Farm Progress

New market paradigms are ahead for wine grape growers

Harry Cline 1

August 18, 2007

12 Min Read

Paso Robles, Calif., as a “wine destination,” seems a bit strange for anyone who has traveled through the semi-coastal city in southern San Luis Obispo County during the past 30 years.

Nice enough town. Nice restaurant stop and usually the cheapest gas on Highway 101. Paso is cowboy country with a great mid-state fair.

It has always been a welcome stop for anyone traveling from the San Joaquin Valley to the coast. The only “attraction” worth visiting (if only once) between Bakersfield and Fresno and Paso, has for years been the James Dean Memorial at Cholame. It is a glitzy, stainless steel thing wrapped around an oak tree with rattlesnake warning signs. Dean died about a mile south, when his sports car plowed into a sedan making a left turn in front of him.

A few more miles west, and the reason Paso Robles is now a “wine destination” becomes evident. Vineyards roll up the hillsides around Shandon, where dry-land wheat has been grown for years. Continuing on toward Paso, billboards beckon drivers to winery tasting rooms. These are not just any tasting rooms, but rows of chateau-like structures befitting California's North Coast wine fascade. They line both sides of Highway 46 into Paso Robles. Head to Cambria, Hearst Castle, and the coast on 46 West, and just off 101 there is a winery tasting room on every corner.

Paso Robles is a Johnny-come-lately in the Central Coast wine expansion of the past three decades. Santa Barbara County and the Santa Maria areas have about a decade head start, but Paso has caught up with, if not passed, its southern neighbors as a recognized wine destination.

There are almost 30,000 acres of wine grapes in the Paso Robles and York Mountain American Viticultural Area (AVA) — 217 bonded wineries and more than 80 tasting rooms. Grapes are the No. 1 agricultural commodity in the county.

Racks of Paso Robles wines are everywhere, even next to the Cheetos and Ding Dongs in local convenience stores.

Twenty-five years ago, when Paso hosted its first wine festival in the downtown city park, 17 wineries and maybe 1,500 people showed up. This year the winery count was 90, at what the Paso Robles Wine Country Alliance calls the largest outdoor wine festival in the state. Annually, about 6,500 people purchase tasting tickets.

Paso Robles is on the wine map.

However, as robust as the transformation of Paso Robles to a wine destination may be, it is only half of the story because only half of the grapes produced in the area are utilized by area wineries. The rest are shipped out of the county, and that puts Paso Robles grape growers in the same dead-in-the water boat as their peers in the rest of the California wine industry.

Gone are the not-so-distant days when grape buyers would go to the end of a dusty road to buy 20 acres of Merlot, according to Dana Merrill of Templeton, Calif., who owns and manages 4,000 acres of Central Coast vineyards. He also brokers grapes and bulk wine as part of his Mesa Vineyard/Wine Management companies and as owner of Pomar Junction Vineyard.

“It was so good for so long and everyone thought it would last forever. Everyone who had premium Cab in their backyard was getting a 30 percent return. Who wouldn't want a piece of it?” said Merrill.

“Vineyards big and small were planted everywhere. It became the lifestyle.”

The inevitable consequences of overplanting became a reality. For at least the past seven years, it has been the California wine grape malaise, exasperated by the huge 2005 crush, that has throttled wine grape prices.

The economic downturn will change in time. Cycles always go the other way at some point. Wine grape experts have been predicting it for several years to no avail.

However, Merrill, a 25-year Central Coast wine grape veteran, is seeing tangible signs of wine grape demand increasing — for certain varietals from certain places.

Stasi Seay of Paso Robles, Calif., is a third-generation San Luis Obispo County farmer and second-generation wine grape grower. She agrees with Merrill.

She is also Central Coast wine growing representative for Diageo Chateau and Estate Wines. She represents about 8,000 acres of vineyards, buying and selling grapes for some of the most prominent wineries in California: Sterling, Beaulieu Vineyards (BV), Edna Valley Vineyards, Solaris and Echelon Chalone — to name a few.

