SELLING WINEGRAPES: PRICING, MARKET, & CONTRACTS

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1 OIV WINE MARKETING PROGRAM GRAPE SUPPLY & ECONOMICS OF PRODUCTION SELLING WINEGRAPES: PRICING, MARKET, & CONTRACTS JULY 20, 2017 University of California, Davis

2 21 DEDICATED BROKERS IN 8 COUNTRIES GLOBALLY BASED TO BUILD YOUR BUSINESS WORLDWIDE

3 THE CIATTI COMPANY - 21 BROKERS WORLDWIDE - ARGENTINA, AUSTRALIA, CANADA, CHILE, FRANCE, GERMANY, SOUTH AFRICA, USA - 9 WITHIN CALIFORNIA - NORTH COAST, CENTRAL COAST, LODI, CENTRAL VALLEY & FOOTHILLS - GRAPES, JUICE, BULK WINE, CASE GOODS, JUICE CONCENTRATES, HIGH PROOF, SPIRITS, STORAGE, & PROCESSING

4 PIECES OF THE PUZZLE Sellers/Suppliers Growers Wineries Negociants Buyers Wineries Negociants Grower Processors Distributor Broker Retail Consumer Products Grapes Bulk Wine Case Goods Other Service Providers Custom Processors Storage/Barrels Bottlers

5 POINTS TO DISCUSS - OVERVIEW - GRAPE MARKET / BULK MARKET - GRAPE CONTRACTS - QUESTIONS / THOUGHTS

6 SALES DEMAND

7 2015 CALIFORNIA TABLE WINE VOLUME & REVENUE Retail Price/ 750ml Price Segment Nine Liter Cases Sold (Millions) % Chg % of Total Winery Sales Revenues (Millions) % of Total Over $25 Luxury 6.2 3% 3% $1,410 12% $14 up to $25 Super- Premium % 12% $2,750 23% $10 up to $14 Premium % 11% $1,950 17% $10 & Over Subtotal Premium $7 up to $10 Popular Plus % 27% $6,110 52% % 21% 2,430 21% $3 up to $7 Popular % 32% $2,310 20% Up to $3 Economy % 20% $920 8% Up to $10 Subtotal Everyday Total Table Wine % 73% $5,660 48% % 100% $11, %

8 2016 ESTIMATED SALES & CASE GROWTH BY PRICE POINT EXCLUDES WINERIES < 5 YEARS IN BUSINESS

9 YEAR END 2016 STATISTICS 2017 (THRU APRIL) - CALIFORNIA SALES - CALIFORNIA SALES (DOMESTIC & EXPORT): +1% -4% - IMPORTS - CASEGOODS: +3% +1% - IMPORTED BULK BY WINERIES: 0% +13% - TOTAL (ALL) - US & IMPORTS: +3% -1% - PREMIUM SALES (ALL) - COASTAL WAREHOUSE US SHIPMENTS: -1% -1%

10 2016 CRUSH

11 SUPPLY/DEMAND DYNAMICS TIGHT SUPPLY MARKET Especially on the Coast Sellers Buying Selling

12 Tons in Millions STATEWIDE GRAPE CRUSH Winegrape Other Crush

13 California Crush Districts and Regions North Coast, Districts 1-5 Central Coast & South State, Districts 6-8, 15 & 16 Northern Interior Districts 9-11 & 17 Central & Southern Interior, Districts 12-14

14 TONS TOTAL STATE TONNAGES 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 0 Total Winegrapes Total Crush

15 TONS STATE REGIONAL TOTAL TONS 2,500,000 2,000,000 1,500,000 1,000, ,000 0 North Coast Central Coast & So. Cal North Interior C & S SJV

16 TONS STATE TONNAGE TOTALS BY VARIETY 800, , , , , , , ,000 0 Chard Cab Sauv Merlot Zin

17 PRICE PER TON STATEWIDE AVERAGE PRICES $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Chard Cab Sauv Mer Zin Total WG Total Crush

18 SUPPLY / DEMAND Buyers SHORT TO BALANCED QUESTIONS: SALES GROWTH COST FUTURE CROP GROWTH? Buying Selling Sellers

19 GRAPE MARKET

20 PSYCHOLOGICAL ADJUSTMENT

21 2017 GRAPE MARKET BUYER ACTIVITY HAS BEEN EARLY, VERY SIMILAR TO LAST YEAR CHARDONNAY, PINOT NOIR, CABERNET SAUVIGNON ALL IN HIGH DEMAND, ZINFANDEL LAGGING SELLERS WERE RELUCTANT TO COMMIT EARLY WAITED TO BETTER UNDERSTAND THE MARKET LIMITED NUMBER OF OPEN GRAPES MAJORITY UNDER LONG TERM CONTRACT GRAPE MARKET SHOULD REMAIN STRONG BUYERS CONSIDERING SOURCING OPTIONS BECAUSE OF AVAILABILITY & PRICING CONTRAINTS CHALLENGE TO FUTURE DEMAND?

