March 8, 2010

Napa "Gentlemen" Growers Getting Squeezed Like A Grape

"In California’s Napa Valley, producer of the most expensive U.S. wines, 2010 may be a vintage year for foreclosures as the industry is squeezed by falling land values [down 15% since 2007] and a consumer shift to cheaper brands."

Vineyard Defaults Surge as Lost Land Values Undermine Napa Wine [Bloomberg]

First Published: March 8, 2010 8:45 AM

Comments from "Plugged In" Readers

This is going to be a very interesting scenario to watch unfold in the valley. I don't see how anyone who has bought vineyard property there in the last 3-4 years using any significant financing is going to survive unless they have rock solid planting contracts in place.

We have a family vineyard and our contract with a large winery expired in 2008, so we had 100 tons of unsold grapes rotting on the vine last harvest. We have had the place for over 30 years so it is paid off, but assuming any kind of mortgage on the place, it would be unsustainable at this point.

Small vineyards are fairly expensive to run, and they don't bring in a lot of cash even in good years (there is always weather risk and other forms of crop risk)when all the grapes are sold. Now that people are buying cheaper wine, wineries are bailing on every contract they can to reduce capital outflows and reduce over supply, it seems to me that the entire industry in Napa and Sonoma could be in for a world of hurt, and anyone leveraged in any significant amount will find the economics does not work out to operate a small vineyard or winery.

Posted by: The Bunk at March 8, 2010 10:01 AM

other hurdles for Napa/Sonoma is the fact that so many countries and areas are developing their land into vineyards, increasing wine supply.

for years it has been Australia, and lately it has been New Zealand, Chile, and Oregon.

this can be a boon or bust for Napa/Sonoma. Australia really overbuilt their vineyards, which made their wines collapse in price. This hurts Napa/Sonoma.

However, the Australian wines (once not so bad especially for price) have really fallen from a quality standpoint and thus there's a smudge against their brands. thus, it makes people want napa/sonoma more.

also, the cheap wines may act as a "loss leader" getting people to start trying wine... then they'll move up in price over their lives. Start with the 2-buck chuck, then move up from there.

The trick will be for Napa/Sonoma to keep the quality while trying to lower price somewhat.
I foresee that the primo brands (opus one etc) will do just fine... the rich are still rich.

I'm hoping against hope that the good/great brands will do well based on their quality.
(this is a shout out to my FAVORITE wine: Geyserville by Ridge wines, a sonoma winery).

if Ridge goes under I'll kill myself.

the bubble in land prices has distorted almost everything, and is yet another reason why high land prices are NOT a good economic thing.

Posted by: ex SF-er at March 8, 2010 11:04 AM

"also, the cheap wines may act as a "loss leader" getting people to start trying wine... then they'll move up in price over their lives. Start with the 2-buck chuck, then move up from there."

Worked with me, I started drinking wine regularly with 2-buck chuck. Now I've moved all the way up to $5 a bottle wine. For a special occassional I even get up close to $10 but unless I'm buying wine to give to someone else I won't pay double digits for it.

Posted by: Rillion at March 8, 2010 11:16 AM

Ex SF-er - I am looking at higher quality grapes being available to wineries for less, because there is a distinct lack of competition for grapes right now as wineries are cutting production. This should allow higher quality grapes to migrate downstream to less premium wineries/brands. However, the economics becomes an issue with the growers, because if they bought the land using leverage and modeling in getting the grapes sold at 2007 prices, then they are in a world of hurt.

It boils down to this, will those who have vineyards in Napa/Sonoma begin to sell their grapes for substantially less just to get them sold. If yes, then there is going to be an economics problem for recent vineyard buyers (will be losing money every year). It should also push out the over planting that happened in the Central Valley as higher quality grapes can now be bought for something closer to what they pay for commodity grapes.

There is one very good sign, American's drink painfully little wine compared to almost every other country, so as that increases (as it is), there is a larger market for sales. The issue is will people ever pay for $30-$50 bottles again, or are we relegated to $15-$30 bottles for a long, long time. If the latter is true, it will be a long and painful event for the valley where just about all the small vineyard owners who bought recently will get wiped out.

