The Wine Cycle, and Where we are Today ASA No Cal December 10, 2009 Tony Correia, ARA, MRICS

…I often wonder what the Vintners buy One half so precious as the Goods they sell. The Rubaiyát of Omar Khayyám Seventy-First Quatrain First Edition of the Translation by Edward Fitzgerald

Manic-Depressive Wheel of Fortune Copyright 2005 Turrentine Brokerage All Rights Reserved DEMAND EXCEEDS SUPPLY EXCEEDS DEMAND

Wine Business Monthly October 2001

The Wine Cycle; California Chardonnay This Time, Its Different….???

"Those who cannot remember the past are condemned to repeat it," Santayana's Law of Repetitive Consequences

Is the Cycle Broken??

Is The Wine Cycle Broken? Nope, its Global

WHATS DOWN THE ROAD FOR GRAPE GROWERS? The Future Wine Sales??

The Wine Cycle Quality, and the Perception of Value, Continues to be the key to Survival, Today, and Success, Tomorrow.

2009 Crush Spot grape market was dead last half of the growing season. Note; Spot market is NOT the whole grape market, many grapes were sold under long-term contracts Wineries which were suffering slow sales did not buy grapes, some actually sold grapes in competition with growers Some Wineries are doing quite well, but had their grape supplies secured, so also did not buy grapes

2009 Crush Some Growers custom crushed their unsold grapes, and now waiting to sell their bulk wine, hoping for a stronger market Imports hitting some segments HARD (Some Bulk Imports have TRIPLED) Industry is holding its breath, waiting for 4 th Quarter wine sales results

Is the Sky Falling? How would you feel if the world was falling apart all around you, Pieces of the sky were falling in your neighbors yard, But not on you…. Before Believing Danny Flowers

California Wine - Cheap is Chic C onsumers Buying Down –(Short or Long Term Phenomenon?)

2007 Isnt this a lovely wine?? Parker 95. $350 a bottle… What a cool guy!!!!

2009 Isnt this a lovely wine?? Costco. $15 a bottle… What a cool guy!!!!

California Wine - Cheap is Chic Consumers Buying Down –(Short or Long Term Phenomenon?) Impact on Growers? – Can I sell my grapes? – At what Price? – When will I get paid? – And WILL I get paid?

Wine prices drive grape prices which drive land and vineyard prices, ergo…

Vineyard Markets –Credit available, but only for qualified, solid borrowers, FOCUS ON CASH FLOWS DEBT SERVICEABILITY –Buyers waiting on the sidelines; One persons problem is anothers opportunity.

Financial stress already apparent in many markets Vineyard values tend to be sticky Good properties are always good properties, Napa Valley is still Napa Valley. Best properties in best areas most insulated from stress. Marginal properties, and secondary or tertiary areas, feel impact if/when grape prices slide and growers suffer losses. Vineyard Markets

Whats planted in California, stays in California Few new plantings in the past 3-5 years, and few expected for several more.

Wine Grape Acres (1,000s) Whats planted in California, stays in California

Non-Bearing Acres as % of Total

New Acres as % of Bearing

Pinot Noir; Total Non-Bearing Acres

Pinot; Non-Bearing Acres as % of Total Acres

Real Estate Markets? So, what does this mean to vineyard and winery markets? Some background, concepts, and history

Can an Ag Business have Value? Example: Kosta – Browne Winery High end Pinot Noir producer 11,000 cases a year, –all sold direct to consumer No owned vineyards; buy grapes No owned winery facility; building and equipment leased Note: Ten years ago, both Kosta and Browne were waiting tables…started this venture with their tip money…

Example Kosta – Browne Winery Acquired Fall 2009 Sale reported at Somewhat less than $40 million

Asset Leasing Models; REITs Vintage Wine Trust Launched March 2005, liquidated 2008 High rental rates VINREIT High profile industry player High rental rates Some signs of stress appearing (Cosentino, Havens)

Vineyard Investment Models Premiere Pacific Vineyards Business model: CALPERS funding; buy superior sites, develop top-end premium vineyards. Original plan was to sell vineyards as they matured, but that has not met with success, so plan has morphed towards leasing, but also little success with that model. Silverado Partners Buy vineyards; or buy or lease land and develop vineyards. Coastal concentration. Add value.

Vineyard Value Components

Vineyard Value Components (Central Coast)

Valuation for Financial Reporting

–Discounted Cash Flow Analysis

Total Value of Estate Winery Property : $6,500,000

Total Value of Winery Facility : $3,764,120

The California Vineyard Market Central Valley North Coast Central Coast

Where are we? Were in the Wine Business, in California.

Central Valley Low cost grapes for low cost wines – Cheap is Chic Few, Big, grape buyers Big Grape Growers Water!!

WATER ? Severe Water Shortage in both Federal and State Central Valley Water Projects Supplies in many Coastal Areas dependent on captured rainfall or fragile groundwater aquifers

Fresno & Madera County Wine Grape Vineyards

Fresno & Madera County Vineyards vs. Thompson Seedless Prices

Fresno & Madera County Vineyards vs. Average WINE Grape Prices

Fresno & Madera County Vineyards vs Top Varieties Rubired French Columbard

Lodi – Delta Area 20% of Total State Production - Chardonnay 27% (10+ Million $5+/bottle) - Cabernet 26% - Zinfandel 34% (10+ Million $4+/bottle) - Pinot Grigio/Gris 38%

Lodi Area Wine Grapes Vineyard Values vs Average Grape Prices Zinfandel Chardonnay

Coastal Markets Market Perceptions Markets are based on Perceptions

Market Perceptions 2009 Sellers think its still Buyers are thinking its the 30s.

2009 Vineyard Markets Few Sales Few Sellers Fewer Buyers Crowded Sidelines, waiting…

North Coast Residential still soft True Trophy properties relatively insulated Market on PAUSE in last quarter 2008 and first quarter Vineyard buyers, and lenders, looking at Operating Economics Capital, Credit issues?

Napa Valley strong demand for the best A+ properties in the best locations – Oakville is always Oakville. High percentage of winery owned vineyards and contracted grapes Marginal areas still suffer

Napa County Open Land

Napa Vineyard Values vs. Price Chardonnay Cabernet

Napa Vineyard Values; Regions

Sonoma County good demand for good properties in good locations more, smaller, independent growers Residential Soft Segmented Markets tied to varieties –Russian River Valley– Pinot & Chardonnay –Carneros – Pinot & Chardonnay –Alexander Valley – Cabernet –Dry Creek Valley – Zinfandel –Sonoma Coast – Pinot More 28% of total State Pinot Production

Sonoma Vineyards vs Grape Prices

Mendocino Co. Vineyards vs Grape Prices

Lake Co. Vineyards vs Grape Prices

Monterey County Economies of Scale > Large, efficient vineyards Chardonnay 90,000 $1,200 a ton 48% of total County Production 16% of total State Production Six Million $12/bottle

Monterey County Values vs. Price

San Luis Obispo & Santa Barbara Counties, Values vs. Price Pinot Noir Chardonnay

Summary: Wine prices drive grape prices which drive land and vineyard prices

Pieces of the Sky… Wine prices under pressure from slow sales; and Buying Down Grape prices under pressure So…… Land, vineyard and winery prices?

The Future? WARP! W ine A sset R ecovery P rogram Cash for Cab?

Thank You!!! And Drink More California Wine!!!