Allied Grape Growers, All rights reserved. Appraisal Institute – Northern California Chapter 2016 Annual Spring Conference Wine and Raisin Industry Analysis Jeff Bitter Allied Grape Growers March 7, 2016

Allied Grape Growers, All rights reserved. “It’s more interesting to talk about huge crops during excess or short crops during shortage, but a short crop in a time of ample supply just makes for a boring production story of “moving toward balance.”” -AGG’s Industry Update Newsletter, January 2016-

Allied Grape Growers, All rights reserved. Our Production Potential……

Allied Grape Growers, All rights reserved. Wine Shipments U.S. Wine Market Volume Graph Source: The Gomberg Fredrikson Report Annual Wine Industry Review

Allied Grape Growers, All rights reserved. Graph Source: The Gomberg Fredrikson Report Annual Wine Industry Review California Wine Shipment Volume

Allied Grape Growers, All rights reserved. The Changing Five-Year Landscape 2010 vs. Now….. Supply/Production: Bearing acreage up 11% (now 555,000) Yield up 5% on average (7.22 TPA average) Competition: Wine imports up 15% (114m case average) Craft beer/Cider Demographics/Consumers: Less boomers, more millennials Premiumization Economics: Recession vs. Recovery Strength of US Dollar up 25%

Allied Grape Growers, All rights reserved. This changing landscape has/will affect different regions in different ways… Some positive Some negative

Allied Grape Growers, All rights reserved. Categorical Review Trends, Issues, Threats & Opportunities

Allied Grape Growers, All rights reserved. Breaking it Down…. Value - (<$7/bottle) Interior (excluding Lodi/Delta) Mid - ($7-10/bottle) Lodi/Delta High - ($10-20/bottle) Coastal (standard) Luxury - (>$20/bottle) Coastal (Napa, Sonoma, etc.)

Allied Grape Growers, All rights reserved. Value Category Trends, Issues, Threats & Opportunities

Allied Grape Growers, All rights reserved. Wine Shipments

Allied Grape Growers, All rights reserved. +/-21,000 winegrape acres removed between the 2014 and 2015 harvests. 20,000 acres pulled (+/- 10,000 winegrapes) from 2015 harvest to end of year. Vineyard Removal…. (All interior, including Lodi) Removals will likely continue at the current pace thru this Spring. Based on current shipment trends/grape buying activity, removals are necessary.

Allied Grape Growers, All rights reserved. “We estimate that – unless demand for <$10 wines recovers or the SJV captures a larger share of the growth of the $10-25 price segment – as much as 40,000 more acres will likely be removed in the coming three years as SJV production will have difficulty finding buyers.” -Stephen Rannekleiv, Rabobank’s Industry Note, July 2015-

Allied Grape Growers, All rights reserved. Value Segment Trends, Issues, Threats, Opportunities Trends Declining demand/Acreage base revamp Issues Economic sustainability/Competing crops Threats Imports/Water policy Opportunities Differentiate & Premiumize (Quality)

Allied Grape Growers, All rights reserved. Varietal Trends, by Segment….. +25% Note: Change stated cumulatively Annual attrition rates estimated +26% -8% -15% +75% +6% +62% +1% California

Allied Grape Growers, All rights reserved. Mid Category Trends, Issues, Threats & Opportunities

Allied Grape Growers, All rights reserved. Mid Segment Trends, Issues, Threats, Opportunities Trends Improving visibility/recognition Issues Labor, return/cost imbalance Threats Surplus of inexpensive winegrapes in SJV Opportunities Provide value priced grapes for the high category

Allied Grape Growers, All rights reserved. Varietal Trends, by Segment….. +15% +39% -6% +1% +49% +3% +32% +2% Note: Change stated cumulatively Annual attrition rates estimated California

Allied Grape Growers, All rights reserved. High Category Trends, Issues, Threats & Opportunities

Allied Grape Growers, All rights reserved. High Segment Trends, Issues, Threats, Opportunities Trends Premiumization lands right in their back yard Issues Pricing pressure – related ability to provide value Threats Competing beverages/producers (both domestic and foreign) vying for same consumer Opportunities Mechanization

Allied Grape Growers, All rights reserved. Washington and Oregon - formidable competition? Domestic Competition….. Washington since 2005/2006: Acreage up by 66% Acreage up by 66% Number of wineries up by 130% Number of wineries up by 130% Wine volume up by 85% Wine volume up by 85% Net economic impact up by 55% Net economic impact up by 55% Oregon since the recession ( ): Acreage up by 18% Acreage up by 18% Number of wineries up by 45% Number of wineries up by 45% Volume up by 39% Volume up by 39% Net economic impact up by 28% Net economic impact up by 28%

