Annual Wine & Grape Industry Forum SJVWA’s Annual Wine & Grape Industry Forum Harvest & Crush 2017 Recap Nat DiBuduo Allied Grape Growers November 29, 2017

First: Look at the SJV position in wine market How are we positioned from the supply side and what are the implications for the future? First: Look at the SJV position in wine market Next: Supply history and outlook Next: Challenges in relation to “neighboring” California wine regions Last: Factors driving success & issues that are threats

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

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.

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

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

Allocations – Grapes & Wine

Planting Trends

Central Valley Wine Shipment Trends About 2% annual loss in recent years

“The bottom line is that, following the 2015 crop, we will still need to remove about 36,000 acres…”

Estimated Interior Winegrape Removals

…..But, it’s not all bad!

$7-10/Bottle >$10/Bottle

Allocations – Grapes & Wine Fungibility Areas

…..so how do we get into the other segments of the market?

Planting Trends The north valley has represented a clear majority of interior plantings in recent years

Production Breakdown

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%

Note: Change stated cumulatively Annual attrition rates estimated

.....so what are we expanding in here in the valley?

Note: Change stated cumulatively Annual attrition rates estimated

What Should Come Out in the Central SJV? Any red grape that struggles to achieve uniform color and/or high sugar Some acreage of “Unpopular” consumer varieties like Zinfandel, Merlot and Syrah Ruby Cabernet? Export market dependent. Generics? – Not necessarily “They may be back.” Low production, economically unstainable vineyards, regardless of variety.

AGG Central Valley Yields

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

Economic Performance Key Measures GDP – Gross Domestic Product Inflation Unemployment rate Other Important Indicators Stock market indexes (S&P, Dow Jones, etc.) Rate of national debt reduction Labor productivity Housing affordability Surveys Consumer Confidence/Consumer Sentiment

California Winegrape Market Points Although there is no shortage of total winegrape acreage in California, coastal regions or more likely to experience tight supply, particularly on certain varieties and/or in specific regions. The supply pressure created by excess interior grapes/wine over the last few years is now mostly diminished (not over) with increased vineyard removals. “Reliable” and “stable” market trends since 2012 have allowed us to plan on increasing supply in proportion to projected increases in demand, by region and by variety. Opportunities in the interior come specifically from strong production and/or above average quality allowing inclusion in price points above $7/bottle.

Concentrate Industry Review

Concentrate Market White Concentrate: Market remains economically unsustainable for California. Finally transitioned from long to balanced in 2017. Argentinian crop was short for the second year in row. California concentrate is selling at $9.00+/gallon. If 100% juice drinks were still popular, we would be experiencing major shortage of product. Permeate (Red 200) – the by-product of crystal-color (75% of volume) – is providing cheap sugar product. Red concentrate: Stable demand/relatively balanced market. California (Red 1,000): $12.00+/gallon. Producers selectively re-signing expired contracts.

Concentrate Market

Go Green or Make Raisins?

Raisin Varieties in Crush

Macro Supply Trends Going Forward

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

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.

Keeping California’s Wine Industry Great In the Central & Southern SJV The Central & Southern Interior continues to produce and sell over 50% of California’s wine. But the <$7 segment of the market is decreasing, so what do we do? We improve quality, we control costs, or we can improve production? Combination of these attributes? We do not walk away from the challenge. We look for the opportunity to work with our winery partners who already have major financial investments here in the SJV. Labor and immigration issues are critical going forward and play a direct role in the success of the wine industry and our business. These issues will also push more mechanization. Water will continue to be a major issue facing growers in the SJV. We must be diligent in learning about SGMA and how it will affect us whether we have rain or not.

Keeping California’s Wine Industry Great 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. Fungibility will play an ever-increasing role in the California wine industry, offering profit opportunity for both growers and processors. Quality is a prerequisite of fungibility. Without it, you are stuck in a rut! 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. Research: We must stop just talking about it and authorize it!

and I’ll be an SJV grape grower until the end of my days!! I’m SJV born, SJV raised, and I’ll be an SJV grape grower until the end of my days!!

Thank you AGG Staff, 2017