I thought I'd tip my lid to the upcoming Olympics in London and in this weeks edition of SVB on Wine, share a story and a revelation about market bubbles and tie that into an observation about year-end grape supply and grape market dynamics.
Let the Games Begin
Somewhere early in the year 2000 my mother-in-law was moving things out of a vacation home in Mariposa CA. I volunteered my help, so together with a hired back from the Starving Students movers; a young man named Anthony, we started lumping furniture. During the synchronized around the corner couch bending preliminaries, Anthony started sharing about his stock investments. Wait...what? Stock investments? This was going to be interesting. It turns out he was actually a student. He was a student taking a videotape course in "How To Retire Before You're Thirty." Moving on to the speed wall-scratching semifinals, he explained his trading philosophy, high growth Internet stock investments, stock picks, and how he had amassed a small fortune already doing it all with credit cards and margin debt. At afternoon's end it was time for the balcony mattress dropping finals and after almost catching it and keeping it out of the dirt which would have received a very high mark from the judges had he managed, Anthony told me this was his final move and he would be retiring from competition. He was going to day-trade stocks from his home and be his own boss.
At the closing ceremonies, we rolled down the paneled rear door of the truck. I latched the door putting a punctuation on the day's athletic competition and stood watching in pain as Anthony pulled away in a puff of dust and exhaust. A loud crash from the contents inside the truck was audible as Anthony dropped the rear tire off the curb. Oh my gawd, I thought! .......Everyone is saying this is a new internet economy and there are new rules. Maybe I should be taking on more risk like him? ....... and then I wondered what broke inside the truck, but that's not important.
Having time to replay the day on my drive home, I called my broker and cashed out of the market. With the Tech Crash hitting just weeks later, I had discovered a new technical indicator that would define my investing strategy from then on. I called it, "the Starving Students Bubble Indicator (SSBI):
"When a Starving Student gives you stock tips, get the hell out of the market because its overbought."Hold on ....I'm getting to the wine part.
Back to Reality
|Glenn Proctor, Ciatti Company|
In the middle 1990's we saw a shortage. It wasn't uncommon for wineries to run out of wine in nine or ten months and distributors were making nice with all the small producers to have enough product to quench the thirst of the mid-life boomer populace. So acute was the problem, Mondavi started importing Chilean bulk wine to go into a new brand (I think it was called Morningstar if memory serves.)
This week I was talking with a stranger; a visitor to wine country. We were at the Marriott bar having a quick dinner. Our visitor told me he was going to get into the wine business and he launched into his strategy, talking in hushed tones as if the ketchup bottle had a wire in it. "There aren't nearly enough grapes for the business today." he whispered. "I'm going pick up a distressed property that has 6 acres of grapes and a 3,500 sf home, and pay for half the mortgage by selling grapes at prices that will have to be higher for the next decade."
|That far away look|
SVB has been predicting the likelihood of a large harvest this year, based simply on the fact farmers will farm for yield in this kind of a market. So needing to get an update this past week, I decided to call around to get an early indicator on yield and harvest timing. The belief from almost all appellations is if the weather continues to cooperate, the harvest will be between large and perhaps even very large. Conditions thus far in the North Coast have been almost ideal, so the harvest could also produce one of those perfect alignments of a large crop AND good quality if major weather issues don't show up to spoil the party. Rain is always a concern but the consensus is harvest will be as much as a month earlier than last year in some appellations, making that less of a concern. As we get later in the season that extra hang time could embolden growers to hang just a little more fruit.
Gomberg Fredrikson report noted that imported wines were dramatically up this year but it was all in bulk wine. While imported bottled wines were down 3,000,000 cases, five months through May, bulk imports were up 167% or 12,000,000 equivalent cases. Those shipments come primarily from the following countries in declining order of shipments: Chile, Australia, Argentina, New Zealand, Italy and France. That bulk wine will go largely into lower priced bottles so I'll discount that point as it relates to the fine wine business for the present, but please bookmark that is a change from past short cycles; if you need generic chardonnay, you don't have to plant vines to find supply. The question simply is one of price.
I talked last week about the declining rate of growth in sales for fine wine business in SVB on Wine but lets extrapolate that data point against a large harvest as well and what do you get? The distinct possibility that the supply that we said was 'trending to shortage' early this year, might just be equalized for another season. Now its way too soon to firmly predict that since we are just starting verasion in the early ripening zones. There are still a lot of things that can happen to yield and cluster weights. Further, from a demand perspective there is still Q4, the big holiday season ahead of us that can turn either way. But with the fiscal cliff and the EU drama which could slow demand as more likely, versus an out of the blue growth ramp-up, placed against the greater likelihood of a larger harvest.... we just might see a grape and bulk market this winter and spring that doesn't behave like its short at all.
This harvest might have some unique gifts for the wine business that will change grape pricing and terms for contracts. That likelihood is increasing especially if we go back and include the dramatically higher level of imported bulk wine. That is a piece of the cycle that is new; the fact that when short, production wineries can just order up supply from offshore instead of planting. That should at a minimum make a betting man think twice before putting money down with conviction, banking on a true shortage at the end of the year.
Let the games begin!