Posted by: The Bunk at March 8, 2010 11:20 AM

Cheaper Oregon wine?

Posted by: anonn at March 8, 2010 11:29 AM

Ex SF-er, you have fine taste. While the Geyserville is from their Sonoma vineyards, my favorites are from their Monte Bello/Santa Cruz Mountains (where Ridge was founded) properties -- I also prefer the amazing views from their tasting room there.

I doubt it's a proper measure, but judging solely by the crowds at the Monte Bello events and tastings this past weekend I'd say that Ridge, and therefore you, are safe for now.

Posted by: FAA at March 8, 2010 12:09 PM

Thankfully, this will have no effect on Ess Eff real estate values. I've documented the trials and tribulations of one of the the article's 'gentlemen', Dinesh Maniar, on this thread. Short summary: he appears to be regrouping (various development enterprises in bankruptcy) and may have stabilized his finances. His Pacific Street residence received on NOTS on Dec. 24 and then the NOD was canceled on Jan. 7 (looks like the NOD dates from Feb. 2005). From the article:
In December, he [Bill Harlan] acquired 21 acres next door known as Diamond Oaks Winery from businessman Dinesh Maniar, owner of two separate Napa parcels that are facing foreclosure, according to county land records and documents in U.S. Bankruptcy Court in Santa Rosa, California.
There are several lawsuits in San Francisco still pending (related to development activities); this

one is topical, as it is about an encumbered property (Sonoma County) that was sold to a winery.

Posted by: EBGuy at March 8, 2010 1:22 PM

"There is one very good sign, American's drink painfully little wine compared to almost every other country, so as that increases (as it is), there is a larger market for sales"

This doesn't jive with what I have read. I assume you are refering to Europe (most of the world drinks little wine). In Europe there is a beer drinking belt, a vodka belt and a wine belt based on climate

America has always been a beer country (becuase of our ancestors being primarly English Irish and Germans) until a year or two ago when we started to drink more wine than beer for the first time in our history

Posted by: zig at March 8, 2010 3:43 PM

I've read that it was quite regional. Certain parts of the US used to drink a lot of wine in the 19th century. It was a German ancestry dominated industry ranging across the Great Lakes and into the Finger Lakes and New York, and it was Prohibition that did it in. http://www.escholarship.org/editions/view?docId=ft967nb63q&chunk.id=d0e9742&toc.depth=1&toc.id=d0e9742&brand=eschol

Posted by: anonn at March 8, 2010 4:08 PM

zig - The US drinks much less wine per capita than most of Europe, but you are right, the trajectory is that we are starting to drink more, but we are still way behind. This is good news for US winemakers in the long run, but that does not address the next 3-5 or even 10 years. I should have said Europe and Australia and not been as general in my original post, because we do drink much more wine than Asia, South America is about on par, Argentines and Chileans more, most of the rest, less.

Posted by: The Bunk at March 8, 2010 4:13 PM

@FAA:
I'm not going to argue: the Monte Bello wines are... well, bello! but they're a different price point at $150 to $300 a bottle compared to my dear old Geyserville at $35/bottle.

Monte Bello is a high end wine and will do well, like Opus One as example
====

@anonn:
yes, in my opinion Oregon wines are cheaper than comparative quality Napa/Sonoma wines. And over the years they have stepped up their game (much higher quality). I'm not sure if the Willamette Valley will become what Napa/Sonoma did. At one time (before the Judgement of Paris) Napa/Sonoma wines were seen as hick-yokel wines grown by a bunch of cowboys. Now they definitely reign up there with French and Italian wines. And they're priced for it too. (especially Napa wines)

Could this happen with Willamette? Unclear IMO.
Willamette wines will never be Napa wines. But Napa wines will never be French Bordeaux either and Napa is doing just fine.
==========

@Bunk man: I agree completely.
However, I also feel like it's hard to assess how much has happened with grape values based on Napa/Sonoma land costs versus new vineyards opening around the area and the world, versus the weather.

some years there is just a major bumper crop like in 2005 with the Pinot grapes. This last year looks like another massive Pinot bumper crop. But prices are hard to analyze.