Allied Grape Growers, All rights reserved. Varietal Trends, by Segment….. +32% +23% -2% +6% +23% +11% +16% +2% Note: Change stated cumulatively Annual attrition rates estimated California

Allied Grape Growers, All rights reserved. Luxury Category Trends, Issues, Threats & Opportunities

Allied Grape Growers, All rights reserved. Luxury Segment Trends, Issues, Threats, Opportunities Trends Differentiation Issues Limited opportunity for growth, scarce resources Threats Dependence on economy Opportunities Branding - AVA and associated brands

Allied Grape Growers, All rights reserved. Varietal Trends, by Segment….. +8% -4% 0% +9% +2% +4% +1% Note: Change stated cumulatively Annual attrition rates estimated California

Allied Grape Growers, All rights reserved. Summing it up…. The macro-trends

Allied Grape Growers, All rights reserved. Our Production Potential……

Allied Grape Growers, All rights reserved. Over the Hump….. Our prediction for 2016 is 16,000 new acres.

Allied Grape Growers, All rights reserved. Evolving California Acreage Base… Represents only 1.3% total growth annually

Allied Grape Growers, All rights reserved. Winegrapes- Final Thoughts/Highlights Premiumization is driving acreage base changes. Premiumization is driving acreage base changes. As an industry, we need to be realistic about what needs to come out of the ground and why. As an industry, we need to be realistic about what needs to come out of the ground and why. The momentum of the business appears to be such that we may revert back to a time of adding an appropriate amount of new acres annually. The momentum of the business appears to be such that we may revert back to a time of adding an appropriate amount of new acres annually. There has been, and always will be, opportunity for differentiation; marketing is key. There has been, and always will be, opportunity for differentiation; marketing is key. Overall, most segments of the wine business are sustainable, on all fronts. Overall, most segments of the wine business are sustainable, on all fronts.

Allied Grape Growers, All rights reserved. Raisin Industry Macro-trends

Allied Grape Growers, All rights reserved. Raisin Variety Uses Raisins Sun-dried in field Dehydrator (specifically Goldens) Wine Dry White Sparkling Brandy or Distillation/Alcohol Concentrate Table & Cannery

Allied Grape Growers, All rights reserved.

Crush

Allied Grape Growers, All rights reserved. Comparing Returns

Allied Grape Growers, All rights reserved. Foreign Competition/Supply “The Argentinian wine industry is facing its biggest challenge in decades, as falling exports, rising inflation, tightened credit and a poor exchange rate combine to endanger the livelihood of many in the industry, especially those at the cheaper end of the market.”

Allied Grape Growers, All rights reserved. White Concentrate: White Concentrate: Market is currently uneconomical for California growers Market is currently uneconomical for California growers California grape $ /gallon California grape $ /gallon Competition is $6.00, and volumes are plentiful Competition is $6.00, and volumes are plentiful Argentina Argentina Making inventory to avoid wine excess Making inventory to avoid wine excess Selling cheap and fast to generate cash Selling cheap and fast to generate cash Apple surpluses exist, negatively impacting the market Apple surpluses exist, negatively impacting the market Health “news” encourages folks to avoid “sugary drinks” Health “news” encourages folks to avoid “sugary drinks” Concentrate Market

Allied Grape Growers, All rights reserved. “Replacing cookies and juice with fruits and vegetables………are achievements worth celebrating”, Obama said.

Allied Grape Growers, All rights reserved.

Shipments: (First six months from August 1) ◦ Natural Seedless domestic shipments are flat compared to last year. ◦ Natural Seedless export shipments (price sensitive) down about 12%. ◦ Total shipments down about 3-4%. ◦ 301,000 tons were shipped for the marketing season Deliveries: ◦ Natural Seedless raisin deliveries by growers to handlers by end of February were about 256,000 tons. ◦ This will still increase but is not anticipated to exceed 330,000 tons by end of the marketing year (July 31). Inventories: ◦ We will likely enter the raisin season with a carry-in at least that of the previous year (which was 140,000 tons) - a bit more than normally desired. ◦ The raisin crop is expected to be on the lighter side this year, and significant vineyard removals may make that excess inventory look attractive. Raisin Market

Allied Grape Growers, All rights reserved. Thank you