OIV Wine Marketing Program Selling Winegrapes : Pricing, Market, & Contracts Grape Supply and Economics of Production July 21, 2016 University of California, Davis
21 DEDICATED BROKERS IN 8 COUNTRIES GLOBALLY BASED TO BUILD YOUR BUSINESS WORLDWIDE
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
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
Points to Discuss Overview Grape Market/Bulk Market Grape Contracts Questions/Thoughts
Sales Demand
Year End 2015 Statistics 2016 (thru March) California Sales California Sales (Domestic & Export): + 1% + 5% Imports Casegoods : + 4% + 8% Imported Bulk by Wineries: - 4% + 18% Total (All) US & Import: + 2% + 4.5% Premium Sales (All) Coastal Warehouse US Shipments: + 6% - 3% Sourced from Gomberg-Frederickson
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 26.5 7% 12% $2,750 23% $10 up to $14 Premium 24.3 8% 11% $1,950 17% $10 & Over Subtotal Premium $7 up to $10 Popular Plus 57.0 7% 27% $6,110 52% 45.0 2% 21% 2,430 21% $3 up to $7 Popular 69.0-1% 32% $2,310 20% Up to $3 Economy 43.0-6% 20% $920 8% Up to $10 Subtotal Everyday Total Table Wine 157.0-2% 73% $5,660 48% 214.0 0.5% 100% $11,770 100% Sourced from Gomberg-Frederickson
2015 CRUSH
Supply/Demand Dynamics Before 2015 Harvest Long to Balanced Questions: Bulk Market Sales Growth Crop Size? Buyers Buying Selling Buyers
Tons in Millions Statewide Grape Crush 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Winegrape Other Crush
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
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 1,000,000 500,000 0 Total Winegrapes Total Crush 2011 2012 2013 2014 2015
TONS State Regional Total Tons 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 North Coast Central Coast & So. Cal North Interior C & S SJV 2011 2012 2013 2014 2015
TONS State Tonnage Totals by Variety 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 Chard Cab Sauv Merlot Zin 2011 2012 2013 2014 2015
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 2011 2012 2013 2014 2015
California State Results State Tonnage Totals 2014 2015 % chg (2014-2015) 2014 2015 % chg (2014-2015) Total Wine 3,892,796 3,704,571-4.8% $766 $692-9.7% Total Red 2,138,294 2,040,781-4.5% $891 $797-10.5% Total White 1,754,503 1,633,790 + 6.9% $607 $555-8.6% CH 718,029 633,572-11.8% $909 $840-7.6% SB 110,420 88,256-2.2% $977 $950-2.8% CS 510,179 455,594-10.7% $1,424 $1,331-6.5% ME 282,300 252,889-10.4% $791 $762-3.7% PN 245,751 184,969-24.7% $1,792 $1,717-4.2% ZN 355,599 388,396 + 9.2% $657 $605-7.9%
Sonoma & Napa Sonoma District 3 2014 2015 % chg (2014-2015) 2014 2015 % chg (2014-2015) CH 87,381 64,209-26.5% $1,973 $2,070 + 4.9% CS 45,772 32,947-28.0% $2,566 $2,647 + 3.2% ME 16,990 12,031-29.2% $1,628 $1,700 + 4.5% PN 47,677 30,677-35.7% $3,259 $3,519 + 8.0% Napa District 4 ZN 15,597 13,071-16.2% $2,554 $2,710 + 6.1% 2014 2015 % chg (2014-2015) 2014 2015 % chg (2014-2015) CH 30, 571 21,145-30.8% $2,392 $2,530 + 5.8% CS 69,530 53,195-23.5% $5,836 $6,240 + 6.9% ME 18,923 14,027-25.9% $2,907 $3,068 + 5.5% PN 9,579 6,248-34.8% $2,518 $2,648 + 5.2% ZN 4,602 4,009-12.9% $3,393 $3,419 + 0.8%