“I am buying whites and selling reds,” said Seay. “The whites from 2005 are primarily gone. Reds are still hanging over the market.”

“Overall, the supply and demand market will begin the true balancing process in 2008, and by 2009 there will be more demand than supply,” she predicted.

The upside is predictable because vineyard planting has virtually stopped. Hundreds of San Joaquin Valley grape growers are out of the business after pulling at least 100,000 acres over the past five years, replacing them with almonds, pistachios, or other crops. While the less valuable valley wine grapes do compete directly with higher value coastal wine grapes, the valley pullouts reduced the overall wine grape supply. On average, there is probably a $500 per ton spread between valley ($200 to $300) and coastal wine grape prices ($700 to $800 per ton).

However, this upturn in the wine grape price cycle will likely be changing long-term and short-term paradigms.

For growers hanging on until the turnaround, expecting to reap windfall prices like in the past upturns, Merrill said they will be disappointed. The Central Coast Cabernet Sauvignon fairy will not magically wave her wand and make $700 Cabernet turn into $1,500 to $2,000 Cabernet in two years.

One reason is that many wineries are not renewing contracts, putting more grapes on the open market, according to Merrill and Seay.

“There are no more large blocks of grapes being planted, but there will be more grapes coming on to the market due to the contracts not being renewed,” said Merrill. Some of those grapes are in large blocks, as evidenced by several notable North Coast wineries leaving the Central Coast.

Consolidation of wine grape buyers also will have an impact. “There are fewer buyers today, and that will mean fewer buyers looking for grapes even when the supply catches up with demand. The few big buyers left will not have time to go down that dusty road looking for 20 acres of grapes.

“They will go to growers, or groups of growers, with large blocks to get what they want,” he said.

Last year, growers saw an inkling of another new paradigm. “The wine world is now a global business where supplies are sourced worldwide to alleviate shortages and oversupplies.” Many experts predicted the beginning of a turnaround last year, but many major wineries went to Australia and other countries, and bought cheap bulk wine rather than purchase grapes. Many of those wineries own, or are partners in, foreign wineries.

“California wineries would rather buy California grapes, but not at twice the price they can get the same thing elsewhere in bulk. Wine is now a world commodity.”

“Because of that, when the cycle starts swinging back the other way, I believe it will be a more gradual process. It will be different than we have seen in other cycles,” said Merrill.

Seay said consumer influence clouds the supply and demand picture.

“We spend our whole lives in the wine business chasing what we think the consumer will want four or five years down the road,” she said. “It can be frustrating.”

For example, two years ago the consensus was to plant Merlot. Today growers are grafting over Merlot to other varieties they hope to sell because no one wants Merlot.

“No one saw the Merlot fallout coming. Some say it was the movie “Sideways” that caused the big shift from Merlot to Pinot Noir and Cabernet. Merlot may have been headed down before “Sideways.” Who knows? What we do know is that Merlot took a nosedive in two years,” said Merrill.

However, there is a sheep-like mentality in these switches. What one grower does, others copy. “I would not be surprised to see us out looking for Merlot in 2009,” stated Seay.

Whites like Riesling, French Colombard and Gewürztraminer were ripped out, or grafted over to Chardonnay just a few years ago. “Guess what wineries are talking about today? Riesling programs,” she noted.

Blends are another growing paradigm. “Wineries are getting away from the varietal names and creating all sorts of crazy blends. You probably should never put together Zin, Syrah and Cabernet, yet some winemakers are, and then making up names for the wine,” Merrill stated.

Merrill and Seay also believe California is doing what Europeans and areas like Napa in California are doing, “building a sense of place.”

“We are doing that here. I am doing that as a company. There is only one Paso Robles, and I think what we are doing here with that is paying off,” he said.

