Sunday, May 5, 2013

The Dance of Grape Pricing


ABC. It's Easy As 1-2-3

The vines flowering this time of year remind me of seventh grade. Maybe its the Aqua-Net hairspray smell the flowers produce but that's when we had our first crack at dancing after school which made institutionally official, our life-long quest to read the minds of the opposite sex. Filing into the sour milk scented cafeteria one sweltering afternoon, the boys took up their station on one wall while the girls occupied the opposite wall. The girls giggled and pointed at us prepubescent pimply-faced males while we in turn stared blankly back across the barren dance floor. "ABC. It's easy as 1-2-3" from The Jackson 5 cranked at volume eleven in the background, so we started to move to the music right where we stood thus signaling in our Cro-Magnon genetic way that we could dance. Well, we could if we wanted to. We just didn't want to. The girls of course had been practicing their dance moves since 3rd grade in front of their full-length closet mirrors. Us boys? We were playing baseball, football, kick-the-can, capture the flag, and tiddlywinks, oblivious to girls - unless you count the observation of cooties.
If you want to skip my meandering memories from 12 year olds first dance experience, you can skip down To The Point Now.

Half the Battle is Mental

Standing there with the weight of expectation hanging heavily in the air; those expectations based on the boys leadership, we stood clueless with results likely to meet our poor mental preparation. You see back in the day, boys were the ones that had to ask girls to dance. A girl who asked a boy to dance would be considered a floozie. So growing uncomfortable by the minute with an empty dance floor and rising to the challenge, we each used what we had in our arsenals to solve the problem: our competitive instincts and ability to formulate a plan. We just needed one song we had heard before with a recognizable beat, and we could fake this dancing thing.

We surveyed the other wall for just the right bubblegum smacking female; someone who wasn't too popular or foxy who might decline our invitation, or too unpopular or doggish because you would catch grief from your pals dancing with her, someone at least glancing your way from across the room on occasion signaling a possible positive outcome.

Then the time came. The perfect song would start to play. This was it. You were ready. Now or never. Steeling up our nerves, we started across the empty floor wobbly-legged on a mission feigning some degree of confidence and most importantly looking at the ground, never once looking directly at the girl of your intentions or walking in a direct path toward her lest someone think you actually liked her.

Executing the Plan

In the other side's bivouac, huddled in a close knit circle the girls shouted into each others ears to be heard over the music, all the while pretending they didn't notice a boy flanking their closed group. Then with heart pounding, you saw the feet of girls knowing you had arrived at the target location. Reaching up, you tapped the girl on the shoulder and were greeted with an unpracticed look of surprise. "Oh! ...ugh.... Hi?" Eyes looking up into hers now locked in anticipation of the question, you suddenly come to grips with a massive error in judgment. The girls all looked smaller from across the room! Your eyes were right about the level of her ..... her chest. Turning around and retreating would be an embarrassing option which would be seen as weakness by both sides. You had to move forward with the plan, so the words ebbed forth like molasses trickling from your dry mouth, "Hey! Ugh .. a ... ughhh....  You want to dance?" Leaning forward and down, she screamed back into your ear the most blessed word known by man; "Yes."

Things Not Going to Plan: Adaptation Rules the Day.

You were the man! With your spirits soaring and in charge now, you grab her sweaty palm and tow her to the center of the room. Then, just as you start to assume your pre-imagined, partially squatting dance position, elbows bent, fists clenched, forearms parallel with the floor, and thumbs up in the air ........ the song suddenly ends. Oh crap! A second error in judgment. You took too long to strategize, slowly walk in feigned confidence, and then stumbled on your words. You missed the song that you maybe could dance to.

Now with the room in silence except for the buzz of gossip coming from the walls, a bead of sweat trickles down your temple. Adaptation is required. Entirely off the plan now, luck intervened when the girl said, "Let's just do the next song...if you want."

Relieved but apprehensive as the scratchy sounds of the needle are heard seeking the groove on the next 45, you tilt your head down and sideways to hear the beat of the new song, your nose unintentionally directed toward your armpit. You realize that you smell like you haven't showered in a week, even if you did shower last week. And then the roof collapses on you as you hear strings. It can't be but  .......  OH MY GAWD! It's a slow song!

You both stare at each other wide-eyed in fear. You are both going to have to go through with it and hold each other. Cautiously you place your hands on her hips while she reaches out to rest her elbows on your shoulders. Staring into her eyes, you try a couple moves and the next thing you know your face comes in contact with her .... um .... her chest, and she's actually wearing a bra! She's no girl! She's a woman and you are touching her! For the first time in your life, you really wished you'd showered and listened to your sister when she said you needed deodorant.

Well that's what someone told me happened back then. That never happened to me of course but it does remind me of the dance that starts about this time of year on crop size and grape price.

To The Point Now

This is the point in the year when growers line up on one side of the dance and talk about how small the crop is going to be so price is going to have to go up. On the other side of the room are the producers who talk about how big the crop will be and steel their nerves and make decisions about their needs for harvest. Should we lock in now or wait until we hear the song start at harvest? Will price go up or can I take advantage of a big year and get some low-priced juice?