I agree with you fully that the high land prices will put a lot of pressure on the vineyards and wineries. I think the high end (like Opus) will do fine. The low end will muddle through with some casualties. I think it's the upper mid range that will get killed
(hence my fear for places like Ridge, the best for the price in the world IMO).

http://www.sfchron.com/cgi-bin/blogs/wine/detail?blogid=54&entry_id=57024

but what happens if we get weird weather and a low yield crop next year? Then some of those upside down Napa/Sonoma vineyards become profitable immediately!
I've seen it happen before. so much depends on the weather.
====
@Rillion:
I spent less than $6 on almost all my wines the first 10 years of drinking wine. But then it slowly creeped up and up and up.

I still drink wine as cheap as $3. My regular table wine is a $3-5 Trader Joes wine. But more often I might try wines in the $10-20 range, and once in a while (1/month) I may try a $20 and up wine.
I always have at least 2 cases of Ridge Geyserville though ($35).

only rarely do I go above that (I have a few Opus Ones and a few Cakebreads and "real" Mondavi's and Brunello's and Bordeaux in the $75-200 range, but those are only for major holidays/events).

I strongly recommend that you DO NOT DRINK A GEYSERVILLE!

Expensive wines are so expensive that one never seriously thinks about drinking them- and when you do you think "ah whatever, over-rated".
Usually, a $200 bottle of wine is NOT 20x better than a $20 bottle as example.

But I believe that a Geyserville is within the reach of the regular joe at $35/bottle which is $9/glass. That's less than many people pay for cocktails at a bar.

and once you taste a Geyserville the other wines just seem so boring.

All of course IMO. At once I never would have believed it. Now, I wish that Geyserville's cost $4 and my tastebuds weep every time I try a real $4 wine. Geyserville is way more than 10x better!

Posted by: ex SF-er at March 8, 2010 4:55 PM

All right but the way you put it was different, and IMO Oregon doesn't belong in the Australia, NZ, Chile discount progression thing. That's what threw me off.

Posted by: anonn at March 8, 2010 5:27 PM

Most of the really good wine from the premium wine growing regions in New Zealand, Australia and South Africa just doesn't make it to the US market so I really disagree that Oregon has any claims to being on some higher level.

Posted by: Willow at March 8, 2010 5:42 PM

What you're saying is something different, Willow.

Posted by: anonn at March 8, 2010 5:50 PM

I guess I was totally unclear.

In the last oh so many years (10-15?) there seems to have been an explosion in vineyards and wineries around the globe. this has increased supply and brought many wines to "the common man" like me.

For some time you could find a lot of French, Italian and Californian wines almost anywhere. But more and more I started seeing some Aussie upstarts.

initially a lot of the cheaper Aussie wines were actually quite good, but over time they lost control of their product, and now they tend to be low cost low quality wines. Yellowtail comes to mind for me. (obviously some still are high end and high quality, Penfold's Grange and Jim Barry's Armagh come to mind and they have the prices to boot)

some of the same happened in NZ as well, but nowhere near as much.
I don't follow the South African wine scene so won't comment much on it.

Obviously, there are stellar wines from the NZ,SA, Australia areas... my point wasn't that they're all bad, only that some of them have lost their global luster.

at one point Napa/Sonoma were also the yahoos of winemaking. But those days are no more. Many rank the Californian wines as good and sometimes better than the French/Italian counterparts

The last decade there has been a surge of Oregonian wines. It is reminiscent of the above stories.
However, what isn't clear to me is whether Oregon wines will join the French/Italian/Californian wines, will it turn into a respectable area for wines with some flame outs like many of the Australians, or will it flame out like other regions have in the past? Only time will tell.

