The Grape Economy

Tackling Supply, Demand and Price

    The wine business is a very cyclical entity that depends less on economic ups and downs and more on the size and quality of the yearly grape crop. This used to be mostly a regional phenomenon, but as producers utilize fruit and juice from far away, it has become a global issue.
    The United States is predicted to become the largest wine-consuming country in the world by 2010, which is great news, because wine is a civilized, healthy beverage enjoyed with meals. However, this statistic also means that all the wine-producing nations in the world have us in their sights as a huge part of their next business plan.
    In good economic times, folks dine out more and drink more good wine; business executives woo clients with good food and wine, and high-priced bottles are given as gifts. When dot-com busts happen and unemployment rates go up, people still drink good wine, but they have a grilled cheese sandwich instead of the fancy restaurant meal. And they might trade that $30 bottle for a $20 bottle.
    So this should paint a pretty rosy picture for the wine industry year in and year out. But problems—namely, supply, demand and price—do arise. Globally, there is a huge surplus of certain wines, most notably Cabernet Sauvignon, Chardonnay and Merlot. The reason why is that when a shortage occurs, growers respond to the high prices by over-planting whatever is hot. Wineries are then stuck with high prices and actually encourage growers to plant, giving the growers long-term contracts to stabilize the prices. Pretty soon there’s a surplus, and those growers with noncontracted grapes watch prices fall. So guess what happens: Many wineries break their contracts and buy the bargain-basement fruit. This leaves the wineries that honor their contracts facing tough competition in the price wars that follow, and it puts growers in a tough situation.
    Many wineries, including mine, do honor their contracts, believing that a quality product will trump any market situation, and yet we realize that our wines need to be priced at a good value.
The point of all this is to note that 2005 produced the largest grape crop in the history of the world. Everyone from Tillamook to Timbuktu had way more fruit than was ever expected. The good news was that the quality of the fruit and subsequent wines was terrific; however, the excess supply that leads to some great bargains will also cause a stoppage of any planting, which will eventually lead to a shortage, especially in a year with a less abundant crop.
    Well, fortunately, 2006 in California was a true quality year, producing about 75 to 80 percent of the previous year’s volume. It was a year with a cold spring, late bud-break and medium-cool weather. And the fall was terrific, an Indian summer with only one day of rain. This led to long hang-time, producing good acid and sugar balance at the end and leading to the production of some amazing wines.
    So while you wait for the terrific ’06s, I think you will be able to find some great-value ’05s as the wine business moves through its cycle. 
—By Kent Rosenblum

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