the entire industry . . .

Cheers

If they’re operating legally, they’re not making money from THC products, due to the federal tax rules. It’s why the US companies have great gross margins, are lucky to have EBITDA, and tough net losses.

This is indeed happening in many states where Cannabis has been legal now for a number of years, less so in the more recently-legal states. Just wait for interstate commerce and importing. It’s already happening with industrial hemp. Similar to wine.

Wine on the high end is no different than any other luxury good - beyond the cost, you’re paying for, among other things, scarcity, demand, and branding. I don’t criticize anyone who can figure out how to make it work in this industry.