Recession forces farmers and wine marketers to adjust by Steve Adler

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What a difference a year makes.

That's the sentiment that has permeated California's wine sector this fall, as growers ship their final gondolas of grapes to wineries to be crushed.

Steve Fredricks of Turrentine Wine Brokerage in Novato sums it up this way: "At this time last year, especially on the North Coast, we were actually looking for sellers. We had plenty of buyers, the market was good and the prices were up for most of the major varieties. Now it is basically the opposite. We have all of the sellers we need and the buyers are mostly absent from the market."

What has happened in the wine sector the past 12 months can be traced directly to the worldwide economic downturn that has prompted consumers of wine to shift to bottles selling at lower price points than before. And for winegrape growers, whether this shift bodes well or not depends a lot on where their grapes are grown.

In less demand are winegrapes from the North Coast and Central Coast that traditionally make wine selling for $30 a bottle or more and are also found on the wine lists at high-end restaurants. The opposite is true for winegrapes from the San Joaquin Valley, particularly red varieties.

"The shift in consumer buying habits is depressing the marketplace for North Coast and Central Coast grapes that are traditionally priced higher," said Nat DiBuduo, president of Allied Grape Growers. "There is a push back from wineries not buying at all this year, and those that are buying are buying at lower prices. That is causing major problems for growers to market their grapes in areas where the cost of farming is high. So they need higher pricing, and they are having some serious issues."

Andy Hoxsey of Napa Wine Co. in Oakville is feeling the ramifications of the shift in consumer spending patterns from two perspectives—as both a grower and a winery operator.

Regarding wine sales, Hoxsey notes that he is picking up customers who are making a downward shift from one price tier to another.

"Our highest price point is $65 bottles of wine, and people who used to be at the $100 price point are trading down to that level. So our sales at the $65 price point seem to be pretty good. Our next lowest price is $45 and that is a perceived value for the guy who used to spend $65. And the consumer who used to buy our $45 bottle is now trading down to our $25 bottle," he said.

But Hoxsey considers himself a farmer first, and that's where he is feeling the negative effects of the economic downturn.

"There is extreme price pressure for what I get for a ton of grapes. And I sell 90 percent of the grapes I grow," he said. "I had grape buyers who wanted to renegotiate, which I can understand, and I had other buyers who rejected the crop in the field and I had to figure out something else to do with the fruit."

One area where demand has strengthened is Lodi.

"It all comes down to supply and demand and what will happen with that in the next couple years, we are not sure. It seems like Lodi is well suited for the price range that we are in right now, but when the economy turns around and people get back to that higher end, we just don't know what may happen," said Lodi grower Joe Valente.

John Crossland, a winegrape grower from Templeton and chairman of the board of the California Association of Winegrape Growers, said the poor economy is affecting consumers, distributors, retailers and wineries.

"The caution to avoid building inventory has hurt wine sales. All of this affects the grower as lower pricing pressure carries through to the beginning of the supply chain," he said. "The crop is not as large as many wineries and brokers reported a few months ago. With exceptions, the crop is about average size. Pricing depends upon when or if the fruit was contracted. Long-term contracts generally are at levels that are higher than today's poor spot prices. Many regions have no market or a very poor market for some varieties. Generally, prices are lower than last year, while costs are continuing to rise."

Crossland said that while winegrape growers are listening to economists who believe that the consumer value shift is long term, he believes that consumers will return to the wines they enjoyed prior to being economically challenged. But he doesn't see that happening for some time.

"The new reality is here for an extended stay," he said.

Agreeing with that assessment is Mark Chandler, executive director of the Lodi-Woodbridge Winegrape Commission.

"The shift to lower price points will last for several years, until the economy recovers. Consequently, there are definitely regional differences, with higher-price regions suffering the most, middle-market regions somewhat stable and the lower-priced regions doing OK. But they are at serious risk from cheap imports acting as a substitute. Under a certain price point, consumers do not read country-of-origin information, nor do they care," he said.

Imported wine, particularly bulk wine that is brought in to be bottled in the United States, is exacerbating the situation, according to California wine sector leaders.

"Low cost imports are the greatest threat to the livelihood of California growers today. Bulk shipments with the wine being bottled here as well as imports of offshore brands contribute to our problems," Crossland said. "The huge surplus of chardonnay in Australia, for example, has helped tank the market here for that variety. We see more labels that were California in the past now marketing imported wine solely because it is available below the cost of production."

Monterey County winegrape grower Steve McIntyre said the current bulk wine situation hurts both Australian and California growers.

"If the wineries want to keep us in business as growers in this state, they are going to have to stop being so short sighted. This model is not sustainable for either Australia or the United States and they are going to have to recognize that at some point. We all need to figure out how to remedy the situation," he said.

Nick Frey, executive director of the Sonoma County Grape Growers Association, said he's also concerned about the effect that imported wines are having on California producers.

"This is the biggest risk of the recession for California grape growers. The huge increases in bulk wine imports are already impacting California producers of wines under $10. The globalization of the wine business is accelerating and the long-term impacts on California grape production are worrisome. We are also seeing bottle imports at higher price points. Thus, no region will be immune from increasing foreign competition," Frey said.

What do winegrape growers do now to survive? The consensus is that they cut back on all unnecessary expenses, while at the same time not jeopardizing the quality of the winegrapes that they produce.

"The core issue is to protect your balance sheet, conserve cash, get through the low part of the economy and be realistic about the future. Value counts: the best quality for the price," said Barbara Insel, president of Stonebridge Research Group in Napa. "Where do growers go from here? Run your business for cash and watch your costs. Improve your quality-to-price relationship."

DiBuduo said he would not be surprised to see the removal of some chardonnay vineyards in the San Joaquin Valley this winter as growers switch to alternative crops.

"Elsewhere in the winegrape growing regions, growers have to be realistic about how much they spend. They should not anticipate 2007 prices, but instead should anticipate that prices will be challenging for the next couple years. I think we have to farm differently. We don't want to lose the quality and the reputation for quality, so we just have to watch our operational costs that much more," he said.

Rob McMillan, founder of the Silicon Valley Bank Wine Division in St. Helena, predicted that there may be some economic improvement in the winegrape sector as early as next year.

"After this year, absent further economic tumult, at this point we would expect to see prospects improve over the glutted feel that is currently out there. We believe demand for grapes has not abated and the soft market conditions are more a reflection of the adjustment wineries have to do to balance current inventories," he said.

In fact, Insel points out that there are some beginning signs of a turnaround at the highest price points.

"The market has shifted in that some direct sales are picking up at the high end for well established brands with customer loyalty. The wealthy have realized that they still have some money. But restaurant and retail are still down 20-30 percent, with a lot of destocking of smaller brands and wine over $20," she said.

(Steve Adler is associate editor of Ag Alert. He may be contacted at sadler@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.