22 2017 GRAPE MARKET - LATE SEASON?? - CROP SIZE AVG. ON COAST; LIGHTER IN VALLEY - HARD TO FIND ANY IN DEMAND VARIETIES - STILL SOME FRUIT AVAILABLE IN VALLEY & SPECIFIC VARIETIES IN COAST - SOME GROWERS CONSIDERING MAKING WINE - ARE SELLERS ASKING FOR TOO MUCH?

23 CALIFORNIA WINEGRAPE ACREAGE EVOLVING TO REFLECT PREMIUMIZATION TREND Sourced from Allied Grape Growers, 2017 Annual Meeting Presentation

24 ALTERNATIVE CROP CHOICES Sourced from United States Geological Survey, USDA, NASA

25 BULK MARKET

26 - BUYERS FEEL THEY RE PAYING TOO MUCH; SELLERS FEEL THEY RE SELLING TOO CHEAPLY BULK MARKET - OVERALL BALANCED MARKET STATEWIDE ARE THERE CRACKS? CROP HELPED (SOME) AFTER A SEVERE SHORTAGE FROM 2015 CROP - CHALLENGE FOR BUYERS TO FIND THE RIGHT WINE AT THE RIGHT PRICE FROM THE RIGHT APPELLATION - AFTER THREE YEARS OF LARGER HARVEST & EXPANDING PREMIUM PROGRAMS FROM AVAILABLE BULK, THE SHORT 2015 CROP FLIPPED THE DYNAMICS - Q1 2016: DEPLETED BULK INVENTORIES & PRICES SHOT UP ALMOST OVER NIGHT - THE PENDULUM NEVER SWINGS SLOWLY

27 BULK MARKET PRICING INTERIOR COASTAL SONOMA NAPA CHARDONNAY $3 5 $5-8 $7 9 $10 14 $9 15 $15 20 $10 14 $15 20 SAUVIGNON BLANC $3 5 $6 8 $5 8 $8 11 $6 8 $12 15 $7 10 $14 28 $PRE HARVEST 2016 PRICES $CURRENT PRICES

28 BULK MARKET PRICING INTERIOR COASTAL SONOMA NAPA CABERNET SAUVIGNON $6 8 $7 10 $11 16 $16 22 $21 26 $25 32 $32 40 $ MERLOT $3 5 $5 7 $6 8 $9 12 $8 14 $14 17 $13 18 $21 27 ZINFANDEL $5 7 $7 9 $7 11 $11 15 $14 18 $16 22 $15 20 $20 25 PINOT NOIR $6 8 $7 10 $9 14 $15 24 $15 23 $24 32 $16 20 $20 28 $PRE HARVEST 2016 PRICES $CURRENT PRICES

29 BRAND ADJUSTMENTS - NEW & DYNAMIC SUPPLY MARKET - WINERIES RATIONALIZING SUPPLY & BRAND POSITIONING - MAINTAIN MARGIN / BRAND GROWTH - OPTIONS CONSIDERED - RAISING BOTTLE PRICE LIMIT SALES GROWTH - ADJUST SOURCING STRATEGY - NEW PREMIUM BRANDS WITH CALIFORNIA SOURCING

30 LODI/DELTA - MORE PREMIUM DESIGNATIONS - SUPPLEMENTING COASTAL SUPPLY s. S. Cent CENTRAL r al Val VALLEY l ey N. cent CENTRAL r al Val VALLEY l ey Cent CENTRAL r al Coast COAST Nor NORTH t h Coast COAST - BIGGER PART OF PREMIUM DEMAND Maj or MAJOR gr ape Gr GRAPE owing Regions GROWING of Cal REGIONS if or nia OF CALIFORNIA

31 CHANGING PRACTICES TO MANAGE COST / SUPPLY - WINERY VALUE = QUALITY / PRICE PER UNIT($/TON) - GROWER RETURN PER ACRE = (TONS x $/TON) FARMING COSTS - RISING COSTS: MARKET DEMAND, LABOR, REGULATION, ENVIRONMENTAL MITIGATION - HIGH WIRE BOX PRUNING - BRIX REQUIREMENTS PRICE ADJUSTMENTS - YIELD PARAMETERS - WINERIES BUYING VINEYARDS VS. BUYING GRAPES - ETC.

