Tuesday, December 5, 2017

Fire Damage Becoming Clear


When you're standing in the middle of something, it's hard to understand just how big it is, and when the Napa fires were at the early stage and there was no progress in containment, I got a sense of just how big a story it was when I started taking press calls from around the globe. The reporters all wanted to know about the extent of the damage to the wine industry, having seen the pictures from Santa Rosa of utter destruction. It's not the first time I was in this position.

When the Napa Earthquake hit, I was tasked with trying to gauge the damage to the wine business for the Federal Disaster Declaration, but in that case I had some data to work with. This time, I had a phone, spotty cell coverage, no internet with widespread power outages so couldn't see news coverage, and was only keeping current with colleagues, family, and clients using texts and cell phone.

      Worst Damage



Now, eight weeks after the fire started, the picture is a little clearer. The fires on the North Coast consumed 245,000 acres, destroyed at least 8,889  structures and killed 44 people, according to Cal Fire. The CA Insurance Commissioner released a report saying damage now has topped $9B, making it the costliest in U.S. history. In Santa Rosa alone, that number includes 4,655 homes representing an estimated 12,000 people who are left to recover their lives. That's a fact that can't be minimized and the numbers reflect an historic level of pain.

We also know a little more about PG&E's position on the costs of fighting the fires, and who might end up paying the final bill based on their testimony to the California Public Utility Commission. It's probably not surprising PG&E wants to pass on the costs of fighting the fire to their customers, but the early numbers being thrown out are an eye-popping: $13 billion with PG&E's wildfire insurance limited to $800 million.

With a $28 billion market cap, those early estimates on costs and liabilities are hardly trivial. The final numbers will depend on whether the utility's equipment is determined to be the cause of the fire which will galvanize class-action litigation. Someone will pay though and in the end because of the size of the loss, it will be a combination of insurance companies, PG&E shareholders, utility customers, and tax payers.

      Wine Business


In the wine business we're still trying to discover the true losses but on the whole we did quite well with significant losses to wineries limited to about 10 in total.

    Vineyards

We know that there were hundreds of small vineyards impacted in the hills that were burned. The extent of the damage is overwhelmingly light. The plastic drainage pipes in many vineyards melted below ground, right along with the above ground drip irrigation. The vines themselves we believe are resilient, but we won't be able to fully confirm our optimism until spring when the vines push.

    Growers

Growers had mixed results. Early reports had the harvest 90% complete and with the benefit of time, that initially optimistic view appears to have been a very good estimate. That said, the fruit still hanging in the hills was the more expensive Cabernet plantings, and a good guess would be 15% - 25% of that still needed to be picked. Some used their crop insurance and filed claims, taking an immediate and early loss. Others didn't have insurance and missed that option. Note: If you are growing grapes, at least get the virtually free CAT coverage.

    Smoke Taint

Some tested clean for smoke taint and harvested as normal, selling to their wineries. Some grapes were rejected by winery buyers, but it seems that was the exception. In most cases, wineries worked with growers to find solutions. One creative solution was to accept the grapes, with the winery accepting the cost of vinification and paying for the crop once smoke taint is ruled out. Everyone kept the smoke impacted juice separate and to the extent there are lots that come up with taint, it will be cleaned up, sold and blended into lower priced wine.

At this point I would be surprised if any Napa/Sonoma brand sold wine that is smoke tainted and believe from early reports the vintage will be quite good from a quality perspective, with the late season heat spike having more impact than the fires. But we'll have to see just how wine writers handle the discussion.

    Hotels and Tourism

October wasn't a good month for Tourism on the North Coast. Cancellations were the norm, and rightly so during the two weeks of fire and smoke. Well-intended merchants tried to get the 'open for business' word out a little early in some cases, but the Tourism organizations in both Napa and Sonoma Counties while sanguine, waited until hospitality operations were fully functioning before pushing out the news and have done a great job timing messages and supporting the industry.

