Wine Supply is Entering Unknown Territory

Grape Supply Cycles

The wine business runs in cycles when it comes to planting. Trying to guess which grapes are needed and just when they are needed is a trick, especially when it takes 5 years to get a fully mature yield. And it's impossible to predict planting decisions effectively without making some guess on demand.

We have been through excess before, but the cycles aren't always created by the same circumstance and this one is unique.

      Shortage with Demand Growth

In the middle 1990s, there was such a strong demand for wine, grape shortages were widespread and grape prices rose rapidly. In our bank's client base, it was common for wineries to run out of bottled wine, well before the next vintage could be bottled.

Mondavi started to import Chilean bulk wine in large volumes for the first time to help fill demand. I remember one client from that era, now gone, who told me, "I only sell wine to people I like. If I don't like them, they don't get my wine." That was a unique time, and those circumstances haven't been seen since.


In response, planting exploded during that same period. At one point, I became concerned about the speed at which sticks were going in the ground, so I researched, developed, and published the nearby chart.

By 1998, we were close to having a supply balance at a macro perspective, in my estimation, and didn't need to plant anymore. But we still kept planting because there weren't enough grapes.

There wasn't great analytic science behind the development of the model. I didn't have perfect shipment information, especially since I was trying to convert shipments backward into tons. I had to make some educated guesses and estimates, especially on restaurant sales, and then create a forecast based on that. It was at least useful. Looking back 15+ years, it was probably more accurate than I knew at the time because we did move into an ear of oversupply exactly as I'd guessed.

That was a supply whip. We went from being short on supply to being quite long in what seemed like an instant; the combination of The Tech Recession, 9/11, wholesaler changes, and massive non-bearing acreage - each adding to compound the problem. Demand for wine was still moving sharply higher, but not quick enough to absorb all the grapes.

Since then, we've gone through several cycles due to long or short harvests in regions, but in the background, we've been watching the annual growth rate in wine slow to the point where, at present, total volume demand for wine on a trailing 12-month basis is no better than zero, based on several sources.

      Excess with Slack Demand

Today, the wine supply is moving into unknown territory. We have now reached the point where we have a large and unhealthy excess in grape supply in all price segments. The factors creating this, however, are unique and nothing like the extended oversupply period of the late 1990s and early 2000s. We've not experienced this set of circumstances before, and that means the responses that worked in the past may not work this time.

From a demand perspective, we are seeing negative volume growth in regions that produce wines positioned below $9 at retail. That's a well-documented issue.

More recently, though, volume in higher price point regions has shown zero to minimally positive growth rates and, luckily, still modest positive growth in sales dollars. On a volume basis, we are close to hitting slack. We haven't seen negative volume growth in the business since 1994, but we are very close to that today. 

It would be great if we had a short bulk supply, empty storage tanks, and we were looking at a light harvest. But talking to brokers and vineyard managers over the past 6 weeks, there is unanimity of opinion that even on the North Coast, we will leave fruit hanging on the vine this harvest. Not everything is contracted. And the early consensus for yield is we are picking out average to average-plus yields.

Given those facts, it's probably not surprising that we are seeing much lower prices paid for uncontracted grapes—if there is a buyer for those grapes. That mirrors price drops on the bulk market, too. There just aren't enough buyers.

With wineries full of supply and short on demand, we will see a modest number of contracts expire after this year without being re-upped at current prices. I don't have a gauge on a number but that's a consistent response I'm getting today from producers.

      Coping with Supply Excess

How will grape growers cope with the supply issue? That's where we are in uncharted territory. In the North Coast in days past, vines could be pulled early that needed replanting, moderating additions to supply. Growers could also drop fruit they might let hang in better times. And in a doubling-down approach, some growers have crushed uncontracted fruit and hoped for a return when price improved in a year or two.

The problem with those strategies is that they all depend on seeing better volume demand growth within a short time. Under the circumstances discussed, making projections of increased demand in the next couple of years is becoming increasingly difficult.

And on the third strategy above, crushing uncontracted fruit will probably add costs that you can't recover in two years. That's a short way of saying that this current cycle can't correct itself in two years.

In the Southern Central Valley, during long periods of excess, vineyards can be pulled and replaced by pistachios, almonds, and pomegranates. Growers can and have moved on to something else; the benefit of diversified farming approaches. On the Central Coast, some of the heavy-production vineyards can be replanted as well.

What about the North Coast? How will supply and demand equilibrate to stabilize price if demand on a volume basis doesn't improve longer-term? Growers on the North Coast don't have profitable alternative crops to plant. Long gone are apples, pears, walnuts, prunes, and poultry. There are less expensive places to farm than Northern California and those crops have found those locales.

Many are asking, "How long will the imbalance last?" Under the circumstances, I don't have an encouraging answer. My guess isn't one anyone will like, so I think I'll sit on that prediction for a while.

There Are Solutions, But They Take Time

The best solution to excess supply isn't pulling vines. The solution has to be improving demand, but that will take time and will be painful for growers in the interim.

This is a topic that I covered in a recent blog as well as the Annual State of the Industry Report but is too extensive for this post.

The short treatment is there are essentially two things that are needed to improve consumer demand for wine and lower the gulf between that and grape supply:

1. Consumers are reducing wine consumption because of health concerns. We need to push back on the cumulative negative health messages from neo-prohibitionists that defy the findings that moderate consumption of wine is more healthy than abstinence. The science is there and has been proven accurate. The California Wine Institute used to have several technical positions supporting this goal and we need to bring that function back. We need other wine organizations in the West to climb aboard that objective too. This is both a policy and a marketing issue.
2. We have to evolve the way we market. We've proven successful in marketing to boomers, but we still have to engage young consumers. That's not an either-or proposition. We need to hold on to existing customers AND attract new ones. The strategies there are many-fold and we need faster implementation of those prescriptive strategies. 

What's Your Opinion?

• How are you responding to this harvest?
• Are you renegotiating contracts?
• If you feel like I'm overplaying the current circumstance, feel free to push back.

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