Monday, May 12, 2014

Supply 2014: Is it Too Much or Not Enough?


This is the time of year when we all hold our breath. In California, some vines are flowering and some are about to. We are mostly out of from the threat of frost but not entirely, and clearly we are not out of a threat from rain in this era of seemingly increasingly unpredictable weather patterns. Nobody likes to see their crop impaired or ruined but this is a year in a macro way, we really wouldn't mind seeing a reduced crop load, as long as it doesn't come in our own vineyard holdings. It depends who you read these days in getting a read on the grape markets.





Going back to last year the discussion on a Morgan Stanley Report citing an impending world shortage created quite a stir in the wine industry with the OIV quickly issuing a report debunking that view. Then this past week I took a long call from a Forbes writer wanting to talk about the view on a well-known industy player who also believes there is an impending shortage of grapes.
In the Annual State of the Industry Report I authored in January of this year I said:
"Inventory is balanced in all segments as long as we look forward to the 2014 harvest which we expect to be average. A third harvest of record or near record yield will have the industry in the position of being over-supplied again. Grape planting is restrained compared to prior periods when supply was in balance. The Central Valley is at the greatest risk in planting ahead of demand."

The important caveat I put in that forecast was "as long as we look forward to the 2014 harvest which we expect to be average." While I'm not normally one to out-guess God on harvest yields, he's thus far cooperated by never giving us three years of above average yields so that's the way I framed it out. Then Wednesday of this past week an article came out in the Western Farm Press that quoted my good friend Brian Clements from Turrentine Brokerage saying:
 
Based on cluster counts, "most observers suspect average to higher production in most areas of California and across most varieties."

That could be a problem for the industry. We only need enough grapes. Not too many. When there are too many grapes, growers see reduced contract prices and wineries find more competition from negociant brands. If there is a pull-back in demand as we saw in the Great Recession, then wineries see their returns killed in the distribution channel and the distributor takes the easy road selling on price.

We noted in the State of the Industry Report the Central Valley was the region at the greatest risk of over-planting and combined with plantings on the central coast that are starting to come into production - could create a supply problem on the less expensive end of production. Thus far on the higher priced end of the market, there appears to be a little more wiggle room but either way the tank space doesn't exist, nor does the demand exist to see a third straight record yield.

                                   Source: Nielsen
Of course supply stocks are impacted by demand as well as planted acreage and yield. On the consumer demand side, we are seeing trading up again into higher priced wines as noted above, and demand about in line with our forecast of 6%-10% in fine wine, and about average growth for the industry overall. That being the case, early on this has the look of a buyer’s market with decreasing prices for grapes and bulk wine. The drought, one would think should moderate a big harvest particularly if the summer is a warm one. Either way, clearly there is a lot of room to see mother nature fall into line with an average harvest still but an above average harvest in most regions and varietals wouldn't be welcome this year.

More on the current situation on the domestic front is available in a PDF from Turrentine brokerage, and on world trends from Ciatti Brokerage

How do you see the grape and bulk market? Have you taken a look at cluster counts at this early point in the season? Was the notion of vine fatigue perhaps exaggerated at the end of last year?

If you think this is valuable reading, please prote this on your favorite social media platform. Feel free to join the site at the top of the page, log in and offer your perspectives on what’s happening in the vineyards and with contract pricing to this point in the year.

 
 

6 comments:

  1. Rob-

    The annual tribal ritual begins...the grower-vintner population prognosticates...it has surprisingly become a continuous, year-around process. It used to be seasonal. The banks and the wineries all used to show up about June 1 and they wanted to know what the growers expected to happen in September. And the wineries seldom bought before ASEV unless a shortage was really apparent. With modern communication, the data has grown in volume, the players have multiplied...and now we even have contests to see who's guesstimate is the best! Estimates are often 'summed up' even though the significant information is really the substantial differences between all of the little pieces.

    In reality, there is not a 'summed-up wine industry'; there are a whole lot of markets served by growers and vintners from various small places in the realm. The important analysis is to look at those smaller pieces. Yes, 60, 70 or 80 percent of the products and price points are in a large supply/demand market...but almost all of the brands have limitations on their freedom to source grapes and wine. As they package their product(s), they have to deal with their image and the consumers' perceptions. That is what is different about the current markets. There is a perception of what value (and character) a brand will deliver.

    There are brands dependent upon specific grape varieties, the character of where they are sourced and the economic price for those vineyard products--this has resulted in many sustainable collaborations between growers and vintners. You point out that growers have been in constant contact with vintners; I believe that very few new grapes have been planted without a home. Even the Central Valley has to consider competitive, alternative crops as well as their water availability issues. I would point out that the newest acreage report shows only 5-8% non-bearing vines in California (don't forget 1-2% of last year's producing vines were also pulled out. If those new vines represent 3 years of new plants, we are not sustaining growth in the supply at a rate to equal to the growth in demand.

