1. Allied Grape Growers, 2015. All rights reserved. Malcolm Media’s Grape, Nut and Tree Fruit Expo State of the Wine & Concentrate Industry Nat DiBuduo Allied Grape Growers November 17, 2015

2. Allied Grape Growers, 2015. All rights reserved. Four Part Presentation Part 1: A look at California Supply Part 1: A look at California Supply Production trends Production trends Acreage forecasts Acreage forecasts Part 2: What Happened with the 2015 Harvest? Part 2: What Happened with the 2015 Harvest? What’s a grower to do? What’s a grower to do? Part 3: Pros & Cons of the Industry Part 3: Pros & Cons of the Industry Part 4: Understanding and Managing Market Risk Part 4: Understanding and Managing Market Risk

3. Allied Grape Growers, 2015. All rights reserved. Part 1: A look at supply

4. Allied Grape Growers, 2015. All rights reserved. A look at supply

5. Allied Grape Growers, 2015. All rights reserved. Factors affecting crop size as compared to last year: Mother Nature – Shorter Crop Mother Nature – Shorter Crop Off 20-25% in the coast Off 20-25% in the coast Off less than 10% in the interior Off less than 10% in the interior New Plantings New Plantings Added 30-35K bearing acres from 2012 plantings (3 years non-bearing assumed) Added 30-35K bearing acres from 2012 plantings (3 years non-bearing assumed) Newer plantings producing more each year Newer plantings producing more each year Vineyards Removals (Predominantly Interior) Vineyards Removals (Predominantly Interior) Removed 25,000 winegrape acres in 2015 Removed 25,000 winegrape acres in 2015 A look at supply - Lots of moving parts

6. Allied Grape Growers, 2015. All rights reserved. Six-year average = 2,690,281 tons In 2014 we were right at our six-year average, but that was with record-breaking bearing acreage. In reality, yields were light. For 2015, we see yields similar to 2014 (below average) A look at supply

7. Allied Grape Growers, 2015. All rights reserved. * *2015 non-bearing acreage includes an assumption that approximately 20,000 acres were planted this year. A look at supply

8. Allied Grape Growers, 2015. All rights reserved. A look at supply

9. Allied Grape Growers, 2015. All rights reserved. A look at supply

10. Allied Grape Growers, 2015. All rights reserved. Segmenting the Business

11. Allied Grape Growers, 2015. All rights reserved. Supply Potential - All Wine

12. Allied Grape Growers, 2015. All rights reserved. Segmenting the Business Essentially, the California Coast Range is the geographic line that represents the +/- $10/bottle pivot point in the market. <$10 >$10 = <$10 = $10-20 = >$20

13. Allied Grape Growers, 2015. All rights reserved. Segmenting the Business <$10 – Everyday Wines – (The “Value” Category) The backbone of the industry Highly competitive (not only within the wine business, but among competing beverage industries) The bottom end of this segment has been declining in volume for decades Generally characterized by higher volume/lower margin Limited differentiation Lower portions of this segment may exist due to oversupplies of wine worldwide Competing interest – production agriculture Geographically – the interior regions (Grapes <$1,000/ton) Bottle Prices: Less than $10 / $10-20 / and above $20

14. Allied Grape Growers, 2015. All rights reserved. Part 2: What happened with the 2015 harvest?

15. Allied Grape Growers, 2015. All rights reserved. The 2015 Harvest Buyers (or lack thereof) Buyers (or lack thereof) Pricing Pricing Crop size Crop size Late season buying Late season buying Sustainability Sustainability What’s a grower to do? What’s a grower to do?

