What Were Those Vines Thinking?

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February 21, 2007 I Vol 19, No. 2 I Copyright © 2007 Turrentine Brokerage I Bill Turrentine, Editor

What Were Those Vines Thinking?

I received a call from a writer who was working on a story about Sauvignon Blanc. She was puzzled by the crop report. She could understand, she said, why growers would reduce the Merlot crop by 22% because wine sales are weak; but why, she wanted to know, would growers pick 6% less Sauvignon Blanc when Sauvignon Blanc sales are growing at a healthy clip? I tried to explain that grapevines respond to patterns of sunlight, water, cold, heat, nutrients, pests and pruning but that they are blissfully unaware of the retail market for wine.

2006 was not a big crop. Nor was it a short one. In fact, the total crush was within 1% of the five-year average. Of eight major premium varieties, six were above and only two below their five-year averages. Compared to 2005, however, the 2006 harvest dropped dramatically. And the reduction came as sales of wines over $3 per bottle are doing very well. Chardonnay, Cabernet Sauvignon, Merlot, Sauvignon Blanc, Zinfandel and Syrah all came in significantly below their 2005 levels. Only two major (or soon to be major) varietals actually increased production, but at least they were the market darlings, Pinot Noir and Pinot Grigio. Let’s take a more detailed look the crop, and the market, for the key varieties.

Chardonnay took the biggest fall, dropping 26% from the previous year, a reduction of 194,000 tons, the equivalent of 32 million gallons. This means that there will be 160 million fewer bottles of Chardonnay trying to elbow their way onto store shelves and restaurant lists. Here are the Chardonnay results, region by region.

  • Central Coast Chardonnay decreased a massive 89,000 tons. That’s a reduction from 2005 of 15 million gallons of wine, which should help to drain a flooded market.

  • The Northern Interior also slimmed down on Chardonnay, dropping 60,000 tons, the equivalent of about 10 million gallons.

  • The Central and Southern Interior tipped the scales at 27,000 tons less than 2005, a reduction of about 4.5 million gallons.

  • The North Coast trimmed off about 19,000 tons, or a little more than three million gallons.

This means that there will be 160 million fewer bottles of Chardonnay trying to elbow their way onto store shelves and restaurant lists.

The bulk market for Chardonnay has been busy. Russian River, Sonoma County and Napa Valley have all been hot appellations with more demand than supply. We have recently moved some of the large Central Coast Chardonnay inventories that had been carried over from the 2005 harvest. Some
buyers have picked up Coastal 2005 wines instead of purchasing 2006 Interior Chardonnay, paying mostly in the $3.00 to $5.00 range for large lots. There has also been good demand for 2006 Interior Chardonnay in the $3.00 to $4.50 per gallon range. The Chardonnay grape market has also been active, especially in Russian River Valley, Carneros, Napa, and Sonoma County.

Cabernet Sauvignon registered the next biggest drop in absolute numbers, down 121,000 tons. That’s the equivalent of 20 million gallons or almost 100 million bottles of wine. Every region

was down:

The Northern Interior dropped 35,000 tons

The Central Coast fell 32,000 tons

The Central and Southern Interior dropped by 31,000 tons

The North Coast was down 23,000 tons.

While there is still a large supply of 2005 Cabernet Sauvignon in bulk, sales have picked up. Napa Valley Cabernet has sold mostly between $16.00 to $22.00 per gallon, with small lots of excellent wines spiking into the low $30s. Alexander Valley and Sonoma County Cabernet has been bringing $7.00 to $15.00. Paso Robles Cabernet has been mostly $5.50 to $7.00 in selective purchases. There has been early, if selective, interest in Cabernet Sauvignon grapes from Napa and Sonoma. We have also had some activity for top quality Cabernet Sauvignon in Mendocino.
Next in the lineup is Zinfandel. Production for a combination of red and white Zinfandel fell 24%, a total reduction of 108,000 tons or almost 18 million gallons. The big drop in Zinfandel comes from the Northern Interior, down 72,000 tons, and the Central and Southern Interior, down 30,000 tons.
Export markets remain active for red Zinfandel in bulk and there has been some buying for domestic programs as well. We have active buyers looking for Central Coast Zinfandel grapes and old vine Zinfandel from Lodi, as well as Zinfandel from Dry Creek and Napa Valley.

The 2006 diet routine has a way to go to get Merlot in shape. Merlot did shed 22% compared to the beefy harvest of 2005. But it was still almost 7% above its five year average, which is more than the market needs. The biggest reduction in Merlot came in the Northern Interior, down 37,000 tons, or six million gallons. The Central Coast also tightened the Merlot belt, down 22,000 tons or about 3.6 million gallons. The Central and Southern Interior dropped by 19,000 tons and the North Coast shed 16.5% or 12,500 tons.

