By Cyril Penn

Consumer demand for California wine continues to outpace new grape plantings, making a shortage of key varietals of California wine appear inevitable, especially at the high-end, attendees at the annual Vineyard Economics Seminar in Napa Valley were told Tuesday.

The situation is expected to open the door for sales of imports, which already account for roughly 30 percent of U.S. wine sales, with a corresponding decline in California's overall market share.

"If we fail to plant, we will lose market share to imports," said Robert Fanucci, a partner with the law firm Gagen McCoy in St Helena, and a Napa Valley grape grower.

"If we don't do something about putting grapes in the ground, we'll be here next year talking about a shortage," David Freed, a major wine grape grower and chairman of the UCC Group said.

"The potential "shortage" has been masked by a large 2006 crop, which followed a gigantic 2005 crop, temporarily prolonging the situation of excess supply that the market has seen for the last few years.

"This trend of excess is something that's hard for some people to get away from," Steve Fredricks, a partner with Turrentine Brokerage said. "People are not preparing very well for the change that's upon us. 2005 caused people to not prepare for the future. There's a change in the (bulk wine) marketplace in terms of what's available but people aren't reacting to it."

"Planting is flat," Rob McMillan of Silicon Valley Bank, a major lender to premium wineries, said. "Even if we start planting now, we're not going to have enough." McMillan presented highlights from SVB's State of the Wine Industry report, including a survey where 89 percent of wineries polled said they feel they have either the right amount or insufficient grape supplies for 2007, while only 10 percent said they feel they have too much.

Speakers said they're already seeing growing demand for high-end Chardonnay and for Cabernet Sauvignon, and a corresponding tightening of supply. Despite Merlot's dismal performance--spot prices are below the cost of farming and there's a glut of bulk Merlot available--speakers predicted that it will make a comeback.

"People think I'm nuts, but if you graft to Merlot, by the time you have a crop, Merlot will be back," Brian Clements, also a partner with Turrentine Brokerage, said. "It's just a matter of time. We have an oversupply situation but sooner or later we will see shortages of Merlot, even though its really hard to believe it."

"Merlot will be back," McMillan said.

"Expect grape shortages for many years to come in the wine business," said McMillan. "You'll start to see a stratification of the top tier wines."

The wine industry typically goes through eight to ten year cycles of over- and under-supply, followed by a planting boom. At this point, though, planting remains flat, despite there being little non-bearing acreage in the ground. Fundamentals have improved to an extent in California's Central Valley, though some acreage is still being converted to other crops.

The current delay in planting, particularly along California's pricey north coast, though, has been exacerbated because bottle prices are not increasing, grape prices remain relatively low, and land costs continue to escalate. Growers can't get contracts to sell fruit to wineries at higher prices going forward than today's spot price and banks are leery of backing vineyards when the return from the grapes doesn't cover the interest payments.

"At the high end, the banks want you to have too much equity," one grower who attended the seminar and runs a very large farming operation said. "And the big buyers like Gallo and Constellation are on the sidelines. Wineries don't want to take the risk, and neither do the banks because grape costs today don't give the returns needed and nobody seems to want to sweeten the deals. We know the prices are going to go up and are planting, but the 'normal' guy can't do that."

The Vineyard Economics Seminar also included sessions about tax and accounting issues specific to vineyards, labor issues, succession planning, updates on governmental as well as regulatory issues, an update on new efforts to market California wine grapes, and more.

<-- Back to Press Clippings