Jeff Bitter 2012

Winegrape Market Review

SJVWA
Winegrape Industry Forum

Jeff Bitter
Allied Grape Growers
November 29, 2012
Allied Grape Growers, 2012. All rights reserved.

Presentation Outline -
Answering the Questions
•Part 1: Production & Supply
•Exactly how big was this crop?
•Are we still short of grapes/wine?
•Where does California fit into the world picture?
•Part 2: Imports
•What drives their presence, and are they here to stay?
•How do we compete or position ourselves considering imports?
•Part 3: The Market
•What were this year’s prices paid?
•What are the factors that determine if today’s prices are here
to stay?
•Part 4: Planting Trends
•What are my neighbors doing?!
•Should I plant grapes?

Part 1:

Production & Supply


Production Analysis
Central Valley Yields, 2012
Comparison of Allied Grape Growers' Central Valley Yields (Districts 12-14)
2011-2012 Four-Year 2012 to Avg
Variety/Category 2009 2010 2011 2012 % Change Avg Yield % Difference
Raisin (Thompson/Fiesta) 8.4 8.9 10.9 8.0 -27% 9.1 -12%
Generic Whites (French & Chenin) 10.6 12.2 10.2 11.5 13% 11.1 3%
Chardonnay 8.2 8.9 7.1 7.8 10% 8.0 -3%
Florals (Muscat, Symphony, etc) 14.3 14.7 12.7 13.2 4% 13.7 -4%
Pinot Grigio N/A N/A 9.0 8.5 -6% 8.8 -3%
Grenache 11.3 10.6 10.9 9.8 -10% 10.6 -8%
Rubired 11.9 13.6 14.4 10.9 -24% 12.7 -14%
Barbera/Carignane 9.5 10.3 8.4 9.8 17% 9.5 3%
Cabernet Sauvignon 10.7 9.4 8.2 8.7 6% 9.3 -6%
Merlot 9.8 9.3 9.2 8.6 -7% 9.2 -7%
Ruby Cabernet 11.8 11.5 11.9 9.8 -18% 11.3 -13%
White Zinfandel 12.7 11.8 11.2 12.6 13% 12.1 4%
Syrah 10.2 10.5 9.3 10.0 8% 10.0 0%


Production Analysis
A regional look at production
Stated in tons crushed
Region 2009 2010 2011 3-Year Average Est. 2012
North Coast 465,938 443,360 393,416 434,238 475,000
Central Coast 508,709 537,202 387,265 477,725 550,000
Lodi/Clarksburg 906,949 705,066 682,431 764,815 950,000
Central Interior 1,738,182 1,831,629 1,803,648 1,791,153 1,825,000
Other 83,253 71,321 75,929 76,834 85,000
Total 3,703,031 3,588,578 3,342,689 3,544,766 3,885,000


California Production
Tons Statewide Grape Crush 2005-2011 with 2012 Estimate
(in Millions)
4.33
4.09 4.25
3.98 3.87
4.50 3.67 3.67
4.00 3.49
3.76 3.70 3.89
3.50 3.58
3.34
3.14 3.25
3.00 3.06

2.50

2.00

1.50

1.00

0.50

0.00
2005 2006 2007 2008 2009 2010 2011 2012
Est.
Other Crush Winegrape Crush

Conclusion:

While the California
winegrape crop, as a whole,
is estimated to be 10% above
average, the Central Valley
winegrape crop was close to
average.

World Wine Supply

Headlines….


World Wine Supply
•2012 supplies from major producers:
•Down in size/inventory:
•Argentina
•Western Europe (France, Italy, Spain, etc.)
•New Zealand
•Stable in size/inventory:
•Australia
•Up in size/inventory:
•California
•South Africa
•Chile

World Wine Supply -
Putting it in Perspective
•California represents only about 10% of the
world’s wine supply…..
•Our estimated increase in production of about
500,000 tons is offset at least three-fold by the
estimated decrease in production from Europe.
•Following the “short” 2011 crop, almost
600,000 tons worth of bulk wine has been
imported by California wineries and bottlers.
•The United States is the single largest wine
market in the world. Everyone is trying to
increase shipments to the U.S.

Conclusion:

No need to panic over the
larger 2012 California crop.
Current global demand and
supply dynamics translate
into opportunity for
California.

Production vs. Shipments
MIllions
California Grapes Crushed for Wine vs. California Wine Shipments
of Tons 2005-2011, with projections and estimates thru 2014
5.0
Grapes crushed for wine, NOT winegrapes crushed.
4.5
Average difference = 212,000 tons
4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Updated March 2012 Est. Est. Est.
Wine Shipment Data Source:
The Gomberg Fredrikson Report
Grapes Crushed for Wine Wine Shipments


MIllions
5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


MIllions
5.0
Shipment Trend Line
4.5
Based on Seven Years
4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


MIllions
5.0

4.5 Need Need Need
3.69 3.76 3.83
4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


MIllions
5.0 Taking the estimated 3.89 million ton
4.5 winegrape crush and taking off approximately Need Need Need
200,000 tons for other uses, we end up at 3.69 3.69 3.76 3.83
4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Conclusion:

California grape/wine
supply is likely in balance
with demand following the
relatively large 2012 crop.


