OIV WINE MARKETING PROGRAM GRAPE SUPPLY & ECONOMICS OF PRODUCTION SELLING WINEGRAPES: PRICING, MARKET, & CONTRACTS JULY 20, 2017 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
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%
2016 ESTIMATED SALES & CASE GROWTH BY PRICE POINT EXCLUDES WINERIES < 5 YEARS IN BUSINESS
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%
2016 CRUSH
SUPPLY/DEMAND DYNAMICS TIGHT SUPPLY MARKET Especially on the Coast Sellers Buying Selling
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 2016 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 2016
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 2011 2012 2013 2014 2015 2016 C & S SJV
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 2016
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 2016
SUPPLY / DEMAND Buyers SHORT TO BALANCED QUESTIONS: SALES GROWTH COST FUTURE CROP GROWTH? Buying Selling Sellers
GRAPE MARKET
PSYCHOLOGICAL ADJUSTMENT
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?
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?
CALIFORNIA WINEGRAPE ACREAGE EVOLVING TO REFLECT PREMIUMIZATION TREND Sourced from Allied Grape Growers, 2017 Annual Meeting Presentation
ALTERNATIVE CROP CHOICES Sourced from United States Geological Survey, USDA, NASA
BULK MARKET
- BUYERS FEEL THEY RE PAYING TOO MUCH; SELLERS FEEL THEY RE SELLING TOO CHEAPLY BULK MARKET - OVERALL BALANCED MARKET STATEWIDE ARE THERE CRACKS? - 2016 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
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
BULK MARKET PRICING INTERIOR COASTAL SONOMA NAPA CABERNET SAUVIGNON $6 8 $7 10 $11 16 $16 22 $21 26 $25 32 $32 40 $45 55+ 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 $CURRENT PRICES
BRAND ADJUSTMENTS - NEW & DYNAMIC SUPPLY MARKET - WINERIES RATIONALIZING SUPPLY & BRAND POSITIONING - MAINTAIN MARGIN / BRAND GROWTH - OPTIONS CONSIDERED - RAISING BOTTLE PRICE LIMIT SALES GROWTH - ADJUST SOURCING STRATEGY - NEW PREMIUM BRANDS WITH CALIFORNIA SOURCING
LODI/DELTA - MORE PREMIUM DESIGNATIONS - SUPPLEMENTING COASTAL SUPPLY s. S. Cent CENTRAL r al Val VALLEY l ey N. cent CENTRAL r al Val VALLEY l ey Cent CENTRAL r al Coast COAST Nor NORTH t h Coast COAST - BIGGER PART OF PREMIUM DEMAND Maj or MAJOR gr ape Gr GRAPE owing Regions GROWING of Cal REGIONS if or nia OF CALIFORNIA
CHANGING PRACTICES TO MANAGE COST / SUPPLY - WINERY VALUE = QUALITY / PRICE PER UNIT($/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.
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?
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
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
WI WINE/GRAPE MARKET SOME THINGS WILL NEVER CHANGE? $750 $4,000/Ton Winery Grower
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)
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
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?
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
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?
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 2016-2017 - 3 5 YEAR CONTRACT TERMS - 10 15 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?
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!
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 - GLOBAL MARKET REPORT - WWW.CIATTI.COM THANK YOU FOR YOUR TIME AND ATTENTION GLENN PROCTOR GLENN@CIATTI.COM 415.458.5150
Bulk Gallons Available Millions CALIFORNIA BULK WINE INVENTORY 6,000,000 5,000,000 4,000,000 35.0 30.0 25.0 Total Bulk Wine (In Millions) 3,000,000 2,000,000 1,000,000 0 Jan. 2015 Jan. 2016 Jan. 2017 Cabernet Sauvignon Chardonnay Merlot Pinot Noir Zinfandel 20.0 15.0 10.0 5.0 0.0 JAN 2015 Total JAN 2016 JAN 2017 Total Gallons (2015-2017)
Bulk Gallons Available Price Per Gallon NAPA 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Jan. 2015 Jan. 2016 Jan. 2017 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
Bulk Gallons Available Price Per Gallon SONOMA 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Jan. 2015 Jan. 2016 Jan. 2017 $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
Bulk Gallons Available Price Per Gallon NORTH COAST 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Jan. 2015 Jan. 2016 Jan. 2017 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
Bulk Gallons Available Price Per Gallon CENTRAL COAST 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Jan. 2015 Jan. 2016 Jan. 2017 $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