San Joaquin Valley Winegrowers Association Harvest 2015 & Future Opportunities Nat DiBuduo Allied Grape Growers November 20, 2015 Allied Grape Growers, 2015. All rights reserved. Four Part Presentation •Part 1: A look at California Supply •Production trends •Acreage forecasts •Part 2: What Happened with the 2015 Harvest? •What’s a grower to do? •Part 3: Pros & Cons of the Industry •Part 4: Understanding and Managing Market Risk Allied Grape Growers, 2015. All rights reserved. Part 1: A look at supply Allied Grape Growers, 2015. All rights reserved. A look at supply Allied Grape Growers, 2015. All rights reserved. A look at supply Lots of moving parts Factors affecting crop size as compared to last year: • Mother Nature – Shorter Crop • Off 20-25% in the coast • Off less than 10% in the interior • New Plantings • Added 30-35K bearing acres from 2012 plantings (3 years non-bearing assumed) • Newer plantings producing more each year • Vineyards Removals (Predominantly Interior) • Removed 25,000 winegrape acres in 2015 Allied Grape Growers, 2015. All rights reserved. A look at supply Comparison of Allied Grape Growers' Central Valley Yields (Districts 12-14) 2014-2015 Six-Year Avg 2015 to Avg % Difference Yield 2014 2015 % Change Variety/Category 8% 9.2 37% 10.0 7.3 Thompson Seedless -6% 10.8 0% "Old" Generic Whites (French & Chenin) 10.2 10.2 N/A N/A N/A 13.7 New French Colombard (2010 or newer) N/A 6% 8.1 6% 8.6 8.1 Chardonnay -4% 13.2 0% 12.7 12.7 Old Florals (Muscat, Symphony, etc) N/A N/A N/A 17.5 New Muscat Alexander (2010 or newer) N/A 4% 8.8 1% 9.2 9.1 Pinot Grigio -14% 10.0 -14% 8.6 10.0 Grenache 2% 12.7 14% 11.4 13.0 Rubired 4% 9.0 25% 9.4 7.5 Barbera/Carignane -14% 8.0 6% 6.9 6.5 Cabernet Sauvignon -5% 8.7 8% 8.2 7.6 Merlot -13% 10.5 -8% 9.2 10.0 Ruby Cabernet -12% 11.5 -6% 10.8 10.2 White Zinfandel -15% 9.4 -9% 8.0 8.8 Syrah Allied Grape Growers, 2015. All rights reserved. A look at supply Winegrape tons crushed, 2009-2014 Region Lodi/Clarksburg Central Interior Total all Interior 2009 2010 2011 2012 2013 2014 906,949 705,066 682,617 916,138 949,591 814,894 1,738,182 1,831,629 1,803,818 1,884,293 2,026,212 1,882,299 2,645,131 2,536,695 2,486,435 2,800,431 2,975,803 2,697,193 • 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) Allied Grape Growers, 2015. All rights reserved. A look at supply AGG Winegrape Acreage Estimates Bearing Non-Bearing Total 2014 555,000 100,000 655,000 2015 562,000 90,000* 652,000 *2015 non-bearing acreage includes an assumption that approximately 20,000 acres were planted this year. Allied Grape Growers, 2015. All rights reserved. A look at supply Allied Grape Growers, 2015. All rights reserved. A look at supply Range of Potential California Winegrape Acres Planted Based on Annual Vine Sales 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 2010 2011 2012 2013 Allied Grape Growers, 2015. All rights reserved. 2014 Segmenting the Business Segment Allocation of Winegrape Vines Sold, 2012-2014 30 Million 27 Million 30,000,000 24 Million 25,000,000 20,000,000 High Mid Value 15,000,000 Higher emphasis in Northern Interior 10,000,000 5,000,000 Major concentration in Northern Interior 2012 2013 2014 Allied Grape Growers, 2015. All rights reserved. Supply Potential - All Wine Est. California Winegrape Bearing Acres, 2013-2017 350,000 Includes 2% Coastal Attrition Rate and 6% Interior Attrition Rate -1% 1% 0% 300,000 250,000 200,000 6% 6% 5% 150,000 1% 2% 2% 100,000 50,000 - High 2013 Mid 2014 2015 Value 2016 2017 Allied Grape Growers, 2015. All rights reserved. Segmenting the Business <$10 >$10 Essentially, the California Coast Range is the geographic line that represents the +/- $10/bottle pivot point in the market. = <$10 = $10-20 = >$20 Allied Grape Growers, 2015. All rights reserved. Part 2: What happened with the 2015 harvest? Allied Grape Growers, 2015. All rights reserved. The 2015 Harvest • • • • • • Buyers (or lack thereof) Pricing Crop size Late season buying Sustainability What’s a grower to do? Allied Grape Growers, 2015. All rights reserved. What’s a Grower to Do? Let’s not be afraid of our own shadow….or making tough decisions! Allied Grape Growers, 2015. All rights reserved. What’s a Grower to do? • 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. Allied Grape Growers, 2015. All rights reserved. What’s a Grower to Do? We have observed many new plantings statewide, BUT……….. Allied Grape Growers, 2015. All rights reserved. What’s a Grower to Do? ……now we see significant removals in the interior. Allied Grape Growers, 2015. All rights reserved. What’s a Grower to Do? Allied Grape Growers, 2015. All rights reserved. Part 3: Pros and cons In the business Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the business • The economy • Foreign competition • Consumption trends Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business The Economy Allied Grape Growers, 2015. All rights reserved. California Wine Shipment Volume Shown in millions of cases shipped, 1980-2014 Recession directly affects the wine business categorically. 69.7 45.9 66.6 30.8 Graph Source: The Gomberg Fredrikson Report - 2014 Annual Wine Industry Review Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Foreign Competition Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Foreign Competition +23% +30% +20% Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Consumption and Categorical Competition Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Consumption Trends Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Consumption Trends Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Consumption Trends “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 Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Consumption Trends Allied Grape Growers, 2015. All rights reserved. Pros and Cons in the Business Consumption Trends Cases (in Millions) Est. California Table Wine Volume <$7/Bottle, 2006-2014 140.0 120.0 106.8 107.2 113.2 117.0 118.1 123.9 122.8 118.0 115.6 100.0 80.0 60.0 40.0 20.0 0.0 2006 2007 2008 2009 2010 2011 2012 2013 Allied Grape Growers, 2015. All rights reserved. Data Source: Gomberg Fredrikson Report 2014 Part 4: Understanding and Managing Market Risk Allied Grape Growers, 2015. All rights reserved. Understanding/Managing Risk 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) 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 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? Allied Grape Growers, 2015. All rights reserved. What’s a Grower to Do? Allied Grape Growers • Is a grape marketing cooperative • We are in the business of representing grape growers • We are in the business of selling grapes to wineries, concentrate producers, dehydrators and other grape buyers • 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! Allied Grape Growers, 2015. All rights reserved. In Summary Considering where market growth is, this is prime opportunity to differentiate for the above $5 “California” bottle. In order to successfully grow grapes for price points below $5, it will require non-traditional production levels and the ability to out-produce those worldwide, which have much lower costs of production. Allied Grape Growers, 2015. All rights reserved. Please visit us at: alliedgrapegrowers.org Allied Grape Growers, 2015. All rights reserved.