16. Allied Grape Growers, 2015. All rights reserved. The 2015 Harvest Buyers (or lack thereof) Many buyers walked away from growers whose contracts ended after the 2014 harvest. Many buyers walked away from growers whose contracts ended after the 2014 harvest. Buyers lamented that the 2012, 2013 & 2014 crops were so large they had plenty of bulk wine inventory and could buy wine on the bulk market. Buyers lamented that the 2012, 2013 & 2014 crops were so large they had plenty of bulk wine inventory and could buy wine on the bulk market. The financial departments put a hold on buying grapes. The financial departments put a hold on buying grapes. They could buy bulk / bottled imported wine cheaper then we could sustainably produce it. They could buy bulk / bottled imported wine cheaper then we could sustainably produce it. Some even suggested skipping a year. Some even suggested skipping a year.

17. Allied Grape Growers, 2015. All rights reserved. The 2015 Harvest Pricing Those with existing contracts were mostly paid the minimum price in the contract. Those with existing contracts were mostly paid the minimum price in the contract. Those who had no contracts were subject to the spot market prices. Those who had no contracts were subject to the spot market prices. Some buyers were willing to pay the equivalent of their minimum prices, but most weren’t. Some buyers were willing to pay the equivalent of their minimum prices, but most weren’t. Thompson Seedless spot market pricing was unsustainable. Thompson Seedless spot market pricing was unsustainable.

18. Allied Grape Growers, 2015. All rights reserved. The 2015 Harvest Crop Size Overall the SJV crop was somewhat below average, depending on variety. Overall the SJV crop was somewhat below average, depending on variety. Thompson Seedless yields were above average and larger than the 2014 crop. Thompson Seedless yields were above average and larger than the 2014 crop. New plantings added to the amount of winegrapes harvested in 2015. New plantings added to the amount of winegrapes harvested in 2015. Compared to growers on the North & Central Coast, the SJV had a fair crop size; but we didn’t have their prices! Compared to growers on the North & Central Coast, the SJV had a fair crop size; but we didn’t have their prices!

19. Allied Grape Growers, 2015. All rights reserved. The 2015 Harvest Late Season Buying Many winegrapes were purchased under the guise of brandy and/or distillery use. Many winegrapes were purchased under the guise of brandy and/or distillery use. Buying was anywhere from $100/ton roadside to $250/ton delivered Buying was anywhere from $100/ton roadside to $250/ton delivered Spot prices were unsustainable for growers. Spot prices were unsustainable for growers.

20. Allied Grape Growers, 2015. All rights reserved. The 2015 Harvest Sustainability (Economic) SJV growers have provided grapes for decades to wineries that provide wine at various price points and quality to a vast consumer base. SJV growers have provided grapes for decades to wineries that provide wine at various price points and quality to a vast consumer base. To continue, growers need to earn a fair living and profit from their vineyards; be economically sustainable. To continue, growers need to earn a fair living and profit from their vineyards; be economically sustainable. To be sustainable, a grower should expect his vineyard to have a combination of sufficient production & a fair price. To be sustainable, a grower should expect his vineyard to have a combination of sufficient production & a fair price. Farmers are good stewards of their labor force, the land they work & live on, the environment and their communities. We are farming “sustainably” whether we document it or not! Farmers are good stewards of their labor force, the land they work & live on, the environment and their communities. We are farming “sustainably” whether we document it or not!

21. Allied Grape Growers, 2015. All rights reserved. Vineyard Evaluation Know what your average production level is! Be honest with yourself. Know what your true costs of production - not only per acre, but per tons produced. Know what your average price per ton has been then factor in the new paradigm of SJV winegrape pricing. Evaluate the alternatives you have What alternative crops can you grow on your land taking into account development costs & timing, water, gross & net per acre. Check with a reliable appraiser or real estate agent on the true value and marketability of your vineyard. The current real estate market is high and of questionable sustainability. What’s a Grower to do?

22. Allied Grape Growers, 2015. All rights reserved. What’s a Grower to Do? We have observed many new plantings statewide, BUT………..

23. Allied Grape Growers, 2015. All rights reserved. What’s a Grower to Do? ……now we see significant removals in the interior.