Central Coast Monterey District 7 2014 2015 % chg (2014-2015) 2014 2015 % chg (2014-2015) CH 124,957 84,397-32.5% $1,210 $1,290 + 6.6% CS 31,709 18,777-40.8% $1,141 $1,221 + 6.1% ME 34,324 24,204-29.5% $1,043 $1,087 + 4.2% PN 62,980 31,969-49.2% $1,677 $1,814 + 8.2% SLO/SB District 8 2014 2015 % chg (2014-2015) 2014 2015 % chg (2014-2015) CH 46,011 33,983-26.1% $1,300 $1,374 + 5.7% CS 51,837 32,740-36.8% $1,452 $1,447 + 0.3% ME 19,131 15,740-17.7% $1,032 $988-4.3% PN 27,494 17,012-38.1% $2,646 $2,955 + 11.7%
Supply / Demand Dynamics Short to Balanced Questions: Sales Growth Cost Future Crop Size? Buyers Buying Selling Sellers
GRAPE MARKET
Psychological Adjustment
2016 Grape Market Early/Mid Season Very active in the North Coast Active in Central Coast Cautious activity in the Valley Buyers aggressive once they determined needs Focus on Cab Sauv, Pinot Noir, and Chard, Sauv Blanc
2015 Grape Market Late Season?? Crop size Avg Minus in Coast; Avg in Valley Hard to find any in demand varieties Still some fruit available in Valley and specific varieties in Coast. Some growers considering making wine Are sellers asking for too much?
Alternative Crop Choices Value in Billions of Dollars Sourced from United States Geological Survey, USDA, NASA
Supply Potential - All Wine Est. California Winegrape Bearing Acres, 2013-2017 350,000 300,000 Includes 2% Coastal Attr ition Rate and 6%Interior Attrition Rate -1% 1% 0% 250,000 200,000 150,000 1% 2% 2% 6% 6% 5% 100,000 50,000 - High Mid Value 2013 2014 2015 2016 2017 Sourced from Allied Grape Growers
BULK MARKET
Bulk Market Overall balanced market Movement of bulk inventory, pricing up Activity levels are positive Current Bulk Market: CH high demand RRV and other areas SB Large volume of demand, Light 2015 Crop helped ME Older vintage inventory; limited demand ZN Large 2013 vintage still looms; bulk market slow PN Short in all areas of CA CS High Demand, especially Sonoma & Napa
Bulk Market Pricing INTERIOR COASTAL SONOMA NAPA CHARDONNAY SAUV. BLANC $3-5 $7-9 $9-15 $10-14 $4-7 $10-16 $15-20 $15-20 $3-4 $4-8 $5-8 $7-10 $6-10 $10-15 $14-18 $15-20 $Prices Pre-Harvest $Prices Post-Harvest
Bulk Market Pricing INTERIOR COASTAL SONOMA NAPA CAB SAUV MERLOT ZINFANDEL PINOT NOIR $6-8 $11-16 $21-26 $32-40 $7-10 $16-22 $23-30 $38-50+ $3-5 $6-8 $8-14 $13-18 $5-7 $10-14 $13-16 $20-25 $5-7 $7-11 $14-18 $15-20 $6-9 $10-16 $19-25 $18-25 $6-8 $9-14 $15-23 $16-20 $8-10 $15-22 $22-32 $22-28 $Prices Pre-Harvest $Prices Post-Harvest
Brand Adjustments New Supply Market Wineries Rationalizing Supply & Brand Positioning Maintain Margin/Brand Growth Options Considered Raising Bottle Price Limit Sales Growth Adjust Sourcing Strategy Competitive Wine Market
Appellation Migration Napa Sonoma North Coast Lake Central Coast Multi County Coastal California
The Market Has Changed! Buyers back to being buyers again for now Shorter supply could push producers to take bottle price increases or change sourcing plan Sellers selling too cheap; Buyers paying to much The Dance Continues Relationships Beneficial to Both Parties Still The Objective Global dynamics of wine business with a strengthening dollar What is a normal crop? That answer has a big effect on the future supply/demand?
