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

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

3. 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

4. Worldwide Wine Production
Chart Source: OIV

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

6. 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.

7. 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-

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

9. Production & Planting
Trends

10. 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

11. 2017
Nursery Survey Review

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

13. 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%

14. Industry Segments & Varietal Supply Trends

15. 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)

16. Tying Regions to Categories

17. <$7/Bottle

19. 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.

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

22. 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.

23. Note:
Change stated cumulatively
Annual attrition rates estimated

24. $7-10/Bottle

26. 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.

27. Note:
Change stated cumulatively
Annual attrition rates estimated

28. $10-20/Bottle

30. Production Breakdown

31. 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.

32. Note:
Change stated cumulatively
Annual attrition rates estimated

33. >$20/Bottle

34. 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?

35. Note:
Change stated cumulatively
Annual attrition rates estimated

36. Answering the unasked question…..

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

38. 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

39. 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

40. 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

41. Macro Supply Trends Going Forward

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

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

44. 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

45. 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.

46. 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

47. 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.

48. Thank you!
alliedgrapegrowers.org

49. Founding Partners

50. Media Partners

51. Sponsors and Partners