The Wine Cycle, and Where we are Today

ASA No CalDecember 10, 2009

Tony Correia, ARA, MRICS

“…I often wonder what the Vintners buy

One half so precious as the Goods they sell.”

The Rubaiyát of Omar KhayyámSeventy-First Quatrain

First Edition of the Translation

by Edward Fitzgerald

Manic-Depressive Wheel of FortuneManic-Depressive Wheel of Fortune

Copyright 2005Turrentine BrokerageAll Rights Reserved

DEMAND

EXCEEDS

SUPPLY

SUPPLY

EXCEEDS

DEMAND

Wine Business Monthly

October 2001

The Wine Cycle; California ChardonnayThis Time, It’s Different….???

0

100

200

300

400

500

600

700

800

79 82 85 88 91 94 97 00 03 06

Pro

duct

ion

(1,0

00 T

ons)

$500

$700

$900

$1,100

$1,300

Pri

ce p

er T

on

"Those who cannot remember the past are condemned to

repeat it,"

Santayana's Law of Repetitive Consequences

Is the Cycle

Broken??

• Is The Wine Cycle Broken?

•Nope, its Global

WHAT’S DOWN THE ROAD FOR GRAPE GROWERS?

The Future

Wine Sales??

The Wine Cycle

Quality, and the Perception of Value, Continues to be the key to

Survival, Today, andSuccess, Tomorrow.

2009 Crush• Spot grape market was dead last half of

the growing season. Note; Spot market is NOT the whole grape market, many grapes were sold under long-term contracts

• Wineries which were suffering slow sales did not buy grapes, some actually sold grapes in competition with growers

• Some Wineries are doing quite well, but had their grape supplies secured, so also did not buy grapes

2009 Crush• Some Growers custom crushed their

unsold grapes, and now waiting to sell their bulk wine, hoping for a stronger market

• Imports hitting some segments HARD• (Some Bulk Imports have TRIPLED)

Industry is holding its breath, waiting for 4th Quarter wine sales results

Is the Sky Falling?How would you feel if the

world was falling apart all around you,

Pieces of the sky were falling in your neighbor’s yard,

But not on you….Before Believing

Danny Flowers

California Wine -

“Cheap is Chic”•Consumers

“Buying Down”–(Short or Long Term

Phenomenon?)

2007Isn’t this a lovely wine??

Parker 95. $350 a bottle…

What a cool guy!!!!

2009Isn’t this a lovely wine??

Costco. $15 a bottle…

What a cool guy!!!!

California Wine - Cheap is Chic”

Consumers “Buying Down”– (Short or Long Term Phenomenon?)

Impact on Growers?– Can I sell my grapes?– At what Price?– When will I get paid?– And WILL I get paid?

Wine prices drive grape prices which drive land and vineyard prices, ergo…

Vineyard Markets

– Credit available, but only for “qualified”, “solid” borrowers, FOCUS ON CASH FLOWS

DEBT SERVICEABILITY

– Buyers waiting on the sidelines;

One person’s problem is another’s opportunity.

• Financial stress already apparent in many markets

• Vineyard values tend to be “sticky”

• Good properties are always good properties, Napa Valley is still Napa Valley. Best properties in best areas most insulated from stress.

• Marginal properties, and secondary or tertiary areas, feel impact if/when grape prices slide and growers suffer losses.

Vineyard Markets

What’s planted in California, stays in

California•Few new plantings in the past 3-5 years, and few expected for several more.

Wine Grape Acres (1,000s) “What’s planted in California, stays in

California”

SJV

Others

Lodi

0

100

200

300

400

500

1995 1997 1999 2001 2003 2005 2007

North Coast

Cent Coast

Non-Bearing Acres as % of Total

0

20,000

40,000

60,000

80,000

100,000

1995 96 97 98 99 2000 01 02 03 04 05 06 07 2008

3

Others

14

13

12 11

8

7

4

20% - 1999

5.8% 2008

5.7% 2004

New Acres as % of Bearing

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

76 80 84 88 92 96 2000 04 2008

New

Acr

es P

lant

ed

4 Yrs

3 Yrs

11 Yrs

Pinot Noir; Total Non-Bearing Acres

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1999 00 01 02 03 04 05 06 07 08

S Barbara

Clarksburg

Lodi

Sonoma

Oregon

Monterey

Pinot; Non-Bearing Acres as % of Total Acres

0%

10%

20%

30%

40%

50%

60%

70%

80%

1999 00 01 02 03 04 05 06 07 08

S Barbara

Monterey

Oregon

Lodi

Clarksburg

Sonoma

Real Estate Markets?