32 THE MARKET HAS CHANGED! - BUYERS BACK TO BEING BUYERS AGAIN - SHORTER SUPPLY COULD PUSH PRODUCERS TO TAKE BOTTLE PRICE INCREASES OR CHANGE SOURCING PLAN - SELLERS SELLING TOO CHEAP; BUYERS PAYING TOO MUCH THE DANCE CONTINUES - RELATIONSHIPS BENEFICIAL TO BOTH PARTIES STILL THE OBJECTIVE - GLOBAL DYNAMICS OF WINE BUSINESS WITH A STRENGTHENING DOLLAR - BIGGEST QUESTIONS: HOW FAST WILL WINE SALES GROW WITH AT HIGHER PRICES, WHAT IS A NORMAL CROP?

33 SUPPLY / DEMAND DYNAMICS Buyers Expanding Sourcing Options WHICH WAY IS THE MARKET HEADED? QUESTIONS: SALES GROWTH AT HIGHER PRICE POINTS CROP SIZE Sellers Buying Selling

34 GRAPE CONTRACTS

35 WINE / GRAPE MARKET LONG OR SHORT Grower Need a home! Please! Grapes For Sale Cheap! Help! The other buyer had a more comfortable chair

36 WI WINE/GRAPE MARKET SOME THINGS WILL NEVER CHANGE? $750 $4,000/Ton Winery Grower

37 BASIC GOAL & OBJECTIVE OF A WINEGRAPE CONTRACT - TO CLEARLY AND ACCURATELY DOCUMENT THE INTENT OF THE BUYER AND SELLER AT THE TIME OF THE AGREEMENT (RECOGNZING THE SUPPLY/DEMAND FORCES IN PLACE)

38 LENGTHS & TYPES OF CONTRACTS - SPOT MARKET CONTRACTS LESS THAN ONE YEAR TO HARVEST. BASED UPON SHORT TERM DEMAND. SUPPLY/DEMAND USUALLY CLEAR TO BOTH PARTIES - INTERMEDIATE CONTRACTS GENERALLY TWO TO FIVE YEARS. BOTH SIDES TRYING TO OUT GUESS SUPPLY/DEMAND - LONG TERM CONTRACTS GENERALLY FIVE TO FIFTEEN YEARS. BOTH SIDES CAN SEE THAT NEAR AND INTERMEDIATE SUPPLY IS SHORT. SELLER LOOKS TO PROTECT INVESTMENT WHILE BUYER LOOKS TO SECURE OF SUPPLY

39 KEY ELEMENTS OF WINEGRAPE CONTRACTS - LOCATION HOW MUCH FLEXIBILITY? - QUANTITY IS IT ACREAGE OR TONNAGE? - PRICING FIXED, FORMULA, REFERNCE, OR AT DISCRETION OF BUYER? - PAYMENT TERMS CAN IMPACT EFFECTIVE PRICE - STANDARDS SUGAR, PH, ACID, MOG, ROT, ECT. KEY WORD IS REASONABLE. WHAT ABOUT ADVERSE WEATHER?

40 KEY ELEMENTS OF CONTRACTS (2) - GROWER WARRANTIES WHAT YOU CAN AND CANNOT WARRANT - DELIVERIES WHEN, WHERE, HOW LONG AND WHO MAKES THE DECISIONS - WEIGHING AND TESTING OF GRAPES ARE THIRD PARTIES INVOLVED AND WHAT ABOUT DEDUCTS? - ALLOCATION OF RISK TIMING OF TITLE CHANGES AS WELL AS RISK OF LOSS. LIABILITY AFTER THE DELIVERY

41 KEY ELEMENTS OF CONTRACTS (3) - RENEWAL AND ASSIGNS DOES THE CONTRACT GO WITH THE GROWER OR THE LAND? IS THERE AN EVERGREEN PROVISION? WHOSE OPTION? - SECURITIES INTEREST FOR GROWER THE IMPORTANCE OF THE GROWER S LIEN - REMEDIES FOR BREACH AND DISPUTES LITIGATION, ABRITRATION OR LIQUIDATED DAMAGES? WHERE?

