How Current Grape Supply and Demand Affects You Nat DiBuduo July 26, 2017

Nat DiBuduo President CEO Allied Grape Growers How Current Grape Supply and Demand Affects You

A few points to make about winegrape production: World winegrape production is mostly flat California production is forecasted to be flat in the near future Most wine regions of the world constitute just a fraction of global production

Worldwide Wine Production Chart Source: OIV

Our Production Potential +15K +10K +10K +13K +11K

The ongoing challenge is to understand The wine world is a large, diverse place with competition from many different countries, regions and appellations, none of which really have a specifically dominant position. The ongoing challenge is to understand your position in this big picture, and more importantly, position yourself for success.

Fungibility “Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution. That is, it is the property of essences or goods which are capable of being substituted in place of one another.” -Source: Wikipedia-

Sections Production & Planting Trends 2017 Nursery Survey Review Industry Segments & Varietal Supply Trends Macro Supply Trends Going Forward Thoughts & Summary

Production & Planting Trends

Economy/Winegrape Supply Interaction Three short crops set stage for balance Light crop in a much stronger market Record crop & huge coastal crop Three “below average” crops 2017 & Beyond: Huge premium opportunity; low end balancing occurring Strengthening economy, but relatively weak dollar Recession Strengthening Dollar, Economic Optimism

2017 Nursery Survey Review

What’s Hot, What’s Not…. 71% Red 29% White

Planting Trends, 2014-2016 2016 – 15 million vines Cabernet Sauvignon - 35% Chardonnay – 16% Pinot Noir – 16% Pinot Grigio – 7% 2015 – 19 million vines Cabernet Sauvignon - 31% Pinot Grigio – 17% Pinot Noir – 15% Chardonnay – 13% 2014 – 27 million vines Cabernet Sauvignon - 29% Chardonnay – 17% Pinot Noir – 12% Pinot Grigio – 12%

Industry Segments & Varietal Supply Trends

Tying California Regions to Categories <$7/Bottle Interior - south of Lodi $7-10/Bottle Interior – Lodi/Delta and north $10-20/Bottle Coastal (standard) >$20/Bottle Coastal Premium (primarily Napa & Sonoma)

Tying Regions to Categories

<$7/Bottle

Talking Points <$7/Bottle <$7/bottle represents over half of all California wine shipments, by volume. There are billions of dollars invested in millions of gallons of cooperage in the Central SJV to produce “California” wine. There are thousands of growers that are heavily invested in, and committed to growing, SJV winegrapes. The problem is economic sustainability: Proper Quality at Acceptable & Obtainable Production Levels - “PQAOPL”. Vineyard removal and lack of new development will continue as the norm unless and until wine shipments <$7/bottle stabilize OR until production of SJV winegrapes regularly makes it way into >$7/bottle wines.

Our forecast for 2017 is +/-15,000 new acres. Planting Trends Our forecast for 2017 is +/-15,000 new acres.

Statewide Vineyard Removal +/-40,000 grape acres removed between the 2015 and 2016 harvests (estimate 18,000 winegrape) As of March 31, 2017, in the San Joaquin Valley, 20,000+ grape acres removed since 2016 harvest, with about 1/3 being winegrapes Estimate 12,000-15,000 winegrape acres will be removed statewide by the 2017 harvest.

Note: Change stated cumulatively Annual attrition rates estimated

$7-10/Bottle

Talking Points $7-10/Bottle This is a mostly stable retail price range, but on a very strong base (i.e. lots of volume in this tight price range). The quality in this price range has been well established and strengthening for both grapes & wine. There is currently interest from wineries to contract 2017 grapes and discuss possible planting contracts. The attributes of fungibility really surface here as wineries look first to the northern interior when considering alternatives to coastal supply. A great place to be in the future, as the demand for high quality wine expands and processors look for ways to control costs.

Note: Change stated cumulatively Annual attrition rates estimated

$10-20/Bottle

Production Breakdown

Talking Points $10-20/Bottle This is the hottest, sizeable price segment presented today. Quality within this price segment is known & established for both grapes & wine. Winery interest is strong for grapes to satisfy consumer demand. Growers have been responding by planting more. There is some serious fungibility occurring to maximize profit opportunity (AVA % vs. California AVA). Fungibility on the upside creates opportunity, but a threat that exists comes from fungibility on the lower end of the price range, as processors look to average down cost.

Note: Change stated cumulatively Annual attrition rates estimated

>$20/Bottle

Talking Points >$20/Bottle Market behavior that drives industry pricing up starts here – at the top. Price elasticity - How high is too high on pricing? Is there a bubble? Did I really say that? Are some AVA’s in jeopardy of becoming mono-varietal? Many vines are being planted in AVA’s contributing to this price category, but a high percentage are replants. Does fungibility degrade the overall quality of an AVA?

Note: Change stated cumulatively Annual attrition rates estimated

Answering the unasked question…..

Exactly where are these new vines being planted on the coast?

Central Coast or North Coast? Popular Coastal Planting Regions San Luis Obispo County (Paso Robles) Santa Barbara County Sonoma County Napa County Sonoma County Sonoma County

CS: Cabernet Sauvignon Sonoma County – Six-Year Weighted District Avg Pricing +8.01% CH: Chardonnay PG: Pinot Grigio SB: Sauvignon blanc PN: Pinot Noir PS: Petite Sirah CS: Cabernet Sauvignon ZN: Zinfandel SY: Syrah MER: Merlot

CS: Cabernet Sauvignon Napa Valley – Six-Year Weighted District Avg Pricing +6.03% SE: Semillon CH: Chardonnay SB: Sauvignon blanc PG: Pinot Grigio CF: Cabernet Franc CS: Cabernet Sauvignon PS: Petite Sirah SY: Syrah ZN: Zinfandel MER: Merlot PN: Pinot Noir

Macro Supply Trends Going Forward

Evolving California Acreage Base Compare these net gains/losses in acreage to wine shipment growth rates by category

Wrapping it up…. Behavior Catalyst ...so what is driving the wine business today? Premiumization empowered by the economy Behavior Catalyst

Keeping California’s Wine Industry Great Quality is a prerequisite of fungibility. Without it, you are stuck in a rut! Labor and water issues are critical going forward and play a direct role in the success of the wine industry. Sustainability and related certifications are a must-do as we continue to differentiate California wine in the market. The collaboration of growers & wineries through regional and statewide organizations provides synergies for advancement and opportunity. Research, Research, Research

Sustainable Winegrowing SWP Overview What is Sustainability? The Sweet Spot Sustainable Winegrowing Just a quick overview of the way we think about sustainability – it is about balancing the 3 Es of sustainability (which you have probably heard of before) or the environmental, economics and social equity (or the people aspect including neighbors and community and employees). The goal is to consider all of these things when you are making decisions in the vineyard or winery.

Industry Commitment California & Regional Programs Sustainability Drivers Industry Commitment California & Regional Programs Oregon Washington New York International Programs Australia New Zealand South Africa Chile Italy

Summary & Highlights Fungibility will play an ever-increasing role in the California wine industry, offering profit opportunity for both growers and processors. There is no shortage of winegrape acreage in California, although specific regions may experience tighter supply. 4M-ton harvests are standard now. Cab Sauv, Pinot Noir, Pinot Grigio and Chardonnay will continue to dominate California varietal offerings, but the future of product development may move more toward blends utilizing regionally appropriate varieties. The stability of current market trends (since 2012) has produced a situation where supply is increasing in proportion to current increases in demand, by region and by variety.

Thank you! alliedgrapegrowers.org

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