I've been pointing out the slowdown in the growth rate of consumer demand by volume for some time now. We are still growing as an industry, but the growth rate is slowing, particularly when looking at volume.I began discussing shifting consumer demand and premiumization in the Annual State of the Industry Report as early as 2006. 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 into a reluctant agreement. Instead of debating the facts as I've laid them out now, the discussion has settled into a strategy discussion.
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| Source: CA Grape Acreage Report |
At some point in a cycle, an equilibrium point is reached as planting moves forward in response to growing demand. At that point, growers will slow down planting.
The nearby chart shows a strong runup in planted acreage starting in 1995. That was a reaction to the start of the current explosion in demand for wine we've experienced for the past 25 years. Something changed to the slope of the line in 2001. That pause was created when planted non-bearing acreage became bearing and coincided with the Dot.com bubble and recession. From there, planted acreage fell into a more predictable but slower pattern, supported by healthy consumer demand.
In 2017, planted acreage hit another inflection point, and a new phase began with acreage removals adjusting for oversupply. That's an indication that we are fully planted, and supply has reached a point of excess. It's hard to argue that demand is growing substantially when acres come out of the ground. That said, looking deeper into this does reveal the source as declining consumer acceptance in lower-priced, high-production wine.
But 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. However, growers are suggesting that the real reason for rejection is that those wineries have more supply than is needed. I don't know which is right, but experience tells us that rejection rates drop when there is short supply, so those stories are one small indicator of a possible market shift.
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| Source: 2018 SVB Wine Conditions Survey |
A better indicator: Last week, both of the major wine brokerages released their harvest updates. Both commented on the good-quality fruit from most regions and 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 near a record harvest in California, which will further tip the scales.
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| 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 are more impactful when drilling down into regions and varietals. Premium wine sales are having a better time in this market compared to lower priced generics. That said, even premium wine growth is slowing. I am uncomfortable predicting that we will make a 180 degree turn from here in the premium sector - at the expense of being called a Debbie Downer.
Comments??
What do you think? Are we at a tipping point with supply? Offer your thoughts below.
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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 need...it 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.
ReplyDeleteThanks Anon 1:11
DeleteIt'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.
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."
ReplyDeleteGabe - 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!
DeleteSame 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...
ReplyDeleteFrom 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...
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.
ReplyDeleteFrom 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.