Part 2:

Imports


Wine Shipments (thru September)
Data Source: Gomberg Fredrikson Report

•Cal. wine shipments are slightly down from last year (-1%)
•The big three are up 3.5% collectively (includes imports)
•Mid and small wineries show mixed results, some
suffering from lingering effects of the recession and
some struggling with inventory shortages.
•Imports/Exports
•All imports are up 23% (exclusively due to bulk imports)
•Packaged is down 2%, bulk is up 129%!
•Bulk imports represent 37% of all imports
•All exports down 4% (exclusively due to bulk exports)
•Packaged up 7%, bulk down 13%
•Bulk exports represent about half of all exports

Imports into the U.S.
Graph Source: Gomberg Fredrikson Report


Exchange Rates
Exchange Rates (Value to $1 U.S.), July 2008 - November 2012 Aus $
Chilean Arg Peso
Peso Euro
1000 5.00

900 4.50

800 4.00

700 3.50

600 3.00

500 2.50

400 2.00

300 1.50

200 1.00

100 0.50

0 0.00

Chilean Peso Australian Dollar Euro Argentine Peso


Imports
Excerpt from the
Gomberg Fredrikson Q3 Industry Review

“It appears likely that big producers
will continue to outsource a portion
of their bulk wine supply needs in the
future in order to maintain adequate
supplies at desired price points,
especially for economy wines, and to
supplement short supplies of hot new
varietals.”

Conclusion:
Imports are here to stay,
regardless of exchange rates.
They provide domestic vintners
with supply alternatives during
times of grape shortage
and/or grape price increases.

Part 3:

The Market


D-TATS
Disease


Desire to-
Talk
About
Thompson
Seedless

The Importance of Thompson Seedless

•Presents grape supply into the “system”
•Blend extension (quantity)
•Price moderation (cost)
•Assists California vintners in competing at
the lowest end of the market
•Provides stock for alternative winery products
•Brandy
•High Proof Alcohol
•Concentrate (both for market and internal use)


Concentrate Market
•White concentrate:
•Short market for all whites
•Cal. grape about $13+/gallon,
but no inventory despite crush
•Apple and foreign grape
concentrate are non-issues
•Strippings (or lack thereof)
playing an important role
•Red concentrate:
•Stable demand & balanced market
•Pricing at about $12+/gallon
•Other countries not expanding
supply – yields are lighter
•California-dominated market

Concentrate Market
Estimated Breakdown - Grapes Used for Concentrate, 2008-2012
TONS

800,000 747,925

700,000
598,365
600,000 535,794
499,323 495,000
500,000

400,000

300,000

200,000

100,000

-
2008 2009 2010 2011 2012 Est.
Raisin Varieties Winegrapes Table Varieties Dark Reds (Rubired, etc.)

The Market for Thompsons
A “perfect storm” for price in 2012
•Low yields recognized by most in the industry early on.
•A robust raisin market
•Generally decreasing acreage/supply
•Concentrate inventories at all time lows with pricing at
all time highs.
•Non-availability of strippings from the table grape
sector
•World supplies of generic/low-end wines as well as
grape alcohol tighter than in past for numerous reasons
including EU pull-out programs and elimination of
subsidies.

Conclusion:

The Thompson Seedless
market should remain strong.
However, it is easily influenced
by a number of factors, some
of which have the propensity
to change quickly.

SJV Winegrape Pricing
SJV Pricing - 2012 Contract "Market" Spot Market
(Districts 12-14) (as low as)* (as high as)
Chardonnay $ 450 $ 700
French Colom/Chenin $ 325 $ 400
Muscat/Florals $ 375 $ 600
Pinot Grigio $ 435 $ 600
Barbera/Carignane $ 350 $ 500
Cabernet Sauvignon $ 475 $ 800
Grenache $ 325 $ 400
Merlot $ 450 $ 700
Rubired $ 300 $ 400
Ruby Cabernet $ 350 $ 500
Syrah $ 375 $ 550
Zinfandel (White) $ 350 $ 400
*Base prices, trucking provided by winery in many cases.

The Winegrape Market
What’s really driving the increased
prices of this year and last year?

Five major factors driving price now, and in the future


•#5: The relatively weak dollar
•Thwarts imports and encourages exports

•Thought or tip:
•Despite the current import/export trends, which are contrary to those
associated with a weak dollar, think about how magnified it would be if
the dollar had been strong the last three years.

