San Joaquin Valley Wine & Grape Industry Forum Correia-Xavier, Inc.

1. San Joaquin Valley Wine &
Grape Industry Forum
December 5, 2012
Fresno, CA
Ben Slaughter, ARA
Correia-Xavier, Inc.

2. The Rest of the State
• Napa:
– Those guys are fine
– Strong crop in general
• Sonoma:
– Those guys are fine too
– Strong crop
– Although, some wineries didn’t take “excess”
tonnage
– Others paid cheap prices for “excess”

3. The Rest of the State
• Central Coast
– More plantings
– Strong and Stronger Values
– Paso Robles has water problems
• May be facing adjudication of water basin
• Water will limit new vineyard in Paso
• “Secondary” North Coast (Lake & Mendo)
– Solid prices
– Excess tonnage hard to find a tank

4. So, what does that mean?
• The rich are still rich
– And buying Napa wine
– Some buying high-end Pinot in Sonoma
• With back to back big coastal harvests:
– Were wineries really out of tank space?
• Where there is a will, there is a tank?
– Or do they see their wine demand as fixed?
• And don’t want to create excess supply?

5. And now, the rest of the story
• With all that coastal stuff out of the way
• How about the rest of the state?
• You know, where most of the wine comes
from…

6. How do Central Valley vineyards
compete?
• Challenge number One:
– Imports
• Challenge number Two:
– Cost of production
• Labor
• Water
• Land

7. Imports
• Panama Canal Expansion
– Target 2015
– Major ports are dredging for new ships
– Current Panamax Class Ship
• 3,000 – 5,000 containers
– New Panamax Class Ship
• 12,000 – 15,000 containers

8. That’s a lot of wine!

9. Imports
• New class of ship:
– Predicted to cut cost by 60% per “ton-mile”
– Good for export crops
• Uh, perhaps almonds?
– Bad for crops competing with imports
• Uh, Central Valley wine?

10. Imports
• August 2013, Journal of Commerce:
– Shipping company Hamburg Süd launched a new
3,800-TEU (20-foot container) ship for back and
forth trade between:
• California and Australia
– Ship’s sponsor?
• Ofelia Gallo…

11. Imports
• As the dollar strengthens, imports will get
cheaper
• Imports of inexpensive wine…
• ARE NOT GOING AWAY

12. What to do?
• Produce like hell?
• Or get the hell out of the way?

13. Cost of Production
• Farming Costs
• Is there any more cost we can trim?
– Water?
•
•
•
•
Use less water?
May not have a choice…
What’s left is more expensive
Energy (pumping cost) going up

14. Cost of Production
• Is there any more cost we can trim?
– Labor
• Robotic eyes?
• Robotic vehicles?

15. Cost of Production
• What is, truly, the cost of production?
– Build a new asset
– Earn a “reasonable” or “sustainable”
return on that asset
– Last year I left with the question:
– Can you buy $12,000 dirt and grow $300 grapes?

16. The Almond Example
• Land:
• Development:
• Total Cost:
• Yield:
• Price:
• Gross:
• Cost:
• Net:
$12,000
$5,191
$17,191
2,500
$2.00
$5,000
$3,000
$2,000

17. The Almond Example
• So, we invested $17,200 to earn $2,000
• That’s a 12% return
(a very over-simplified example)
• But, Ben, I can’t buy land for $12,000!!!

18. The Almond Example
• Land:
• Development:
• Total Cost:
• Yield:
• Price:
• Gross:
• Cost:
• Net:
$14,000
$5,249
$19,249
2,500
$2.00
$5,000
$3,000
$2,000

19. The Almond Example
• At $14,000/acre land
• That’s a 10.4% return

20. The Almond Example
• Land:
• Development:
• Total Cost:
• Yield:
• Price:
• Gross:
• Cost:
• Net:
$14,000
$5,249
$19,249
2,500
$2.25
$5,625
$3,000
$2,625

21. The Almond Example
• At $14,000/acre land and only $2.25/lb
• That’s a 14% return
• This is over-simplified
• Your mileage will vary
• But, it leads to…

22. Sales of Open Land
$20,000
$17,500
$15,000
$12,500
Demand for Nut Crops
$10,000
$7,500
$5,000
$2,500
$0
'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

23. Cost of Production
• Winegrowers forced to compete with nut
growers
• Land pricing at $10,000 to $15,000
• Development costs $14,750 (UC)
• Total Cost $25,000 to $30,000
• But what’s a reasonable return?

24. Permanent Planting Cap Rates
30.0%
25.0%
Pistachios
How about 8 to 12%?
20.0%
15.0%
Almonds
Citrus
10.0%
Walnuts
5.0%
Winegrapes
201
2
201
1
201
0
200
9
200
8
200
7
200
6
0.0%

25. The Winegrape Example
• Land:
• Development:
• Total Cost:
$14,000
$14,750
$28,750
• Rate Return:
10%
• Target Net Income:
$2,875
• Cost:
$2,700
• Gross:
$5,575
• Tons per Acre:
12
• Grape Price: $465

26. Cost of Production
• In this example:
– If you pay $14,000 for dirt
– You need $465 per ton to make a return
competitive with Almonds
– Does not mean if you buy dirt and plant vineyard
it’s worth $28,000
• Lots of variables
• And yes, I realize I’m preaching to the choir
• And please don’t go run out and plant almonds
• Our time is coming…

27. Central Valley Vineyard Sales
$30,000
Price Per Acre
$25,000
$20,000
$15,000
$10,000
$5,000
$0

28. Wine Grape Vineyard Sales
$30,000
$25,000
Price Per Acre
$20,000
$15,000
$10,000
$5,000
$0

29. Transaction Volume
Number of Transactions
120
100
WG Vineyard
80
Only 4 Sales in 2013
Raisin Vineyard
60
40
20
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

30. The Winegrape Example
• Land:
$4,000
• Development: $14,750
• Total Cost:
$18,750
• Rate Return:
8%
• Target Net Income: $1,500
• Cost:
$2,700
• Gross:
$4,200
• Tons per Acre:
12
• Grape Price: $350

31. The Moral of the Story
• For now, nut crops look better than wine
• Grape prices must continue to rise to spur
larger-scale planting at current land price
• Water scarcity could change Nut/Wine balance

32. The Moral of the Story
• If (when?) the Fed slows the printing press:
–
–
–
–
–
The dollar strengthens
Imports more affordable
Nuts less valuable
Borrowing get more expensive
Downward pressure on land prices
– The only constant is change…
– I’m sure I’ll be proven wrong by next year!

33. Thank You!
Ben Slaughter, ARA
Correia-Xavier, Inc.
www.c-x.com