(and a glimpse into the future) Harvest & Crush 2018 Recap (and a glimpse into the future) Jeff Bitter Allied Grape Growers November 28, 2018

Evaluating the Market and Forecasting the Future First: Set the stage for wine market discussion Next: Trends in the wine business Next: Central Valley supply/demand Finish: Quick discussion on concentrate (Time permitting)

Setting the Stage However Grape & Wine Markets Are Under Constant Evaluation Short and Long Term Supply Evaluation Crop Size, Bulk Wine Market & Acreage Analysis Short and Long Term Demand Evaluation Consumer Behavior and Demographics Producers/Winemakers Generally Slow to React Varietally (Difficult) vs. Categorically (Do-able) However Growers Seek Stability Challenges to Stability Exist Mother Nature Global Supply Ever-Rising Costs Understanding Grape/Wine Spot Market Gives Directional Information Never Truly Reflects Industry Stability

So are we experiencing a time of stability in the wine industry?

Wine Industry Stability Stability can come in times of growth, times of regression, or amidst no change at all. Market stability is a function of supply/demand equilibrium, regardless of specific market volume/size or direction and can be present in certain segments of the market while simultaneously being absent in others. REALITY: Over the last year or two, we have been teetering on imbalance…..

Threats To Market Stability Unavoidable Supply Changes (short-term) Large crops and/or imports pressure Economic Regression (mid-term) Consumer Age Demographics (long-term)

Trends in the Wine Business….. Where are things going and how do we line up with that?

Premiumization vs. Commoditization The $10/Bottle Divide Premiumization: The action or process of attempting to make a brand or product appeal to consumers or buyers by emphasizing its superior quality and exclusivity. Commoditization: The process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers. REALITY: We have been commoditized in the Central Valley

Premium Wine Shipment Growth Rates are Slowing Wine Shipments Premium Wine Shipment Growth Rates are Slowing

Total California Wine Shipments Percentage changes reported from the Gomberg-Fredrikson Report REALITY: California wine shipments are down.

Wine Shipments What are some of the characteristics associated with slowing wine shipments? Incredible competition and product offerings Growth brands are essentially cannibals Wine producers practice “just-in-time” supply management Start/stop buying behavior (Grapes and Bulk Wine) Bottling/warehousing just before shipment Speculative or opportunistic grape buying is limited Enhanced efforts surface to maintain margin Wine producers focus on value More attention on the intersection of price/quality

Are consumers really drinking less wine?

Domestic Wine Consumption Growth REALITY: Consumers aren’t drinking less wine, they are drinking less California wine.

Supply Stability Planting at Attrition Rate (Forecast)

Statewide Supply Record crop, but not record yield

Central Valley Winegrapes

Central Valley Removals REALITY: We have been, and will continue to, adjust our acreage to match demand.

Supply Stability 9,000 Net Acre Reduction (-5%)

Supply Stability 9,500 Net Acre North Valley Addition (+7%) Overall Interior Acres Flat From 2016

Central Valley

Central Valley

Highlights indicate what was definitively up or a good-sized crop in 2018 Central Valley Yields

Highlights indicate what was definitively down or a relatively short crop in 2018. Central Valley Yields

Central Valley Returns “Average” Return Per Acre Using 2018 Price Est. Highlights indicate likely economic sustainability

Central Valley Returns “Average” Return Per Acre Using 2018 Price Est. Highlights indicate important revenue breaking points

Relative Bright Spots in the 2018 Winegrape Market Generic Whites (including Thompsons) Florals Rubired (Color) Grapes for Rosé REALITY: There are economically sustainable winegrape growers in the Central Valley.

Winegrape Market Realities Trump’s “very unofficial” reaction Over the last year or two, we have been teetering on imbalance. Demand and supply trends of wine & winegrapes are limiting opportunities for Central Valley market expansion. We have been commoditized in the Central Valley. Given market dynamics are “stable” over the next year, it is likely we will see no real change in the value of, or demand for, most Central Valley grapes for crush. California wine shipments are down, but consumers aren’t drinking less wine. Imports are making in-roads at our expense in a U.S. market that is still growing. We have been, and will continue to, adjust our acreage to match demand. The recent over-supply of Central Valley winegrapes is now mostly diminished with increased vineyard removals. There are economically sustainable winegrape growers in the Central Valley. Opportunities in the interior come specifically from strong production and/or (to a lesser extent) above average quality, allowing inclusion in higher-priced wines.

Our problem is demand driven rather than supply driven. Bottom Line: Our problem is demand driven rather than supply driven. Opportunities for future success depend on increasing demand.

Red and White Grape Juice Concentrate Shifting Gears….. Red and White Grape Juice Concentrate

Red and White Concentrate

Red and White Concentrate Red concentrate: Stable demand/relatively balanced market. California (Red 1,000): +/-$12.00/gallon. Producers selective about re-signs; based on color history White Concentrate: Finally transitioned from long to balanced last year. Argentinian crop was “average” in 2018. California white concentrate traded at or near $10.00/gallon this year. Demand is impacted by permeate (Red 200) – the by-product of crystal-color (75% of volume) and table grape strippings and other “leftover” grapes.

Defined Need

(and a glimpse into the future) Thank you! Harvest & Crush 2018 Recap (and a glimpse into the future) Jeff Bitter Allied Grape Growers November 28, 2018