Sunday, February 10, 2013

Draghi and Grape Pricing

Price and Returns of CA Grape Crop
    Total Value of CA Grape Crop

    Mario Draghi was in the news this past week concurrent with the Preliminary Grape Crush Report. Both are related. A weak Euro and oversupply are not the best combination. Thankfully, we are not presently oversupplied nor is the Euro weak, but where is it headed?

    Link: Crop Report Shows Record California Harvest. Size does matter. When we wrote the State of the Industry Report in December we said, "We now know that harvest was quite large estimated at 3.7 million tons by most, though we at SVB suspect it was a record yield approaching 4 million tons."  

    The final-preliminary verdict was 4,013,904 tons and growers made a record return. As you can see in the above charts from Tony Correia the total value of the crop was up a whopping 45% over the prior year. For the math challenged out there, that's what you get from the product of a record harvest multiplied by substantially increased price per ton. As an example of price strength, Napa cabernet was up almost 10% on average cresting $5k a ton for the first time ever. 

    With near or record high prices in some regions, combined with the huge crop size and pushback from consumers on bottle price increases, growers expecting additional upside price negotiations on grapes will be disappointed. I'm sure we will be hearing more on this in the week ahead as we all go to our pencils and do some math (...or get a Ouija Board in my case.)

    Link: ECB President Mario Draghi expresses concern over the value of the euro.  Last year Draghi stated the ECB would “do whatever it takes” to keep the euro together, which drove the currency off its lows from $1.22 to a high of $1.36.  Our position was the markets were misinterpreting his statement and it was in the Union's best interest to depreciate the currency. Now he's announced he wants to take the euro down to ensure exports can keep pace.We said in the SVB State of the Industry Report that "Draghi’s comments were directed at preserving the Eurozone Agreement and not aimed at strengthening the currency. Long term, every indication is the euro should weaken against the U.S. dollar. While our economy bumps along at a weak rate of growth, the EU must: deal with massive problems in basic agreements, repair huge cultural differences, deal with debt and banking crises, and repair a recession. As the entirety of the EU slips back into recession, the ECB will want to weaken the currency to enhance exports." 
    Balanced Wine .... get it?
    In this case it appears both calls of the harvest and Euro direction may have been pretty good. For the high production space the big harvest will lower domestic bulk price naturally but less than one might otherwise expect because of the weak world harvest. Size does matter and in this case, the Euro was small and the US was large, so early season imports should be slowed somewhat from the furious pace of last year and pricing which would normally soften early, might be more sticky in the lower priced wine business. Longer term as the Euro does weaken as Draghi indicates in the linked article, it will pressure high production returns.

    The fine wine business is in a little different position as many growers vinified at the end of the year instead of letting the massive harvest go to waste. With the preliminary report out, they will see the writing on the wall and would likely try and move the bulk wine early which will soften price. The one caveat in this case is there are a lot of stuck fermentations this year - probably due to the large harvest and lower nutrient levels. That might delay some bulk wine hitting the market. Longer term, bottled imports out of the wine producing regions should continue to pressure domestic fine wine producers.

    All in all, it looks like the business is in balance but we'll see some early price reductions.

    Before signing off - a public service announcement for the men out there who are slightly forgetful: Thursday is Valentine's Day.

    What are your thoughts about the Crush report and the impact on prices - bottled, grapes, or bulk?


    1. So far it seems the Euro is ignoring Mario. How long will that continue? I see many Euro traders hedging for a 1.40! I don't understand this, but I'm not a currency trader, just hoping for a lower Euro so that balance really happens.

      1. The G20 came out with a statement that they would not target their exchange rates to gain a competitive world edge, but the G7 added that monetary easing which has the side-effect of weakening a country’s currency was allowed..... whatever that means. It certainly shed no light on any concerted monetary movements. In the end though, with most of the worlds rates already at the bottom, the Central Banks really lack tools to impact currencies any way. At some point, when risk is off - and I think that day might show up in the back half of this year, we will start to look at the strengths of economies again and the EU is clearly lagging. Add to that Germany's surprise worse than expected GDP in Q4 which was mostly from export contraction, and you are going to find few EuroBankers arguing against allowing the Euro to fall.


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