• So, what does this mean to vineyard and winery markets?

• Some background, concepts, and history

Can an Ag Business have “Value”?

• Example: Kosta – Browne Winery• High end Pinot Noir producer

• 11,000 cases a year, – all sold direct to consumer

• No owned vineyards; buy grapes

• No owned winery facility; building and equipment leased

Note: Ten years ago, both Kosta and Browne were waiting tables…started this venture with their tip money…

Example

• Kosta – Browne Winery• Acquired Fall 2009

• Sale reported at “Somewhat less than

$40 million

Asset Leasing Models; REITsVintage Wine Trust

Launched March 2005, liquidated 2008

High rental rates

VINREIT

High profile industry player

High rental rates

Some signs of stress appearing

(Cosentino, Havens)

Vineyard Investment Models

Premiere Pacific VineyardsBusiness model: CALPERS funding; buy

superior sites, develop top-end premium vineyards. Original plan was to sell vineyards as they matured, but that has not met with success, so plan has morphed towards leasing, but also little success with that model.

Silverado Partners

Buy vineyards; or buy or lease land and develop vineyards. Coastal concentration.

Add value.

Vineyard Value Components

$0

$25,000

$50,000

$75,000

1

Overhead

Trellis

Vines

Water System

Water Source

Ld Prep

Land

Vineyard Value Components (Central Coast)

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

1

Overhead

Trellis

Vines

Water System

Water Source

Ld Prep

Land

Valuation for Financial Reporting

New Vineyard Units $ / Unit Value

Vines 77 $4,541 $349,657

Trellis 77 $4,023 $309,771

Irrigation System 77 $1,845 $142,065

Wells & Pumps $154,396

Land Improvements 77 $1,243 $95,711

Roads, Fencing $31,650

Building 2,450 $15 $36,750

Water Rights 80 $3,000 $240,000

Land, Vineyard 80 $16,000 $1,280,000

New Vineyard 80 $33,000 $2,640,000

–Discounted Cash Flow Analysis

Category 0 1st 2nd 3rd 4th 5th 6th

Land Cost $100,000

Development Costs $11,127 $7,470 $71 $0 $0 $0

Cultural Costs $1,934 $670 $2,958 $1,959 $1,934 $1,934

Harvest Costs $0 $0 $100 $300 $600 $900

Overhead Costs $1,486 $1,494 $1,600 $1,682 $1,682 $1,682

Total Costs $14,547 $9,633 $4,729 $3,941 $4,216 $4,516

Grape Yields (Tons/acre) 0.00 0.00 0.50 1.50 3.00 4.50

Less Income $0 $0 $2,000 $6,000 $12,000 $18,000

Net Cash Costs ($14,547) ($9,633) ($2,729) $2,059 $7,784 $13,484

Plus; Proceeds from Sale of Mature Vineyard, less Costs of Sale @ 5% $209,000

Net Cash Flows ($100,000) ($14,547) ($9,633) ($2,729) $2,059 $7,784 $222,484

Costs Per Acre (by year of development)

($100,000)

($50,000)

$0

$50,000

$100,000

$150,000

$200,000

0 1 2 3 4 5 6

VINEYARD DEVELOPMENT AND SALEInternal Rate of Return = 11.32%OAR of Sale = 6.13%

Land Purchase @ $100,000/acre

Vineyard Development

Vineyard Sale @ $220,000/acre

Operating Income

650,320750,000

1,719,000

3,113,800

266,880

Equipment Residence Vineyards

Land Winery

Total Value of Estate Winery Property : $6,500,000

650,320

333,302

500,000

1,780,498

500,000

Equipment Caves Site Permit Buildings

Total Value of Winery Facility : $3,764,120

The California Vineyard Market

Central Valley

North Coast

Central Coast

Where are we?

We’re in the Wine Business,

in California.

Central Valley• Low cost grapes for low cost

wines – “Cheap is Chic”

• Few, Big, grape buyers

•Big Grape Growers

•Water!!

