Saturday, June 04, 2005

The 2005 Crop - Can We Handle It Yet?

Thanks to Bob from Barrel Builders for some questions about this year's grape crop.

An article in last week's Press Democrat suggests that cluster counts (the number of grape clusters Mother Nature has provided on each vine or "shoot") are up over last year. Typically, this will lead to a larger harvest, depending on the ultimate size of the clusters, weather conditions, etc.

Bob asks "I know the economy is improving, but is the wine market ready to absorb the crop? Many growers still don't have contracts. Wineries will be squeezed by price-cutting. The cost of imported winemaking equipment and barrels has gone up 40% in three years, with the increasing value of the euro."

Good question, and there are a number of topics and issues here. First, many portions of the wine market have turned from oversupply to short or even undersupply. See my article on the Wine Group buying an Argentinian supplier for evidence of how tight the central valley has become. In addition, Pinot Noir sales have gone into very short supply from a combination of increased consumer demand (the "Sideways" effect) and speculation by producers that they can sell even more Pinot (the long-term "Sideways" effect).

If you look at California's vineyard supply picture, 60,000 acres have been pulled out of the South Central Valley since 2001 (which was probably a good thing) and very little has been planted anywhere in California in the last few years as banks tightened up their lending policies, basically requiring a "pre-plant contract" meaning growers had to have a guaranteed buyer before the bank would lend them money. As you note, many existing growers still do not have contracts because wineries are wary of giving long-term contracts with built-in inflation factors as they were doing in the late 90's. The growers made a killing up to 9/11, but the power has shifted to the wineries as producers have figured out how they got burned by committing to long-term contracts that inflated above the spot market price.

In summary, I don't think you can accurately predict where the market is going in the broad view - its far too fragmented and changing too quickly - except to stay that another short crop would be very damaging to California producers as it would open the supply/demand door to more imports. (if the crop is light, take a "long" position on Chile & Spain!). In certain markets, like Pinot, a bumper crop would be a good thing for everyone involved, and Cabernet could generally stand another light harvest or two.

As for barrel costs increasing, I continually hear that many wineries are relying on less new oak. Perhaps this will offset the continued increases in the cost of barrels. Or, buy American, Hungarian, Canadian oak if French gets too expensive!


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