Two months after the fires, hotel occupancy is back to the normal tight levels, but some of that is due to displaced homeowners who are getting insurance support and need a place to stay. Tourism is still slightly impacted, but the more popular restaurants are fully booked again and busy. Tasting rooms are also going toward their normal winter pace and close to normal in visitation. The events that have been scheduled for fire relief have brought in millions to help recovery efforts, and that has helped the hospitality and wine business though paradoxically locals staying in hotels has made it more difficult to find local accommodations.

    Who Would of Thunk

There are other impacts that we wouldn't think of at first. For instance, local truck and car operators reported sales took an unexpected positive turn in November given the estimated 7,000 vehicles that were destroyed.

Personally the biggest impact was the annual survey that SVB runs to determine conditions in the business had to be cancelled this year because it was scheduled to go out October 12th. With our offices closed and wineries scrambling in the North Coast, there was no way we could get the survey done this year. That will impact our trending efforts for years ahead of us because we'll have a gap year to deal with.

We will still publish the Annual SVB Wine Report next year and will present the live videocast on January 17th as normal. I am hoping we can get the report out the week before Unified, but I've had to scramble for new sources of data support to fill in gaps, so the report release may slip a little. Wish me luck!

      Comments


If you have any comments relating to the recovery efforts, updates on conditions you'd like to offer, or pity for me having to work harder to get the report done this year, feel free to log in and offer your thoughts below.

24 comments:

  1. Thanks Liz. The loss of hone's and the impact on people is the sad story. I can't imagine what it would take to recover and do one's job. We learn a little more each day.

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    1. [insert thumbs up emoji] ... limitations of the platform :o)

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  3. Important to talk about the effect this will have on labor. There will be a significant increase in demand for workers as rebuilding efforts ramp up. Vineyard, restaurant, and hospitality labor will become even more scarce and expensive as a result. This could be largest impact on the wine industry for 2018.

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    1. Anon 12:43 - Labor has been a problem for several years as opportunities for work have improved in Mexico and immigration has become more forward in the political debate. Housing for those who work in support roles in hospitality and the wine business were already expensive and rare. The damage in Santa Rosa in particular has taken out many homes from the workforce in support and even to the ownership level, causing many to rethink their job choices.

      We learned in the Oakland Hills fire decades ago that when someone loses everything, they also lose the bounds that tie them to an area. Housing is expensive and there are jobs in other states and industries.

      Add to that the demand for construction labor and construction support companies. We will have people making the journey to come and make a higher wage for rebuilding just as we did in the Oakland Hills fire but costs will go up.

      So you're right of course. Labor will be another casualty of the fire that will need to be dealt with.

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    2. As a (recently retired) vineyard manager and farm labor contractor in 4 counties. I can attest to a worsening labor problem. Over the last 7 to 8 years we saw fewer and fewer transient laborers coming to work for us. We retained our full time EE"s but the much needed seasonal migrant workers just stopped showing up. This fire devastation only exasperates and already difficult scenario.

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    3. Paul R. - It's definitely not getting better. Thanks for the comment!

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    4. According to Beacon economics, to rebuild Sonoma County alone, over the course of three years, will require a marginal increase in the labor force of >6,000 people (roughly 19,000 man-years). Unfortunately, our labor force was already shrinking and with housing prices set to rise even more in the wake of the fires, the mismatch is set to become the #1 economic threat to our region. Without policy interventions, it is possible that we will see our local economy cease expansion and sink into stagnation for several years.

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  4. Smoke tainted wine that has been treated properly to remove the offensive flavors is indistinguishable from any other wine. It doesn't get sold off or blended into lesser wine. Its not terribly common, but its far from rare. From a wine drinker's perspective its invisible.

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    1. Bob - thanks for the comment. You sound like someone who knows and I really can only go by what I hear others who work in filtration tell me. I don't know that I've ever had a $50 bottle of cabernet that's been cleaned of taint. If I have, then you are right and it's invisible, at least to me.

      I've been told that the wine itself can be cleaned up, but the wine loses some of its character. Don't ask me how that's measured.

      More obviously, we know that the smoke molecule attaches itself to sugar molecules and releases when sugar is converted to alcohol and CO2. Many wine producers like leaving some small level of sweetness in the finished wine. So there is a fear that smoke taint can emerge after bottling. Even if it's a small chance, that's a risk a fine wine producer can't take. Furthermore, there is a heavy suspicion about any of the juice for the '17's that are available. Buyers want provenance or need a trusting relationship with the seller. I know from talking to brokers that is driving down the price buyers are willing to pay, and by default - that means that lower priced bulk will go in a less expensive bottle.

