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.