Regardless, the Willamette Valley wines are some of the first major American competition to Sonoma/Napa in some time.

and obviously, I'm talking about the American wine market. There are clearly demographic differences in wine sold around the globe. you see far more Aussie, NZ, and South African wines in Britain than you do in France as example.

all of course IMO. getting people to agree on wine is like getting sports fan to agree on the best sports team.

I think the bigger thrust of my argument is that worldwide competition is brisk and coming from almost everywhere in the guise of high priced amazing wines, low cost good wines, low cost garbage wines, and everything in between. High land costs do not help the situation.

Posted by: ex SF-er at March 8, 2010 8:22 PM

There once was a fellow who started out drinking two buck chuck
Got hooked and soon was spending hundreds for the best cellar pluck
Had he gone for beer
His dollars would be held dear
And for the same price buying best Belgian Trappist by the truck

Posted by: The Milkshake of Despair at March 8, 2010 11:34 PM

Napa has always been a bit overrated, while Sonoma and Mendocino have always been a bit underrated.

It's been interesting to see Healdsburg become so chic and trendy as I spent a lot of childhood and young adult vacation periods up there and environs. Quite a cultural shift from Giorgio's, John and Zeke's, and the Western Boot to the Hotel Healdsburg and Cyrus. Hint to visitors- skip the winery tours and go to the Tip Top liquor store instead.

A shout out to the Trentadues (one may thank them in addition to Paul Draper for your Geyserville, and I know they used to (still do?) take care of the grapes at the old Lytton Springs property (now owned by Ridge I think)).

There is some good juice produced in the seven-oh-seven but too much of the stuff is cloying, "over oaked", and overpriced. Too many vanity projects disguised as boutique wineries. A good recession based shakeup would do the industry some good in the long run.

The one thing holding back California wines is the lack of a long standing food and wine culture like the ones that exist in France, Spain, and Italy. Wines from any particular region in these countries have historically evolved to complement and enhance the local cuisine. On the contrary, too many wines from California vintners aim to try to impress Robert Parker and groups of hen parties.

In fact, one could easily make the argument that wines from Mediterranean Europe complement California cuisine better than California wines do. Just look at the wine lists of area restaurants that serve "fresh local food".

By the way, one cannot claim any kind of global wine expertise and ignore Spanish wine, period. One ignores the tradition and quality of regions like La Rioja and Ribera del Duero, instead speculating on whether "Oregon wines" ?!?! "will join French/Italian/Califonian wines". I mean, c'mon, one should be comparing Oregon wines to Washington wines and maybe California ones. But the French/Spanish/Italian wines blow Oregon away, generally speaking. Better climate and a couple thousand years more experience do make a difference.

Posted by: nnona at March 9, 2010 2:12 AM

I have also noticed that as varitals from certain countries pick up cache, then their prices go up pretty dramatically. New Zealand Sauv Blanc's and Argentine Malbec's come to mind. You used to be able to buy good Malbec's for $8-10 here in the US, now those same bottles are $15-18. Similar rise for the New Zealand Sauvignon Blancs. The issue is that even those prices are still below what similar wines are from Napa/Sonoma. I think ex-SFer hit the nail on the head that global production is going to bring down wine prices in California, and that is going to deeply affect the entire supply chain beneath. Grapes, land, migrant workers pay, etc. are all going to suffer.

I look at it very similar to the economy in NY, so much is based on those in finance making their millions and spending it at restaurants, retail, limo's etc. Take away those high earners, and there is a lot of people below that will be out of work. You take away the high end wines where all the margin is made, and then you are relegated to loss leaders and brands that just barely turn a profit (or break even), and so everyone else down the supply chain gets squeezed. The entire model becomes unsustainable for many.

Posted by: The Bunk at March 9, 2010 7:37 AM

Yes nnona, good point. For me, personally, Riojas are probably my favorite right now. A lot of times you can get a decent bottle like a cheaper Cune for less than a California wine of comparable quality too.

Posted by: anonn at March 9, 2010 8:09 AM

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