      I would love to try a before and after sample of tainted and cleaned up wine from the same lot if you happen to come across a few ML's of that.

      Thanks for the comments and contribution to the discussion.

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    2. Spot on comment Rob. Over the past several years we've learned some lessons with smoke and the subsequent treatment and resulting wine. Wine that was deemed clean from smoke has come up tasting quite differently in the glass a year or two later...the smoke demon reared it's ugly head. Wineries in the know have been very careful accepting grapes with smoke exposure. Growers beware. Crop Insurance is worth every penny !

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    3. Hi Rob,

      You are absolutely right about glycosidically bound precursors. For this reason, we advise all of clients to ferment dry if there is any possibility of smoke exposure. A little concentrate will take care of RS after treatment. This will also prevent the return of the smoke later. At least if the proper compounds are removed in the first place. Identifying those is more than half the battle. The other piece is removing them to below threshold. It takes a lot of work to do this, because we are talking about Parts Per Billion in the single digits. Not everybody is willing to stay at it as long as it takes.

      It could eventually be possible to show you samples. But most of the effected wines won't be processed for months to come. An important note is that wines treated come out very low in CO2. This is easily adjusted (sparged) but not everybody bothers to tell their clients this. We do. Any wine low in CO2 tastes "flat" or, as some incorrectly conclude "stripped". But you bring back the CO2 and voila, you have fruit, tannin, mouthfeel, and a lack of smoke flavor/aroma/finish.

      Incidentally, our sources are indicating that the smoke taint this year is still relatively limited and very low levels. Especially compared to 2008 vintage.

      Paul R you are right about crop insurance. But it would be foolish not to harvest the grapes. Just keep them separate. Get them treated. Even if one doesn't yet believe that they can be "good as new" grapes from premium appellations will carry plenty of value to justify treatment which runs pennies/liter.

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    4. As a manager we advised our clients but ultimately it was between the winery and the ranch owner. Often the buying winery would refuse delivery leaving the owner with at times a tough decision. Some clients opted to harvest, treat the juice and then try their luck on the bulk market. The bulk market as you know is not always the financial cure that we are looking for but at times merely a "feel the pain" extender....It's an interesting business and ever changing. That's for sure

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    5. Paul - Thanks for all your comments. We've learned a lot in the last 60 days about smoke and fire and suspect we'll learn more in the spring.

      Can't believe a Napa/Sonoma brand would take ANY chance with smoke taint. Can you imagine the embarrassent of a recall?

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    6. Exactly...they just won't take that chance. Some tried in the past only to tarnish their brand.The quality that we've all worked for and the price points that have been hard won just can't be messed with. The consumer will absolutely kill it...No wineries mentioned but we all know one or two that tried their hand with the smoke....bad move

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  5. Thank you...always enjoy your insight

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  6. A relief to read a non-volatile update on the situation in the industry--post fire. And for knowledgeable comments, thoughtful treatment of the subjects, as well as addressing aspects that might not have been considered. Thank you!

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    1. Dywrite - Thanks for the kind note. Appreciated!

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  7. "Tourism is still slightly impacted, but the more popular restaurants are fully booked again and busy. Tasting rooms are also going toward their normal winter pace and close to normal in visitation."

    I personally keep in touch with about 30 wine/restaurant/tourism business owners in Sonoma and Napa and 100% of them strongly disagree with the above statements. Maybe time for a fact recheck?

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    1. Anon 12-11 - Thanks for pushing bank on the comment. I am only right 97.4% of the time so I can be wrong on occasion.

      My information comes from talking to the local restaurants as well. Those I've spoken to tell me the traffic is back to seasonal norms unless you are a second tier restaurant.

      Perhaps the seasonal issue is the difference? Either way, I agree two sets of data from two different casual surveys, asked in two different ways can yield different results.

      Where we will agree is we all still want to get the word out that all is well in wine country and tourists are welcome!

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