Friday, October 20, 2006

Gallic Syndrome to Strike Napa

Gallic Syndrome - you know what it is, you just haven't heard the term (I just coined it). It happens when you have an area (say....oh, I don't know.....let's use France as an example) that has regions producing both excellent wines and vin du table. I believe that Napa is headed for a Gallic Crisis (a sympton of the Gallic syndrome). I've been watching vineyard and winery prices steadily climb - an acquaintance tells me of a winery property he purchased ten years ago that he just sold for a four-fold profit! - and I think valley-floor Napa has hit its ceiling (get it? the floor hit the ceiling? I kill me...). If you can find a way to short-sell it, consider doing so. Consider the following:

1) In 2005, a mega-crop created an estimated surplus of 1,000,000 cases of Napa Valley Cabernet! Much of this surplus (and surpluses of Merlot, Chardonnay, etc) are fueling brands by Fred Franzia/Bronco, Don Sebastiani & Sons, and Gallo (Napa Valley Vineyards & Louis Martini). All of these brands are selling for $15 or less and are doing quite well. The 2006 harvest looks to be of average level, so the pressures of oversupply won't come off quite yet.

2) Much Napa Cabernet is truly average (gasp! sacriledge!). Its true. Most of Napa's 45,000 acres are on the valley floor, often with deeper soil and high vine vigor. The fruit is good, but its not good enough to support Cabernet prices of $30+, in my opinion.

3) Most of the remaining planting options in Napa County are in outlying areas (like Pope Valley, Chiles Valley, Wild Horse Valley) that are shunned by most wineries. Fruit planted here will not generate the same interest as Napa Valley proper and will thus see downward price pressure. Hillside plantings are virtually banned in Napa and will be the best place to ride out the coming years.

4) Imports are probably the biggest challenge to Napa's aristocracy. Australia, Chile, Spain, South Africa, even France and Italy are all able to produce wines of greate quality at prices below Napa's. Imports grew about 11% last year while California grew at 4% and 2006 shows this trend continuing so far. California wineries, particularly Napa, are not currently equipped to compete on a global level.

5) Land costs, in particular, will make it difficult for us to compete. At $150,000 per acre for valley floor Napa vineyards, you will struggle to get a 5% return on your grape farming efforts right now (assuming you can find a buyer for your grapes!). Wineries and vineyards are still selling for high prices, but I just can't see it continuing unless there are enough people willing to forgo a return on their investment just to have a small slice of the Napa pie.

6) As Megan at Wine & Spirits Daily points out, Don Sebastiani was recently heard to say "Napa Valley grape prices are not prepared for (global) competition." and "Napa Valley has invited that competition. The perception that Napa will always be Napa is lazy thinking..."

As I implied at the top, I don't think that the high-end Napa producers will be affected by this (those in the hills or those in highest-priced AVA's like Rutherford and Oakville). Those wines, good or bad, are scarce enough and still in very high demand. Its the generic Napa floor wines that, in my opinion will be hardest hit.
You can already see evidence of this stratification in the California State Crush Report. The highest price paid for Napa (District 4) Cabernet was $26,500 per ton (probably a per-acre contract gone horribly wrong) and the lowest was $200 per ton (only enough to cover the costs of picking) with thousands of tons sold for $3,000 and below. The average, according to table 6, was $3,970 per ton...
[see this link to USDA statistics for California in 2005 ]

This tells me that the Gallic Syndrome is already in effect. The question is, what will it mean for "brand Napa". My guess is that higher-end consumers will begin to focus on sub-apellations like Mt. Veeder or Stag's Leap and that "Napa Valley" will become a much less valuable thing to have on one's label.


Anonymous Anonymous said...

Of course the hillside grapes are largely crushed by those who grow them, so we don't know what the "market price" for them would be. And Napa County has approved many hillside projects in the last several years--just look on the hills east of the airport.

October 22, 2006 9:35 PM  
Blogger St. Vini said...

The hills east of the airport were approved for development pre-current-moratorium. The project was originally for houses, postponed for quite a few years and then sold off, in pieces, for prospective grape development. I believe that is why it was outside the current moratorium.


October 24, 2006 2:58 PM  
Anonymous Anonymous said...

The $26,500 per tone quoted in the piece was paid by Paul Hobbs to Andy Beckstoffer for 4 tons of Cabernet from his Tokalon vineyard.

October 26, 2006 9:19 AM  
Anonymous Stuart said...

How does that work out to bottle price: assuming 170 gal/ton yield, and a 2% loss in making it, that's about $160 per gallon to break even on the purchase. For those of use purchasing, it would be about a direct transfer to the $/btl price (so ~$160 per bottle), using the average which seems to float thru the wine marketing circles. Who's paying prices like that these days? Its Tokalon fruit, so probably pretty good, but I have a ethical problem paying $160 btl. Can't say I'd pay for a bottle just based on the price, too much good wine available at lower prices.

October 26, 2006 1:06 PM  
Anonymous Mary Baker, Dover Canyon said...

About nine months our wine alliance hosted a blind comparative tasting of cabs and syrahs in the $20 and under category from around California. Napa wines came in at the bottom of the bucket . . . the big California contender in that category was . . . Lodi!!

One theory put forth to explain the uniform awfulness of cheap Napa reds was the possibility that a lot of valley floor properties are managed by vineyard consulting firms that just don't pay attention to the lesser properties, whereas Lodi is working hard on all its viticultural fronts and the fruit is still inexpensive.

Whatever the reason, I think we can expect to see some very competitive QPR's coming from Lodi.

October 29, 2006 10:01 AM  
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