GRAPE CONTRACTS
Wine / Grape Market Long or Short Grower Need a home! Please! Grapes For Sale Cheap! Help! The other buyer had a more comfortable chair
Management of Quality & Return Return per Acre = (Tons x $/Ton) Farming Costs Winery Value = Quality / Price per Unit($/Ton) What opportunities exist to maximize return per acre and winery value to benefit both the grower and winery and deliver consumer value
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 (recognizing the supply/ demand forces in place).
Length and Types of Contracts Spot Market Contracts - Less than one year to harvest. Based upon short term demand. S/D usually clear to both parties. Intermediate Contracts - Generally two to five years. Both sides trying to out-guess S/D. 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.
Key Elements of Winegrape Contracts Location - How much flexibility? Quantity - Is it acreage or tonnage? Pricing - Fixed, formula, reference, or at discretion of buyer? Payment - Terms can impact effective price. Standards - Sugar, ph, acid, MOG, rot, etc. Key word is reasonable. What about adverse weather?
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 change as well as risk of loss. Liability after delivery.
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? Security Interest for Grower - The importance of the grower s lien. Remedies for Breach and Disputes - Litigation, arbitration or liquidated damages? Where?
Contracts 2014-2015 1-3 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
Contracts 2016 3-5 year contract terms 10-15 year planting Contracts Pricing with fixed or min pricing and an upside on contract if market improves Min more discussed than Max Bonuses/Quality incentives but wineries willing to accept fruit Wineries more willing to work with growers on quality parameters Brix, Color Reference pricing used in Coastal areas for future price adjustments
GLOBAL COMMENTS
Shifting Supply Paradigm SA BRANDS SA AR BRANDS NZ BRANDS AR NZ CH BRANDS CA BRANDS EU BRANDS CH CA BRANDS EU AU BRANDS AU OLD CONSUMER PERCEPTION NEW CONSUMER PERCEPTION
Tons in Millions WORLD PRODUCTION 9 8 7 6 5 4 3 2 1 0 2013 2014 2015 2016
EUR-USD, Jan 14- Nov 16 Sourced from Rabobank
Current Market Conditions International World production was balanced after now tight due to 2016 southern hemisphere Casegood imports up; Bulk imports down Everyone wants into US market; Casegoods are the priority Prosecco continues growth, NZ Sauvignon Blanc New plantings everywhere
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
Ciatti Reports / Publications California Market Report World Report www.ciatti.com THANK YOU FOR YOUR TIME AND ATTENTION Glenn Proctor glenn@ciatti.com 415.458.5150
Current Market Conditions Domestic 2015: Tale of two harvests Past vintage bulk inventories being depleted Supply Balancing Interior grapes in demand: Coastal buyers looking for availability and lower cost Big demand for Coastal Cab; Napa/Sonoma grapes/bulk Sales of premium bottle segments ($12-$20+$20+) rise Sales of value bottle segments ($7 and under) struggle Domestic Casegoods sales flat overall (+1%); but better in 2016
Wine / Grape Market Short to Long? Grapes For Sale Cheap! Help! Three Years of Healthy Crops has filled our tanks IS THIS GOOD or BAD?