24. Allied Grape Growers, 2015. All rights reserved. Vineyard Removals It is primarily a SJV phenomenon. Some redevelopment in the coastal areas. It may be a very tough decision based on vineyard age & variety. In most cases the ground is not being replanted to grapes. Removal Data – From Observation and Public Records 35,000+ grape acres (25,000+ winegrapes) are estimated to have been pulled out since the 2014 harvest. During the months of September & October the amount of vineyard removals increased by 50% over the previous year. It is likely removals will continue at the current pace thru Spring (weather allowing), as growers continue to evaluate & plan to plant alternative crops. What’s a Grower to do?

25. Allied Grape Growers, 2015. All rights reserved. What’s a Grower to Do?

26. Allied Grape Growers, 2015. All rights reserved. Let’s not be afraid of our own shadow….or making tough decisions! What’s a Grower to Do?

27. Allied Grape Growers, 2015. All rights reserved. What’s a Grower to Do? Allied Grape Growers Is a raisin grape & winegrape marketing cooperative We are in the business of representing grape growers We are in the business of selling grapes to wineries and concentrate providers We are not in the nut business We are NOT telling anyone to remove or sell their economically sustainable vineyards. We are telling growers to be smart businessmen and assure your future and the future of your families!

28. Allied Grape Growers, 2015. All rights reserved. Part 3: Pros and cons In the business

29. Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the business The economy The economy Foreign competition Foreign competition Consumption trends Consumption trends

30. Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business The Economy

31. Allied Grape Growers, 2015. All rights reserved. Graph Source: The Gomberg Fredrikson Report - 2014 Annual Wine Industry Review 30.8 66.6 69.7 45.9 California Wine Shipment Volume Shown in millions of cases shipped, 1980-2014 Recession directly affects the wine business categorically.

32. Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Foreign Competition

33. Allied Grape Growers, 2015. All rights reserved. +20% +30% +23% Pros and Cons in the Business Foreign Competition

34. Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Consumption and Categorical Competition

35. Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Consumption Trends

36. Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Consumption Trends

37. Allied Grape Growers, 2015. All rights reserved. “Millennials generally drink more premium wine than the typical US wine consumer, but they are not yet the core consumers of ultra-premium wines. The sweet spot of millennial consumption appears to be the $10-25/bottle range.” - Stephen Rannekleiv - Rabobank Beverage Industry Analyst Pros and Cons in the Business Consumption Trends

38. Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Consumption Trends

39. Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Consumption Trends

40. Allied Grape Growers, 2015. All rights reserved. Part 4: Understanding and Managing Market Risk

41. Allied Grape Growers, 2015. All rights reserved. What creates market risk? OVERSUPPLY -Either from a supply/demand imbalance caused by a multi-year, longer term issue Or from a large crop or series of large crops (generally a shorter term issue) Understanding/Managing Risk

42. Allied Grape Growers, 2015. All rights reserved. Understanding/Managing Risk Some Closing Comments Different Varieties & Relationships Planting contracts dictate what to plant, but consider your current mix of varieties as well as who you sell to. Little to no Central SJV planting contracts are currently being offered. Ask your buyer if they would like the SJV grower to be available for them in the future and how do to develop a partnership with them to remain viable. Different Crops Evaluate your property for suitability of alternative crops. Different Options Do you want to continue farming? Do you want to consider leasing your vineyard or maybe even selling it & retiring? Different Landscape of the SJV in the future?

43. Allied Grape Growers, 2015. All rights reserved. What’s a Grower to Do? Allied Grape Growers Is a raisin grape & winegrape marketing cooperative We are in the business of representing grape growers We are in the business of selling grapes to wineries and concentrate providers We are not in the nut business We are NOT telling anyone to remove or sell their economically sustainable vineyards. We are telling growers to be smart businessmen and assure your future and the future of your families!

44. Allied Grape Growers, 2015. All rights reserved. In Summary Market growth is currently at the upper end of the market. This is a prime opportunity to differentiate “California” and move up the price ladder; not just for the interior, but for all production areas of the state.

45. Allied Grape Growers, 2015. All rights reserved. Please visit us at: alliedgrapegrowers.org