Sunday, October 14, 2018

Wine Supply is Hitting a Tipping Point

I've been pointing out the slowdown in the growth rate of consumer demand by volume for some time now. We are still growing, but the growth rate is slowing, particularly when looking at volume.

I began to talk about shifting consumer demand and premiumization as early as 2006 in the Annual State of the Industry Report. This is a pretty optimistic industry so I was called a Debbie Downer when I started discussing the forward trends back then. That blow-back has since settled down into general agreement and instead of debating the facts as I've laid them out, the discussion has settled into a discussion of strategy.

Source: CA Grape Acreage Report

At some point as demand in volume flattens while bearing acres increase (above chart), we should expect to see a change in grape buying patterns from wineries and ensuing price changes depending on the specific region and variety

From all the signs I can see, it appears we've arrived at that tipping point in supply. That will change a lot of things going forward.

      Reading the Tea Leaves

In the past month there have been stories of wineries rejecting fruit. Smoke taint is the reason cited which is reasonable when there is taint. But growers are suggesting the real reason for rejection is those wineries have more supply than needed. I don't know which is right but either way, experience tells us that rejection rates drop when there is short supply, so those stories are one small indicator of a possible market change.

Source: 2018 SVB Wine Conditions Survey

A better indicator: Last week, both of the major wine brokerages came out with their harvest updates. Both commented on the good quality fruit from most regions and both hinted at a large harvest. For the past several months, both brokers have suggested wineries might be changing their buying patterns, but as is often the case when we are at this point in a cycle, harvest is the final arbiter. 

It looks like the verdict is nearly in now and we may end up with a record harvest in California which will further tip the scales.

Source: 2018 SVB Wine Conditions Survey

      Current Wine Broker Comments

Within the Ciatti report Robert Selby said:
Growers will have to decide whether or not to turn any overage, unwanted by the buyer, into bulk wine. They should think very carefully about this and not do it unless they can bear the potential risk considering that the bulk wine market continues to be sluggish. The lack of market activity, together with the fact the 2018 crop is looking big, means prices are softening across the board.
In the Turrentine Report Steve Fredricks said:
For some time, a number of market variables have been pointing toward a market of excess supply and seem to currently be outweighing the market indicators for a supply shortage. ...We seem to be on pace for a crop with higher than average yields, which may intensify some of the market dynamics of excess and continue downward pressure on pricing.
All I can say is what a bunch of Debbie Downers!

      Real Time Data

All of my pals who are involved in researching the industry will want to blow holes in this macro view of the current situation, and rightly so. Supply and demand is more impactful when drilling down into regions and varietals. 

But there is more than supply and demand you need to consider when making plans. What about the ability to raise price on your bottles? How about getting a better understanding of grape purchase expectations?

As a winery owner, what you should be interested in is how the current business conditions will impact you. That's why we started an annual survey of business conditions about a decade ago.

The charts above on the current harvest quality and harvest yield are both from preliminary data in the currently open Annual Wine Conditions Survey which will close this coming Friday. 

Those who take the survey will get the gratis results and with it, more direct indicators of how current trends are impacting your region and your price points. 

The data returned will be far beyond harvest yield and quality - extending into many facets important for your planning in the year ahead.

Only survey participants will get the complete set of analysis and the complete anonymized data set, but the survey is on the last week and will close this Friday the 19th.

Please make taking the survey a priority this week, and join hundreds of your fellow vintners who have already participated this year.

With grape supply at a tipping point and volume metrics in consumption dropping, there is no better time to invest the 15 minutes it takes to get actionable data for your wine business ... and did I mention it's free to all participants? Since we don't sell the information, that's the only way to get it.


What do you think? Are we at a tipping point with supply? Offer your thoughts below.

If you think this information and discussion is valuable and want to spur additional discussion and participation in the 2018 SVB Annual Wine Conditions Survey, please share this post on your favorite social media platform.


  1. Definitely agree with the macro analysis...there may be stars and dogs among the varietals and locales, but the big picture tells the important story. As a grower, we are no longer selling over-contract fruit at a big discount...we are dropping it. Growers are the only suppliers I know who get excited about producing more goods than their customers is best for all to "right size" yields rather than maximize yields. By over-supplying in one year we might gain a little short tern, but are creating a chronic over-supply situation.

    1. Thanks Anon 1:11
      It's a dance that buyers and sellers engage in when we are talking about supply. At a point it becomes obvious there is too much, but there is resistance to call that out clearly because it lowers seller pricing. Of course the lack of clarity and willingness to ignore trends is the thing that adds to enhanced volatility once the top is crested.

      The real question I haven't settled on yet is whether this change is short term or longer term.

      When we had over planted in the late 1990's there was a clearly a longer term issue because vines would need to be removed. This one is a little different because it's being driven more by changing consumer preference and a slow down in consumer purchasing. (Yes it's still growth - but it's slowing.) So it's possible we could clear this overage quickly with all the private labels that are starting out there, or it might take a little longer depending on planting and the true strength of consumer purchasing. That's a research point for the Annual State of the Industry Report that I'm starting on this week.

  2. Rob, great analysis. I want to point out, though, that while the short-term trends are well-presented and relevant, they are part of a bigger picture. I have been predicting since 2011 that we'll see prices for coastal CA fruit rise until they peak in 2018. As we've approached this point, I have revised my estimate to be 2018-2019, depending what variety and where it's grown. I think you're spot on, but I think you're saying that "we can feel the car braking to a halt," whereas I might phrase it as "we have finally arrived at the stop sign that we've been driving to for a while now."

    1. Gabe - No market change happens overnight or in isolation of course. Predicting a trend like grape pricing that far out is a grape accomplishment so congratulations!

  3. Same old story. Different time and a few new characters. The cornerstone dynamics of grape production and wine sales will always be the leading factors. Toss in a few ancillary dynamics and there you have it...

    From my point of view I.E. Alexander Valley, Russian River and Anderson Valley... Yes 18 is a bigger but not exactly an enormous crop. Some of our buyers were taking a hard look and asking for a fruit drop and other buyers were happy to take all they could get. For us the last 3 crops have been marginal. Coupled with out of control production( labor and other compliance BS) costs has made growing grapes a helluva lot less "fun and romantic" than it was in yesteryear. "Right Sizing" yields is a great concept that I completely understand but right sizing requires a consistent level of production that then can be manipulated. Drought. Heat. Too much rain. Lousy set. etc.....make consistent crop loads a challenge. Thus. We have the age old cycle of under / over supply. Fun times...

    Always appreciate your insight Rob...

  4. Paul - There is nothing new under the sun with ag cycles. This one is a little different I believe at least compared to the cycle from the 90's that left a lot of production from all the wrong places going into the tech recession. That left a big overhang. Looking at the planting chart above, we aren't dealing with the same issue.

    From a macro view - this is about a slow down in sales growth of wine so ignore regional differences, this could be short to recover from if sales growth picks up. There is also a question I've not yet looked into about non-bearing. My instinct tells me this is a modest oversupply that we could resolve in 3-4 years, but I have more analysis to do to prove that out.

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