Lower tonnage and moderate sales growth have stimulated a few flickers of life in what was a dead Merlot market. Most of the sales have been from the 2005 vintage and mostly from the Coastal areas. We have sold Sonoma Merlot in the $7.00 to $8.00 range and Central Coast in the $3.50 to $7.00 range. But there is still an ocean of Merlot looking for a home.
Sauvignon Blanc declined 6% from last year but it is still up 28% over its five-year average. Sonoma and Lake Counties each had their biggest Sauvignon Blanc crops ever. Napa, Lodi and the Delta each had the second largest crops in their history. Demand is strong in Napa for both bulk wine and grapes.
The Syrah crop managed to fall 20% from last year but still bring in the second biggest crop in California history. Statewide, the crop fell by about 30,000 tons or 4.9 million gallons. The crop in the interior regions was close to its five year average. The crop in the coastal areas, although down sharply from 2005, was well above its five year average.
Statewide, market darling Pinot Noir climbed a much-needed 12% above last year and a remarkable 55% over the five-year average. But that gain of 11,000 tons or 1.8 million gallons reflects very different trends in the Central Coast as compared to the North Coast:

  • The Central Coast actually dropped in production by almost 6,000 tons, the equivalent of nearly a million gallons.

  • The North Coast came on very strong, with an astounding increase of nearly 17,000 tons or 2.8 million gallons.

  • The Northern Interior gained 1,500 tons.

  • The Central and Southern Interior dropped 1,700 tons.

Demand for Pinot Noir in the bulk market continues strong. We have a number of sellers trying to tie Pinot Noir to Merlot and other varieties but these package deals are not moving very fast. We sold several North Coast and a few Central Coast 2006 Pinot Noir lots not tied to other varieties. Prices are down slightly from last year but demand remains very strong.

Pinot Grigio continued its rapid rise, up 16% from 2006 and up 128% from its five-year average. The biggest gain was in the Central and Southern Interior, a gain of over 6,000 tons or more than a million gallons. The Northern Interior climbed by 3,600 tons. The North Coast gained 40% over 2005 but on a much smaller base, up 1,200 tons. Demand for Pinot Grigio in bulk and as grapes remains strong.
Of Fees, Flies and Fleas

The fly said to the flea, “I charge a fee.” The flea said the fly, “This flea flees fees, so fly.” Turrentine Brokerage – and I don’t want to shock anyone here – charges a fee for its services. Over the last 34 years, we have sold over a billion dollars of grapes and wines for winery clients. And, while selling that rather massive amount of product, we have rarely discussed our fees with our winery clients. We have also sold hundreds of millions of dollars of grapes for growers and we often discuss fees with the growers. What’s the difference between wineries and growers when it comes to discussing our fee? Wineries recognize that sales, marketing and strategic planning are key business functions, even for grapes and wines in bulk. A fair number of growers, on the other hand, really do not consider sales, marketing and strategic planning to be intrinsic parts of their businesses. When the market is slow, of course, some growers will call us every week and will even offer us two or three times our standard rate to sell their grapes. But when an actual buyer or two appears on the horizon, some of the same growers will do everything they can to avoid paying a fee. Other growers are happy to pay our fee when a winery makes its first tentative purchases, but they would like to cut us out if the winery comes back for multiple years.

Now I understand all of this. I have cheap Scottish blood flowing in my veins and I hate paying fees myself, unless I am getting real value for my money. So what’s the value for a grower who hates to pay fees?

  • The Brands – we keep grower clients informed about which brands are hot and where the new opportunities are arising. We let them know when brands change plans - and when they change hands.

  • The Players – the players are constantly changing but we keep grower clients in contact with the right folks at the right potential buyers, from the field rep to the president and all stations in between.

  • The Market – the grape market is in constant flux. We share insight gained from thousands of grape deals closed with buyers and sellers all over the state, from small lots to thousands of tons. We also share unique insight gained from largest volume of bulk wine sales in California, sales that take place every day and give exclusive, real time information about market dynamics.

  • The Long-Term Trends – in the grape business, a grower either plays the long-term trends or the trends play him. Turrentine Brokerage has an unparalleled record of predicting long term trends and helping clients to profit from them.

  • The Negotiations – we close grape deals every working day. We can guide a grower around the pitfalls and towards the best opportunities.

Grape growing is a long-term business and most growers want long-term contracts if they can get them. We price our services much lower than some others because we are focused as much as possible on the long-term. Many growers see the logic of working closely with us when the market is dead. But when the market comes to life again, they start playing hard to get. The irony is that we can only work a limited amount of magic when the market is flooded. But when the market starts moving, we can help growers tap a tremendous opportunity. In a seller’s market, growers get the chance to choose the best long-term customers for their grapes. This is a rare opportunity. Usually it works the other way around and the buyers are the ones who get to carefully select their suppliers. But once in while in the wine business, the dynamic shifts for a brief spell and growers – if they understand what’s going on - get the opportunity to pick the best long-term partners. To do this intelligently, growers need the best information they can get about the brands, the players, the market, the trends and the contracts. With this help, they can make wise long-term decisions from a wealth of choices. Our fees are then insignificant compared to the value and peace of mind.

Tel 415.209.9463 I Fax 415.209.0079 I www.turrentinebrokerage.com I grapes, wines in bulk, case goods, barter, strategic planning

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