Sunday, September 29, 2013

Inventory Days Higher, Grape Prices Headed Lower

Pig in a Python
Here's a late edit to this post: If there are 6 pigs in a 7 pig python and the python doesn't ....er ... pass one of the pigs, how many pigs can the python eat?

To really understand what's going on with inventory, you have to get a handle on the whole chain: Consumer demand, depletions, distributor supply, winery supply, imports, bulk wine supply, forecast harvest yields, and non-bearing acreage. I spend a great deal of time trying to sort through each of those to get a sense of what is coming next for the producers. Its a nerdly existence but it helps the winery clients who bank with me so I take the time, research, read, and talk to a lot of smart people.

At Silicon Valley Bank, we've been collecting financial information for decades now in our own nerdly lives to examine trends impacting the fine wine business. The chart to the left is from our database of wine industry financial statements and is weighted to smaller producers who carry inventory longer and charge higher prices versus higher volume producers.

Our chart demonstrates how in the higher priced segments, inventory days increased from 695 days, to 981 days for a 41% increase once the 2012 harvest was in the cellar. That is a massive jump and looking at the last decade, represents the highest level of wine inventories during the period. The next closest data point was from the period after 2000 when we had a large and very average quality vintage headed into the teeth of the Tech Bubble and recession. We had too much inventory back then because the channels were full, tanks were full, and growth rates in wine sales were going backward.

The chart above shows graphically the impact the 2012 harvest had on grape supplies. The harvest was HUGE and still is sending shock waves into the business even now in the form of flat or declining bulk wine prices, fewer imports going into domestic brands, storage that has been strained going into 2013, and that's leading to a significant amount of re-discussion to tackle the question, "Just how much added acreage is needed?"

Figuring out how much added acreage to plant isn't an easy calculation - especially when imports, varietals, regulations, alternative uses and price points are factored in. Last year we suggested that the reaction to under-planting during the previous cycle might be different this time and growers were less likely to just throw sticks in the ground and speculate. Allied Grape Growers in their Spring newsletter pondered the exact same question. We are all more cautious this time around because nobody wants another decade of oversupplied grapes. This time, history is a little clearer and the information available is a little better from which to make decisions, but planting decisions are by no means easy.

After we released last weeks blog and said grape prices would likely feel downward pressure after this harvest, the following news story came out from Jeff Quackenbush at the North Bay Business Journal: Wine Grape Crop Moderates Pricing. Its a report of the discussion had at the 22nd Annual Wine Industry Financial Symposium. The great Glenn Proctor from the Ciatti Company presented the chart to the left which compliments the Turrentine chart above, but gives a little more information on supply at the varietal level. (Wonder why you can't find a good reasonably priced Zinfandel in Safeway?)

Ciatti reports a 166% growth in overall bulk wine inventory YOY between September 2012 and 2013 and Glenn noted in his portion of the speech that, "There is a concern if the 2013 crop comes in as large as many are expecting, what the price will be to move that volume?" Indeed that is the question at hand to sort out between suppliers and producers.

There is a lot to consider if you are a grower today beyond weather, bugs, and labor shortages. How much to plant? When to replant? Farm for yield again? How to price long and short contracts? What might you do with any grapes that go unsold with this harvest? Are you thinking about crushing them and converting to bulk wine and hoping for a better market next season? While that might have worked out last vintage, I'm not sure about that strategy this year  - unless you expect a quick rebound in consumer demand and expect the 2013's will be as well received as the 2012 vintage.

While we believe the 2012 vintage will be easily absorbed into the three-tier channel given the prior allocations from 2011 and the market anticipation for that vintage, we question if 2013 will get the same reception if harvest continues at this pace and demand remains moderated at the consumer level.

Once again, we might be getting to a point where some growers will get whiplash moving from a position of having only recently gained the upper hand in price negotiations, to a little bit of dancing around in the dark on a tightrope while we all grope for the right long-term planting solutions and in the short term, monitor the consumers reception to the 2012's and 2013's in the three-tier system.

What do you think? Anyone disagree with this perspective? Are we long, short or balanced after the harvest? Any stories you want to add to the discussion? 

Please log in, share this story through your favorite Social Media application if you think its worth pointing others to the discussion - then offer your own perspective about grape prices and plantings in the next year.