•Outlook:
•Most economists don’t anticipate immediate or sudden changes to the
value of American dollar. Of course, no one anticipated 9/11 either.


•#4: Competition from alternative crops
•Almonds primarily, but all ag crops in general

•Thought or tip:
•All ag is doing good right now, in part because of our global price
competitiveness (weak dollar). Cheap money (low interest rates) and
lower cost of inputs and development, relative to grapes, also helps
encourage growers to look at alternative crops.

•Outlook:
•Can you say $3/pound? For how long?
•Many market forecasts from the almond industry point toward unfilled
market capacity in the short term.


•#3: Forethought by buyers
•Buyers needed to secure mid-term supply via aggressive contract offers
•Translates into competition for existing grapes

•Thought or tip:
•Growers have had the opportunity to “play the market” a bit the last two
years. While less grapes on the spot market creates higher spot market
prices, at some point wineries choose to go without or look at alternative
supply sources when the price for “those last few tons” gets too high.

•Outlook:
•Price seems to be stabilizing based on supply/demand factors. External
factors may limit further substantial price increases.


•#2: The re-establishment of the “mid-market”
(post-recession)
•Simply put, the $7-14/bottle is hot, but wineries depleted inventories!
•Market challenges exist in changing price on current brands

•Thought or tip:
•Don’t under-estimate the importance of the wine market at price points
higher than those in which SJV wine traditionally goes. Watch grape
markets in other areas of the state.

•Outlook:
•Large Lodi and coastal 2012 crop will help supply $7-14 programs.
Demand for SJV fruit will come in the interest of averaging down price.


•#1: Overall supply balance, or “shortage”
•Not just domestically, but globally.

•Thought or tip:
•The moderate planting of new grapes will serve to preserve market
share while protecting us from sudden surplus due to excess production.

•Outlook:
•Planting will continue in moderation. Speculative planting will be at a
minimum, while contracted planting may slow down just a bit in the
immediate term.
•With the exception of a few “smaller” world producers, like Chile and
California, most winegrowing regions are not expanding their acreage.
•Does anybody know the size of the 2013 crop? Please advise if so.


Conclusion:

Factors that drive winegrape
prices have been in the
grower’s favor lately. The
market is always searching for
equilibrium, and it feels like
we are there, at least for now.

Part 4:

Planting Trends


2012 California Nursery Survey
•In January of 2012, Allied Grape Growers conducted a
confidential & voluntary survey of California nurseries to
determine up-to-date planting trends:

•Data represents at least 85% of the major varietal vine
sales in the state, by variety, and region.
•Dependent upon vine spacing, total potential planted
acreage identified via the survey represents between
17,000 and 23,000 acres.
•Survey participation was slightly skewed toward the
larger state nurseries. Smaller, coastal nurseries were
not as likely to participate, therefore the resulting data is
likely missing a minor level of coastal influence.


Breakdown of Vines Sold by California
Nurseries - 2011
Red Winegrapes White Winegrapes
45% 55%


Breakdown of Wine Varieties Sold
by California Nurseries, 2011
Other Reds Include:
Cabernet Chardonnay,
Grenache Sauvignon, 11.5%
Petite Verdot 13.2% Pinot Grigio,
Cab Franc 2.4%
Syrah Sauvignon
Barbera Other Red, Blanc, 1.1%
Ruby Cab 9.2%

Petite Sirah,
2.8%
Muscat of
Malbec, 3.1% Alexander,
22.1%
Rubired, 1.5%
Zinfandel,
2.4%
Pinot Noir, Muscat
9.5% Canelli, 2.8%
Merlot, 3.6% French Other Whites Include:
Other White, Colombard, Various Florals
4.8% 9.9% Viognier
Allied Grape Growers, 2012. All rights reserved. Chenin Blanc

Categorical Allocation of Vines
Sold by California Nurseries, 2011

High
Mid
Value

Note the amount of
green on this chart
vs. burgundy or gray.

California Acreage Trends
Estimated Coastal & Interior Bearing Acreage, 2000-2015
Acres

600,000

500,000

400,000 48%
39% 50%
300,000

200,000
61% 50% 52%
100,000

-

Interior Coastal


Conclusion:
Planting has been moderate,
targeted (via contracts) and
concentrated in the SJV.
Contracts will continue to be
offered. There is no
recommendation to plant on
speculation.

Take Home Message
Like most ag crops in the San Joaquin Valley,
winegrapes look promising for the immediate
future. Our industry will continue to face the
everyday pressures of global competition,
economic uncertainty, regulation and taxation,
fluctuating crop sizes (Mother Nature) and
indecisive and fickle consumers. But the
underlying factors that create a stable market
look to be in our favor, at least for the
foreseeable future. Here’s to a great 2013!

View this on-line at:
alliedgrapegrowers.org


Jeff Bitter 2012

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