33rd Annual Grape Day State of the Industry Nat DiBuduo Allied Grape Growers April 21, 2016

-AGG’s Industry Update Newsletter, January 2016- “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-

Wine Shipments U.S. Wine Market Volume Graph Source: The Gomberg Fredrikson Report - 2015 Annual Wine Industry Review

California Wine Shipment Volume Graph Source: The Gomberg Fredrikson Report - 2015 Annual Wine Industry Review

Wine Shipments Data Source: The Gomberg Fredrikson Report - 2015 Annual Wine Industry Review

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%

This changing landscape has/will affect different regions in different ways… Some positive Some negative

Trends, Issues, Threats & Opportunities Categorical Review Trends, Issues, Threats & Opportunities

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.)

Trends, Issues, Threats & Opportunities Value Category Trends, Issues, Threats & Opportunities

Wine Shipments

(All interior, including Lodi) Vineyard Removal…. (All interior, including Lodi) +/-35,000 grape acres removed between the 2014 and 2015 harvests (est. 21,000 winegrape). 27,000 acres pulled (+/- 13,000 winegrapes) from 2015 harvest to end of March.

Trends, Issues, Threats, Opportunities 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)

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

Trends, Issues, Threats & Opportunities Mid Category Trends, Issues, Threats & Opportunities

Trends, Issues, Threats, Opportunities 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

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

Trends, Issues, Threats & Opportunities High Category Trends, Issues, Threats & Opportunities

Trends, Issues, Threats, Opportunities 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

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

Trends, Issues, Threats & Opportunities Luxury Category Trends, Issues, Threats & Opportunities

Trends, Issues, Threats, Opportunities 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

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

Summing it up…. The macro-trends

Over the Hump….. Our prediction for 2016 is 16,000 new acres.

Our Production Potential……

Evolving Acreage Base… Represents only 1.3% total growth annually

Pierce’s Disease Assessment

Sustainability Issues

Final Thoughts/Highlights on Winegrape Industry 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. 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. We need to be diligent in controlling invasive pests statewide

Thank you. www.alliedgrapegrowers.org