One of Merrill's marketing tools is to bottle wine from the vineyards he manages and or owns, and take the bottles to wineries and wine marketers, just like he would market the grapes.

“As a vineyard management company, we have established a good reputation for the grapes we produce. We enhance that reputation by taking wine from our own vineyards,” he said.

“People say you cannot sell Syrah. We sold 50 tons of it to a North Coast winery for $1,350. They could have bought Syrah cheaper, but they felt it was a good value for their program. They may buy more later,” he said.

“I am optimistic about the future. One reason is I think there are some smart winery buyers out there who are now starting to buy grapes. Maybe not for the prices people wanted, but for a lot more than rock-bottom low prices.”

“They have locked in prices where they and the grower can make some money for five or 10 years,” he said.

Merrill points out that the California wine industry is relatively small.

“Although there has been a lot of consolidation and sales of wineries, the same people are in the industry. The marketer or buyer who worked for Glen Ellen may now work for newer emerging brands. It would be great to have these companies buy grapes in Paso Robles. We are a coastal region that can hit their price points. People in this business know what is going on and are making decisions on what is obvious for the next few years. There are very few new vineyards being planted locally,” he said.

During this downturn, California wine sales have continued to grow.

Although most growers, wineries and lenders would agree with Seay and Merrill that the numbers certainly foretell a balancing of supply and demand, there does appear to be few new vineyards going in the Paso Robles area.

“You may see some small boutique vineyards go in over the next couple of years, but no big plantings like we have seen in the past,” he said.

One reason is the expense. “It costs about $45,000 per acre to put in a new vineyard, including land, irrigation system, trellising … everything,” he said. “There is not a lot of good land for vineyards left, and what exists is expensive because this has become a very desirable place to live, as well as grow wine grapes. There are some vineyard sites that are worth a lot more per acre for building sites than they'll ever be worth for wine grape production.”

Plus, the downturn has had its fallout and vineyards are for sale by those who cannot or do not want to hang on. “Right now you can buy nice vineyards here for $30,000 per acre,” he said.

Merrill and Seay believe the Paso Robles area is one of the better coastal locations for wineries and grape growers.

“It is a lot easier doing business here than in Santa Barbara County and Monterey. For example, if you want to build a winery here on ag land, it is an agricultural project. In the other two counties it is industrial,” Merrill said. “We get unprecedented cooperation and support from the county.”

The economic impact of wine and wine grapes in Paso Robles and San Luis Obispo County is $1.8 billion. Wine tourism brings in $113 million.

“The thing that makes me optimistic is we are seeing the under-30 crowd at the festivals and the tasting rooms. Their parents discovered Napa, and they are discovering Paso Robles,” said Seay.

Merrill and Seay credited the Paso Robles Wine Country Alliance for leading the way toward establishing Paso Robles as a “wine destination.”

“It is the largest voluntary wine promotion group in the state. The budget is $1 million annually, and you could say that all goes for promotion,” said Merrill.

Merrill still meets a lot of people with considerable cash in hand who want to grow wine grapes, make great wine, and live happily every after. “I have talked people out of that who did not understand that it takes a lot of hard work and good business acumen to sustain a wine grape vineyard or winery,” said Merrill.

“I guess you could be lucky and buy a Pinot Noir vineyard one day and the next day the movie “Sideways” comes out. Not many people will be that lucky,” he said.

Two years ago, when the movie came out, Santa Barbara Pinot Noir was selling for $2,000 per ton. Now it is being offered at $4,000 per ton.

During those same two years, there were grape growers on the coast who left other wine grape varietals hanging because they had no buyers. Other producers sold grapes at bargain basement San Joaquin Valley prices, and regretted it because by law the price had to be reported, lowering the value of coastal wine grapes.

“Little by little, supply is catching up with demand,” Merrill said. “One thing that will help it along is that the Central Coast crop is small. Not a small as 2006, but we do not have a big crop on the Central Coast.”

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