42 CONTRACTS YEAR CONTRACT TERMS? - PRICING BASED ON REGIONAL WINERY PRICES - MIN/MAX PRICING LIMITS - BONUSES/QUALITY INCENTIVES FOR PARTICULAR STANDARDS MET OR PRACTICES PERFORMED - FARMING PLANS WITHIN CONTRACT STRUCTURE AND UPDATE ON ANNUAL BASIS - HIGHER BRIX RANGES DEFINED IN CONTRACT AND WITH COLOR AND FLAVOR RIPENESS PARAMETERS - LIMITED USE OF REFERENCE PRICING

43 CONTRACTS YEAR CONTRACT TERMS YEAR PLANTING CONTRACTS - PRICING TIED TO CHANGE IN REFERENCE PRICING SOME WITH MULTIPLIERS OR REFERNCE TO OTHER DISTRICTS - SELLERS HAVE MORE LEVERAGE RE GENERAL TERMS AND CONDITIONS BRIX BONUS? - WINERIES WILLING TO WORK WITH GROWER ON HARVEST PARAMETERS, MECHANIZATION, CULTURAL PRACTICES, ECT. - QUALITY HURDLE HAS BEEN LOWERED FOR HOW LONG?

44 SUMMARY / CONCLUSION - BUYERS NEED SUPPLY TO MEET GROWING NEEDS - ALL BRANDS LOOKING TO GETTING CREATIVE IN THEIR SOURCING TO FIND A SUSTAINABLE MARGIN - GRAPE PRICING: LOOKS STABLE INTO FUTURE - IS THERE A CEILING? - ARE WE SEEING CRACKS IN THE BULK MARKET? - WILL SUPPLIERS LEAVE MORE EXPENSIVE APPELLATIONS AND UPSET THE CURRENT MARKET CONDITIONS? - HOW BIG WILL THE 2017 CROP BE? IS ONE BIG YEAR ENOUGH? - MORE QUESTIONS THAN ANSWERS!

45 FINAL THOUGHTS - ALWAYS BE OPEN TO NEW INFORMATION AND CHANGES IN THE MARKET - WHEN YOU HAVE IT FIGURED OUT IS USUALLY WHEN YOU STUMBLE - RELATIONSHIPS STILL MATTER - DON T LEAVE A DOLLAR ON THE TABLE BUT A NICKEL IS WORTH THE INVESTMENT - SMALL INDUSTRY CONDUCT YOURSELF AS SUCH

46 CIATTI REPORTS / PUBLICATIONS - CALIFORNIA MARKET REPORT - GLOBAL MARKET REPORT - THANK YOU FOR YOUR TIME AND ATTENTION GLENN PROCTOR GLENN@CIATTI.COM

47

48 Bulk Gallons Available Millions CALIFORNIA BULK WINE INVENTORY 6,000,000 5,000,000 4,000, Total Bulk Wine (In Millions) 3,000,000 2,000,000 1,000,000 0 Jan Jan Jan Cabernet Sauvignon Chardonnay Merlot Pinot Noir Zinfandel JAN 2015 Total JAN 2016 JAN 2017 Total Gallons ( )

49 Bulk Gallons Available Price Per Gallon NAPA 400, , , , , , ,000 50,000 0 Jan Jan Jan Bulk Chardonnay Bulk Cabernet Sauvignon Bulk Merlot Price Per Gallon CH Price Per Gallon CS Price Per Gallon ME $56 $52 $48 $44 $40 $36 $32 $28 $24 $20 $16 $12 $8 $4 $0

50 Bulk Gallons Available Price Per Gallon SONOMA 400, , , , , , ,000 50,000 0 Jan Jan Jan $32 $30 $28 $26 $24 $22 $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 Bulk Chardonnay Bulk Cabernet Sauvignon Bulk Merlot Price Per Gallon CH Price Per Gallon CS Price Per Gallon ME

51 Bulk Gallons Available Price Per Gallon NORTH COAST 1,400,000 1,200,000 1,000, , , , ,000 0 Jan Jan Jan Bulk Chardonnay Bulk Cabernet Sauvignon Bulk Merlot Price Per Gallon CH Price Per Gallon CS Price Per Gallon ME $22 $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0

52 Bulk Gallons Available Price Per Gallon CENTRAL COAST 1,400,000 1,200,000 1,000, , , , ,000 0 Jan Jan Jan $24 $22 $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 Bulk Chardonnay Bulk Cabernet Sauvignon Bulk Pinot Noir Price Per Gallon CH Price Per Gallon CS Price Per Gallon PN