WATER ? • Severe Water Shortage in both

Federal and State Central Valley Water Projects

• Supplies in many Coastal Areas dependent on captured rainfall or fragile groundwater aquifers

Fresno & Madera County Wine Grape Vineyards

$0

$3,000

$6,000

$9,000

$12,000

200820052002199919961993

Fresno & Madera County Vineyards vs. Thompson Seedless Prices

$0

$3,000

$6,000

$9,000

$12,000

200820052002199919961993

$50

$100

$150

$200

$250

Fresno & Madera County Vineyards vs. Average WINE

Grape Prices

$0

$3,000

$6,000

$9,000

$12,000

200820052002199919961993$100

$150

$200

$250

$300

Fresno & Madera County Vineyards vs Top Varieties

$0

$3,000

$6,000

$9,000

$12,000

200820052002199919961993$100

$150

$200

$250

$300

$350

$400

$450

Rubired

French Columbard

Lodi – Delta Area

20% of Total State Production

- Chardonnay 27% (10+ Million Cases @ $5+/bottle)

- Cabernet 26% - Zinfandel 34%

(10+ Million Cases @ $4+/bottle)

- Pinot Grigio/Gris 38%

Lodi Area Wine GrapesVineyard Values vs Average Grape

Prices

$0

$5,000

$10,000

$15,000

$20,000

$25,000

200820052002199919961993

$0

$150

$300

$450

$600

$750

Zinfandel

Chardonnay

Coastal MarketsMarket Perceptions

• Markets are based on Perceptions

Market Perceptions 2009

Sellers think it’s still 2007.

Buyers are thinking it’s the ’30s.

2009 Vineyard Markets

• Few Sales• Few Sellers• Fewer Buyers

• Crowded Sidelines, waiting…

North Coast• Residential still soft•True “Trophy” properties

relatively insulated•Market on “PAUSE” in last

quarter 2008 and first quarter 2009.

•Vineyard buyers, and lenders, looking at

Operating Economics

•Capital, Credit issues?

Napa Valley

• strong demand for the best A+ properties in the best locations

– Oakville is always Oakville. • High percentage of winery owned

vineyards and contracted grapes

• Marginal areas still suffer

Napa County Open Land

$0

$30,000

$60,000

$90,000

$120,000

$150,000

$180,000

20082006200420022000199819961994

Napa Vineyard Values vs. Price

Chardonnay

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

20082006200420022000199819961994

$500

$1,500

$2,500

$3,500

$4,500

$5,500

Chardonnay

Cabernet

Napa Vineyard Values; Regions

$50,000 $150,000 $250,000

Prime NV

Secondary

Carneros

Outlying

Sonoma County• good demand for good properties in

good locations• more, smaller, independent growers

• Residential Soft

• Segmented Markets tied to varieties– Russian River Valley– Pinot & Chardonnay– Carneros – Pinot & Chardonnay– Alexander Valley – Cabernet– Dry Creek Valley – Zinfandel– Sonoma Coast – Pinot More

28% of total State Pinot Production

Sonoma Vineyards vs Grape Prices

Sonoma CountyDistrict Three

$20,000

$50,000

$80,000

$110,000

1994 1996 1998 2000 2002 2004 2006 2008

Sonoma Vineyards vs Grape Prices

Sonoma CountyDistrict Three

$20,000

$50,000

$80,000

$110,000

1994 1996 1998 2000 2002 2004 2006 2008

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Chardonnay

Sonoma Vineyards vs Grape Prices

Sonoma CountyDistrict Three

$20,000

$50,000

$80,000

$110,000

1994 1996 1998 2000 2002 2004 2006 2008

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Chardonnay

Cabernet

Sonoma Vineyards vs Grape Prices

Sonoma CountyDistrict Three

$20,000

$50,000

$80,000

$110,000

1994 1996 1998 2000 2002 2004 2006 2008

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Chardonnay

Cabernet

Pinot Noir

Mendocino Co. Vineyards vs Grape Prices

$0

$15,000

$30,000

$45,000

$60,000

$75,000

20082006200420022000199819961994

$600

$800

$1,000

$1,200

$1,400

$1,600

Lake Co. Vineyards vs Grape Prices

$0

$10,000

$20,000

$30,000

$40,000

$50,000

20082006200420022000199819961994

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

Monterey County Economies of Scale

> Large, efficient vineyards

Chardonnay• 90,000 tons, @ $1,200 a ton

• 48% of total County Production

• 16% of total State Production

• Six Million Cases @ $12/bottle

Monterey County Values vs. Price

$0

$10,000

$20,000

$30,000

$40,000

2008060402200098961994$500

$750

$1,000

$1,250

$1,500

$1,750

$2,000

ChardonnayCabernet

Pinot

San Luis Obispo & Santa Barbara Counties, Values vs. Price

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

20082006200420022000199819961994

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Pinot Noir

Chardonnay

Summary:

Wine prices drive grape prices which

drive land and vineyard prices

Pieces of the Sky…

• Wine prices under pressure from slow sales; and “Buying Down”

• Grape prices under pressure

• So……Land, vineyard and winery prices?

The Future? WARP!Wine Asset Recovery Program

“Cash for Cab?”

Thank You!!!

And

Drink

More

California

Wine!!!