    Yes, 4 million tons can be the new norm. Go back a few years and project the growth of supply vs. growth in demand; we need these grapes. Then, look at the performance of brands. Your $9-$22 products averaged over 10% growth the past 52 months...and, many of the strongest brands in those categories have released 2013 products already! You have noted in the past that the less than $7 sales are down...but the grapes are still being processed and used. The new vineyards in the Central Valley are being planted to a new purpose and for new products with higher value. No doubt there are islands of over supply and situations of significant shortage. But, as of May 13 it looks like another good year. That is probably what the Argentinians thought in December...that did not happen...it is never over 'til it's over.

    I think if it is a big harvest, we will use it all; if not, there will be shortages. My biggest concern today is that many cold climate grapes are substantially ahead of a 'normal' phenologic growth...wineries need to clear the tanks and get ready for an early harvest. And, then we have to hope that the promised El Nino does not bring too much early rain as we hurry to complete the harvest.

    Happy Vintage 2014!

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    1. Rich - thanks for logging in and offering your well written insights. It is an annual discussion, in fact May 5th of last year I had a similar post about the Dance of Grape Pricing: http://svbwine.blogspot.com/2013/05/the-dance-of-grape-pricing.html

      The industry is evolving without question both in terms of information and with the availability of world-wide substitutes. I'm personally concerned first by the Central Valley plantings because while new plantings may have a home, that can put a contract with an existing vineyard out of a home. The Big Valley has a history of overplanting. I'm betting they wont do it this time with better information.

      Because the San Joaquin also has global competition that can change on a dime with a change in the dollar strength relative to import countries, that plays a part in the safety margin as well. To a large extent, the wines produced down there don't go into the low priced wines anymore and that's to their advantage to move from commodity risk.

      On the N. Coast, demand for Cabernet seems still pretty strong and foreign competition isn't as much of a threat. In Oregon and Washington however, the continued planting of vineyards with cost and value advantages could start to play a role in softening the CA market at a point in the future.

      What does it mean in summary? Only what we know: We've had two record harvests, the tanks are full, grape and bulk prices are softening and a large or another record harvest wont be welcome. As you say - we are a long way before we get there but clearly, if there aren't clusters to count, its pretty hard to have a record harvest. If they start out heavy - that possibility is preserved. I'm still betting on an average harvest when Mother Nature inserts herself into the equation.

      Thanks again for the very well thought out post. Please come back and offer more thoughts to the community here Rich.

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  2. Hello Rob
    With all your rich references on this blog entry, I could not help myself. As we all know clusters are one indicator - but there are still other issues (Set, Berry Size, etc) that can have effects on final tonnages. We know more than we did a month ago - but we still do not know, that is what makes this time of year so interesting.
    I think the bigger issue when looking at what we need in 2014 - is really understanding what we got in 2012 and 2013. There are currently 27 plus million gallons of bulk wine on the market - if that was not there we would be looking at 2014 differently. Also I still believe that there is a feeling of optimism about the long term growth potential of our business, having adequate supply is probably a better situation for our long term positioning and growth than not having enough.
    Also I wanted to point out that the Ciatti Company also has a report on the trends in the domestic market to go along with our world report. A new California Report will be up in the next few weeks - you can go here to see a copy http://www.ciatti.com/ciatti-reports
    As always Rob, I appreciate the jocular repartee SMILE!

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    Replies
    1. Clearly one of the most enlightened wine brokers in the business since you read and post here Glenn. We always appreciate your insights.

      27M gallons is a lot of gallons ... 11.4M cases if my math is right, and that's just CA wines and doesn't include wines purchased from off-shore sitting in domestic producers tanks. I totally agree however none of this discussion would matter absent the large 2012 and 2013 harvests.

      Optimism about the growth rate in wine is nice but like we discovered in 2010 and 2011, the year to year changes in supply have a more immediate impact.

      As a product, growth seems to hover around 3% per annum. If this harvest is normal or light, none of this will matter and I think we are just fine. If not, where the rubber hits the road will be by price point, region, and varietal. I hear there is a fair amount of demand for NC cab, but also a fair amount on the market? Could we take more? I suspect we could. I'm not so sure the same would hold true for blenders were this vintage again like the previous two.

      Appreciate the reference to your research (http://www.ciatti.com/ciatti-reports#sthash.boRI3Fbl.dpuf) . Its always a good read.

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  3. Higher end vineyards usually only have 1-2 clusters per shoot anyways. I think it is a bit early to predict for this segment of the vineyards in Cali. 2012 and 2013 were big for the vineyards we source from not due to cluster count, but due to cluster size. Many vineyards that are used to putting hand grenade sized Pinot clusters put on softball sized clusters. We had double or triple the tonnage due to the weight. We'll see at fruit set what the harvest may bring. My guess is closer to average than above-average,

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    1. David - sincerely appreciate you logging in and offering your well-thought views. Its absolutely early to predict anything without question. The only reason this is worth talking about is the two prior vintages and what has thus far been a perfect spring. Who knows what happens next but I think everyone should agree a large/record harvest isn't needed this time around.

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