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Central California grape industry welcomes hints of recovery

Central California grape industry leaders weren't ready to pop champagne corks. But they weren't hanging crepe, either, in reporting early signs of economic recovery in the wine, juice concentrate, and raisin segments.

The optimistic outlook emerged at a recent conference in Fresno held by the Central California Wine Growers, California Association of Winegrape Growers and the California Wine Industry Symposium Group.

According to speaker Nat DiBuduo, president of Allied Grape Growers, “The market has changed and we are getting better.” He said quotes from wineries are circulating for 2004-crop grapes at higher prices than were paid in 2003.

Reduced supply is one reason for improvement, he explained. The wine grape marketing cooperative's estimates are that as much as 80,000 to 90,000 acres of vineyards in the Central Valley have been pulled since the late 1990s.

The removals are thought to include about 35,000 acres of Thompson Seedless and 50,000 of wine varieties. That acreage is not being replanted in grapes, and more uneconomical acreage will likely be pulled.

Expressed another way, he added, at an average of eight tons per acres, removals thus far represent at least 640,000 tons fewer grapes on the market, or about twice the 2002 crush of combined vineyards in Monterey, San Luis Obispo, and Santa Barbara counties.

Minimize inputs

Depressed returns have caused growers to minimize inputs of fertility and irrigation that also reduced yields.

On the demand side, DiBudo said, the so-called “super or extreme value” wines priced at $2 per bottle have attracted new consumers to absorb bulk wines surpluses.

At the same time, grape concentrate and raisin markets are also improving to help pull up prices for all segments, while a stronger U.S. dollar may have enhanced exports and slowed imported wine competition.

Speaking for Allied's 500 growers members from Lake County to Kern County, DiBuduo said, “We've probably hit the bottom and we couldn't be any lower than the past three years.

“We will produce quality wines and grapes, and there's a partnership between growers, lenders and wineries. We all need to cooperate so growers can produce quality and protect their assets.”

Analyzing improvements in the grape juice concentrate component of the industry, Brad Miller, a broker for Joseph W. Ciatti Co., San Rafael, said, “We see pent-up demand for grape juice concentrate in the U.S. and we could have sold more this year. We've bottomed out, the pendulum has swung, and we have some optimism for next year.”

U.S. production of juice concentrate, including grape, pear, apple and pineapple, was 745,000 tons in 2002, but slipped to an estimated 450,000 to 500,000 tons the following season.

White juice concentrate was in oversupply in 2002 and sold at $3.85 to $4.55 a gallon, but in 2003 the range was $5 to $6.50. Meanwhile, red juice concentrate moved from $3.85 to $4.25 in 2002 to $6.40 to $7.50 the following year.

“Demand for red concentrate was elevated by demand for white,” Miller said. “That means we will have better demand for Rubired grapes coming in this next year. In general, we are in an under-supply position, and the situation should allow more margin for higher priced grapes next year.”

Grape concentrate

Grape juice concentrate continues to be global commodity with intense competition. For instance, in 1998 the U.S. claimed 42 percent of the imports of the product to Japan. But by 2002, that was 31 percent, reflecting the new, aggressive industries of South Africa and Chile.

Miller urged grape growers to monitor international trade policy and be aware that Japan offers a duty advantage for concentrate coming from Chile. He noted that the strengthening U.S. dollar caused Canada, the biggest market for U.S. juice concentrate, as well as Japan, to look to Chile and Argentina as cheaper sources.

U.S. measures against bio-terrorism, however, are an asset as concentrate users search for traceable sources of wholesome product.

The California segment of the industry is in the best shape it's been in for the past three to four years, and even though the number of processors has shrunk from six to three, demand is still there, Miller said.

In the long term, he added, growers who supply the grape juice concentrate market must evaluate their efficiencies just like processors, bottlers, and retailers of finished products.

“You need to have the vines in the ground that will support this industry efficiently and competitively, and you need to know when to make some reinvestment in that.”

Glen Goto, chief executive officer of the Raisin Bargaining Association, Fresno, said prospects are brighter after three years of excessive inventories and depressed returns for growers. Supplies became burdensome with the 2000 crop of 430,000 tons, while demand for the industry remained at about 300,000 tons.

‘Turning around’

“Things are turning around,” he said, adding he sees potential for increases both in the amount of “free” tonnage raisin growers are allowed under volume regulations of their federal marketing order and in the price for the 2004 crop.

Acreage of raisin-type varieties has been reduced in recent years by as much as 35,000 from the level of about 270,000 during the 1990s.

As reserve raisin stocks are worked down, the 2003 preliminary price for growers is $526 (65 percent of $810) per ton, up from the $395 (53 percent of $745) for the 2002 season.

In an analysis of the wine industry in the Central Valley, Jeff O'Neill, president of Golden State Vintners, said wine grapes' bubble burst, similar to the “dot-com” collapse of computer industry, during the mid-1990s. He blamed excessive optimism and poor communication between vintners and growers.

A significant turn-around is being made in the southern interior of the valley, O'Neill said, since virtually no new acreage of any significance has been planted there in the past 10 years.

“But 60 percent of the growers there are still selling grapes below their production costs. We've got to move the pricing up. The reality, historically, is that when growers are making money, wineries are making money. Unless both are making money, the situation is unsustainable.”

The northern interior, the other key portion of the valley, is overplanted with Cabernet Sauvignon, and perhaps Chardonnay. The effects are yet to be seen, particularly with respect to where the market goes for wines at $3 to $6 per bottle, he said.

O'Neill said his company, which operates five regional wineries and owns 9,000 acres of wine grapes, is “reasonably convinced” that a structural, not a cyclical, change is under way and consumers will expect better value at lower prices.

“That bodes very well for the entire Central Valley,” he added, since the Central Coast is overplanted in wine grapes and growers there have much higher production costs.

“Consumers won't pay $10 a bottle for wine that they are now paying $6.99 for. Consequently, a lot of the big brands on the Central Coast are looking to the Central Valley to replace those grapes.”

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