Talking to one of my readers and winery clients this past week, I heard something for the second time this spring: Early estimates of crop size portend another large crop. While not impossible, to think that we will get another record year like last year - back to back ... it would be about as unusual as a girl agreeing to dance with me in the seventh grade. 

Before we can really get a handle on what might happen to price, you first have to have an idea of what is happening with producers and their supply to determine their appetite for grapes. Are they selling their wine?

In the SVB Wine Industry Report released in January, we predicted the year was going to start off slow from the perspective of GDP. Growth trends in wine sales had been dropping for 3 years running and the Fiscal Cliff wasn't making the investment environment any less risky. We predicted getting pricing increases early in the year would be difficult and we said the second half of 2013 should see improving trends as the economy benefited from the middle class joining in the recovery.

We're we right? Early returns on wine sales this year demonstrate that the first quarter was slightly better than we'd guessed and sales growth was tepid but positive. The economy is doing slightly better than expected too and pricing increases have been taken in modest amounts, reflected more by reductions in promotional allowances. From that we can intuit, as we predicted there is only limited pricing power in the hands of producers so supply is at least in balance and not long.

Steve Fredricks, Turrentine Brokerage
Talking Friday to a wine broker who will go unnamed, I got a few pieces to the puzzle regarding bulk supplies. I'm told that the juice that's been sitting in tanks from the large harvest has been moving along at a steady pace. Asking his view of expected harvest yields, he offered the view that I share as well at this stage: no matter how many clusters per shoot people see, it really is just too early to extrapolate anything from that.

Last year there were fewer clusters than people are seeing today and we still ended up with a record harvest. To get there, we needed perfect conditions through the entire season in all appellations. This season we are three to four weeks ahead of normal due to a warm spring and lack of rain. Conditions could be perfect, and then again we might get a rain in July. Last year we were also coming off some weak harvests and needed crop, so farmers tried to hang more tonnage. This year coming off a large crop, farmers who farm for above average volume could be in for a surprise at harvest if yield comes in as large as last year. Farmers should be hedging their bets this year with that knowledge and only look at specific varietals like chardonnay and high-value cabernet as places more likely to find spot buyers. From the perspective of this unnamed broker and my opinion as well, anyone betting on a second massive crop while possible, is making a bad bet.

Coming Together 

Managing grape supply is like the dance. Growers and wineries line up on opposite walls and try to read the minds of each other in addition to the consumer, but all send mixed and lagging messages.

Half the battle is mental. You need a plan. The plan should include measures of long term control of your most important grape supplies, and those should be intertwined with a strategy that hedges the lengths of grower contracts so they don't expire at the same time and thus create wide variability in your inventory cost.

You want to be an important partner. Surveying the other wall, don't get into a place where you are a minor player and more easily declined when market conditions change. Growers want a balance in customers as well. They don't want a scillion people running through their vineyards trying to control cultural practices by row.

Execute in a defined way on the grape plan and don't be prone to following the gossip coming from the walls. Talk to people without a bias who have supply and pricing knowledge like unnamed grape brokers, or maybe your favorite wine banker who's in therapy still over his seventh grade dance experiences.

Be prepared when plans go awry. When the music stops suddenly and your plan is crushed, do you have a backup strategy? Where can you get more grapes and where do you have relationships that allow you to adjust a contract if necessary? In any business but particularly the wine business, make sure you have the capital and a banking relationship that allows you to survive those unexpected changes. Especially today if you are struggling even a little with cash flow in this interest rate environment, think about the level of debt you possess and what that interest expense will look like with normalized rates. Short-term rates are going to increase in the next 18 months.

Finally be creative and remain positive. Some of the best marketing plans and products were developed when the plan didn't pan out. So when you end up with lemons, figure out creative solutions to adjust. We talk to our clients constantly about creative options. Its what we do for a living. Recognize even when you get stuck dancing with someone who has their chest in your face, there are always positives behind every dark cloud.

Sorry for the long post. I hope it was at least entertaining. It was theraputic for me.

What do you think?
  • Where will the harvest come in with yield this year?
  • What are early indications in your AVA with crop? 
  • Are you seeing additional plantings to support growing demand?
  • What is happening to the price of grapes in your market?
  • How are sales of bulk wine? Can you find what you need at the right price? 

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1 comment:

  1. Good article in Wines and Vines re: an interview with David Freed.

    Speaking with David yesterday, he sent me a forward look at the Vineyard Economic Seminar Survey Results. Unsuprising to me, the growers responded the issue that will have the greatest impact on the California Wine Industry is Grape Price Increases.

    Will the market support grape price increases beyond where they are? Stay tuned.

    If you are interested in attending the 18th Annual Vineyard Economics Seminar on Thursday, May 23, 2013 at the Napa Valley Marriott, you can contact Kathy Archer:


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