2015 Grape Market Mid Season No frost; Cluster counts and crop expectation - average plus Buyer giving notice on contracts Wineries putting own fruit on market Market activity slowed in all regions; Very limited activity Buyers waiting, do not want to set market
Acreage & Grape 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 will be planted this year. Sourced from Allied Grape Growers
New Grape Seller Remaining Growers have learned to Survive Bulk Market Diversification vs. Desperation More Price Maker than Price Taker Bulk Private Label/ Own Label Lengthened selling period providing options Not as reliant on traditional buyers Grape prices are compared to other options
California State Results State Tonnage Totals Total Wine 2013 2014 2015 % chg (2013-2014) 2013 2014 2015 % chg (2013-2014) 4,245,852 3,892,796 3,704,571-8.3% $749 $766 $692 + 0.8% Total Red 2,405,942 2,138,294 2,040,781-11.5% $836 $891 $797 + 4.7% Total White 1,824,625 1,754,503 1,633,790-4.0% $623 $607 $555-4.2% CH 758,382 718,029 633,572-5.3% $908 $909 $840-0.7% SB 127,679 110,420 88,256-13.5% $946 $977 $950 + 2.8% CS 524,248 510,179 455,594-2.5% $1,334 $1,424 $1,331 + 5.7% ME 346,195 282,300 252,889-18.5% $764 $791 $762 + 3.0% PN 259,897 245,751 184,969-5.4% $1,734 $1,792 $1,717 + 1% ZN 469,259 355,599 388,396-24.2% $668 $657 $605-2.2%
Sonoma & Napa Sonoma District 3 2013 2014 2015 % chg (2013-2014) 2013 2014 2015 % chg (2013-2014) CH 87,884 87,381 64,209-0.6% $1,917 $1,973 $2,070 + 2.9% CS 44,256 45,772 32,947 + 3.4% $2,426 $2,566 $2,647 + 5.8% ME 18,785 16,990 12,031-9.6% $1,598 $1,628 $1,700 + 1.9% PN 54,827 47,677 30,677-13.0% $3,077 $3,259 $3,519 + 5.9% ZN 20,172 15,597 13,071-22.7% $2,452 $2,554 $2,710 + 4.1% Sonoma District 3 2013 2014 2015 % chg (2013-2014) 2013 2014 2015 % chg (2013-2014) CH 87,884 87,381 64,209-0.6% $1,917 $1,973 $2,070 + 2.9% CS 44,256 45,772 32,947 + 3.4% $2,426 $2,566 $2,647 + 5.8% ME 18,785 16,990 12,031-9.6% $1,598 $1,628 $1,700 + 1.9% PN 54,827 47,677 30,677-13.0% $3,077 $3,259 $3,519 + 5.9% ZN 20,172 15,597 13,071-22.7% $2,452 $2,554 $2,710 + 4.1%
Central Coast Monterey District 7 2013 2014 2015 % chg (2013-2014) 2013 2014 2015 % chg (2013-2014) CH 116,540 124,957 84,397 + 7.2% $1,186 $1,210 $1,290 + 2.0% CS 36,015 31,709 18,777-12% $1,058 $1,141 $1,221 + 7.9% ME 37,927 34,324 24,204-9.5% $1,016 $1,043 $1,087 + 2.6% PN 56,044 62,980 31,969 + 12.4% $1,692 $1,677 $1,814-0.9% SLO/SB District 8 2013 2014 2015 % chg (2013-2014) 2013 2014 2015 % chg (2013-2014) CH 55,400 46,011 33,983-16.9% $1,231 $1,300 $1,374 + 5.6% CS 56,464 51,837 32,740-8.2% $1,358 $1,452 $1,447 + 6.9% ME 24,734 19,131 15,740-22.7% $1,029 $1,032 $988 + 0.3% PN 28,956 27,494 17,012-5% $2,629 $2,646 $2,955 + 0.6%
Global Wine Supply (MHL) 2003-2014 GLENN TO ASK RABOBANK FOR UDATED SLIDE Sourced from Rabobank
Global Bulk Market Pricing CA CHILE AUSTRALIA SOUTH AFRICA CHARDONNAY $4.00 NA $2.95 $2.40 PINOT GRIGIO $6.50 $3.80 $3.65 NA CABERNET SAUVIGNON $7.00 $2.50 $3.00 NA MERLOT $5.00 $2.50 $3.00 NA
Gallons in Millions Bulk Wine Imports Into The US 30 25 20 15 10 5 0 2012 2013 2014 Source: US Department of Commerce, Gomberg, Fredrikson & Associates
Final Thoughts Lighter 2015 crop has helped balance; contrasting harvest Value brands struggle, premium segment rising Bulk Imports replace lower end grapes; will continue Import casegoods up Strong Dollar Premium brands evaluate sourcing strategy New Acres Loom More Acres Needed?? Competition for Consumer