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It’s time to plant new vineyards — with caution

Allied Grape Growers President Nat DiBuduo kept repeating, “We are bullish on the California grape industry,” at the recent Unified Wine and Grape Symposium in Sacramento.

His predecessor Barry Bedwell, now president of the California Grape and Tree Fruit League, echoed similar sentiments as he visited with some of the more than 10,000 people on hand at the largest gathering of grape growers and vintners in the U.S. “There is a lot of optimism in this room today,” he assessed before the much anticipated state of the industry session.

And as two grape growers left a packed hotel ballroom, one was overheard asking the other, “Feel any better now?”

Many factors point to the long overdue economic rebound for California wine grape growers; supply and demand are close to balance; the tank-bursting 2005 crop is about gone; there seems to be no major wine producing region in the world with a huge glut of wine to dump on the world market at fire sale prices; and overall U.S. wine sales continue to move up.

The U.S. is now the largest wine grape market in the world with sales of more than $30 billion.

The S word — shortages — was even uttered a time or two in late January at the symposium. Shortages actually curtailed sales of some premium wines this past season.

No question 2008 promises to be a much improved year for grape growers. The future looks bright since there have been relatively few new vineyards planted in California over the past five years as wine sales grew. Wineries are already looking for grapes for 2008 and long term after what most consider a below average 2007 crush of 3.55 million tons total and 3.20 for wine grapes. This compares to 3.14 million tons for wine in 2006 and the huge 3.76 tons 2005 crush for wine of a total crush of 4.33 million tons.

However, the overall optimism seemed a bit forced as if growers and industry leaders were wanting to will a turnaround as much as believing what DiBuduo and other state of the industry speakers said when they laid out reasons they believe there is a brighter future ahead for wine grape growers.

You could hardly blame them for wanting to be optimistic after eight years of low wine grape prices and a couple of recent years of prediction that a turnaround was at hand only to find a dead end alley around the corner.

Bedwell predicted the collapse of wine grape prices in the late 1990s due to an oversupply of grapes for the demand before he left Allied. DiBuduo has seen first hand the power of Bedwell’s mystic powers. For the seven years DiBuduo headed Allied, the largest grape marketing cooperative in the state selling 250,000 tons annually, he never recommended growers plant grapes. Just the opposite as he saw at least 125,000 acres of vines pushed out from the San Joaquin Valley after 1998.

He recommended at Unified for the first time in his Allied tenure that growers consider planting more grapes. However, in an exclusive interview with Western Farm Press, he put more caveats on his recommendation than a Dalmatian has spots.

They should be the right variety for the area, the right variety for what a winery wants, and most of all for the right contract. And don’t plant without a contract.

Right now those right varieties seem to be Chardonnay, Pinot Grigio, Pinot Noir, and Riesling. They were the ones garnering the most winery interest at Unified, according to Jeff Bitter, vice president of operations at Allied and DiBuduo.

Cabernet Sauvignon, Merlot, and in some regions Zinfandel, are in oversupply and should not be considered for a new vineyard or top working now.

Wineries are interested in buying the four hot varieties and banks are willing to finance new plantings with contracts. However, DiBuduo and Bitter say wait.

Don’t take the first offer.

Shop any offers to other wineries.

Wait until at least after bud break (six weeks away) or even until after fruit set before signing long or short term deals.

There is little indication demand for wine grapes will lessen before then, according to the pair.

California grape growers, like producers of other crops, have been on economic roller coaster rides before. The last trough, however, was one of the deepest and longest in decades. Because of that, DiBuduo says long-time grape growers are tempted to take the first offer put on the table.

“Don’t take just enough to cover costs just because you drive the tractor,” he said. ”Grape growers deserve to make a profit just like wineries.” That comment drew the only applause from the huge crowd at the state of the industry session.

It is no secret that many crops, from almonds, to pistachios to wheat, cherries, alfalfa, tomatoes and many other crops are profitable in the Central Valley. Many call it one of the best times for the valley’s agriculture because of the myriad of attractive alternatives.

“Look at the profit potential for almonds or other crops and compare that against what wineries are offering,” he said.

“There is no reason a grower has to take a cost of production contract on a $12,000 an acre investment like a vineyard. You can put $12,000 in the bank and draw interest and make more money than just getting enough back to cover costs,” DiBuduo said.

“Be smart. Get a return on your investment,” he warned.

One of the biggest fears at Allied or with other grape growing organizations is that there will be runaway speculative planting like there was in the 1980s following a fairy tale report of wine grape demand by the Bank of America. The result then was the collapse of the wine grape growing economy under the weight of far too many speculative vineyards.

The removal of 125,000 acres of valley vineyards since 1998 can be called a hangover from those days. And still vines are coming out this winter, destined to be planted back to non-grape crops. Bitter estimates predict 15,000 to 20,000 more acres of vines will come out this winter. This is likely more from frustration at seeing continually low wine grape prices compared to more economically alternative crops.

Bitter believes, fortunately, there are more negatives to ponder in speculative planting than in the past.

“The cost of real estate is very high. Steel prices used for grape stakes, end posts and wire are very high. The demand for alternative crops is very high and the water supply in California is a big question mark right now,” Bitter said.

“Add all that up and it would be difficult to justify new speculative vineyards today,” said Bitter, although he and DiBuduo acknowledge that there is prime vineyard land to be developed in the Central Valley, Central Coast and the Lodi area.

“There is little land suitable for vineyard development on the North Coast to meet future demand, although you may see vineyard redevelopment to meet the demand for certain varietals,” DiBuduo said.

Bitter and DiBuduo said following the upward trend line for wine demand in the U.S. with crops projected from current acreage will likely identify a shortage of wine grapes in 2010 or 2011.

And since it takes three years to get a crop off a new vineyard and another three to five years to get what could be an average crop, California wine grape supply is on a trend line to see it topple below the upward demand trend line.

And California may not be the supplier of choice if wineries can get wine from somewhere else in the world. Grape growers discovered that fact last season when growers expected at least a slight rebound in grape demand and prices only to find wineries buying bulk wine offshore to blend with California wine to produce the latest winery ploy, an American appellation.

By law California wineries can blend 25 percent of non-California wine with a domestic wine and call it an American appellation.

“Imports are growing faster than domestic sales and already imports are taking 31 percent of the U.S. market,” said DiBuduo, who is among those championing a mandatory, growers-funded California wine promotion commission to recapture markets lost to imports.

Unfortunately, many of these imported wines (bulk or bottled) have direct ties to California wineries either through marketing agreements or outright ownership of foreign vineyards and wineries.

DiBuduo recognizes that supply growth in California is limited over the next three to five years since there have been very few vines planted in recent years to meet the California wine shortages anticipated over the next five years.

Planting opportunities exist today, acknowledges DiBuduo. While he encourages growers to be smart about any future developments, he also recognizes if California growers do not meet the wine demand, their peers in South America, Europe, South Africa or Australia will.

The tightrope ahead is a long one and how growers navigate it will determine their future and in many ways the future of the California wine grape industry.

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