Grapevine: The Life and Times of California Small Producers
The California agricultural industry is the juggernaut of the food industry. It supplies more farmed products to the world than any other nation. On a micro level, the California wine industry supplies over 90 percent of wine consumed domestically. And wine is big business in the United States. Over 80 percent of all wine is produced by 2 percent of winemakers.
These winemaking behemoths impact the entire food chain, not to mention the influence they exert on consumers’ drinking habits.
But what about the other 98 percent? Whether they are hobbyists dabbling in premium wines as a pastime or dedicated farmers seeking to eke out a living, these winemakers must cope with the same economic conditions and environmental vagaries as the giants of the industry, yet oftentimes without similar capital wherewithal.
Just in the last two years, I’ve noticed changes occurring up and down the California coast that are affecting the future of wineries, but seem to be placing a heavier strain on small producers as they cope with a realignment of the industry.
So what are these conditions and how are the 98 percent coping with them?
1. Economics and finances: A number of the small producers set out in the 1970’s and 1980’s as ambitious, idealistic farmers seeking to “get back to nature” and “buck the establishment.” Back then land was inexpensive and their energy for farming that land was boundless.
Fast forward to the 21st Century.
Land values have skyrocketed. Prices for prime vineyard land have been growing at an average five to 10 percent. Today, an acre of prime Napa Valley land costs a whopping $150,000. (By comparison, land in Tuscany’s Chianti Classico averages $50,000). The astute winemaker investing in land in the late 1970’s is living on and farming valuable property. But as many investors found out in the Great Recession, equity does not generate the cash flow necessary to meet the rising costs of running a business. Longtime winemakers are overleveraged and are being forced to sell their operations, at times at significant discounts.
2. Replanting vines: Grapevines do not age gracefully. Production begins to diminish after 20 to 30 years; vines are typically replaced within 30 years of planting. It is now that time in the vineyard life cycle in the United States. It is estimated that 15 percent of grapevines in Napa Valley will be replaced in the next few years – at a hefty cost of approximately $50,000 per acre. This is placing additional stress on cash-strained winemakers.
3. Mother Nature: She smiled down on California’s winemakers in 2012 and 2013 with excellent vintages, which produced excellent fruit and yields. The 2014 vintage is progressing well, with the impact of the prolonged drought not yet having any material impact on yields. Hope springs eternal in the breast of the stressed farmer.
4. Succession: As the first generation winemakers of the 1970’s and 1980’s near retirement age, there is rarely a family member willing, or ready, to take over the reins.
Winemakers in the United States face much higher costs than their Western European multi-generational counterparts and therefore a higher cash breakeven point. From the significant cash investment in land to the hired help to manage and operate the winery, smaller wineries seem to be on the cusp of insolvency more often than not. Not an appealing proposition for the next generation, if indeed there is one in the family portrait.
As the California wine industry heads into the 2014 harvest season, the long term effects of the Great Recession, and Father Time, are playing out. Consolidation in the last two years has been higher than any in recent memory. The 2 percent are slowly transitioning into the 1 percent as retiring or cash-strapped small producers exit.
What will the next two years bring to this industry? Perhaps only time – and the banks – will be able to tell us.
Nick Antonaccio is a 35-year Pleasantville resident. For over 15 years he has conducted numerous wine tastings and lectures. He also offers personalized wine tastings and wine travel services. Nick’s credo: continuous experimenting results in instinctive behavior. You can reach him at nantonaccio@theexaminernews.com or on Twitter @sharingwine.
