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July 2004, Volume 10, Number 3

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Water and Wine

California farmers, who use about 80 percent of the state's storable or developed water, have been getting more efficient in water use, which means that farm output can remain stable even if water is transferred within agriculture and from farms to cities. In 1991, over a million acre-feet of water was sold by farm irrigation districts to the state's water bank, fallowing 11 percent of crop land in Yolo and Solano counties, but farm sales and profits fell far less than 11 percent in these counties as farmers adjusted to the more expensive water available. In recent years, more than a million acre feet a year has been transferred from agriculture, mostly for environmental mitigation.

There are likely to be more water sales in response to droughts and long-run transfers to cities. However, there is no uniform mechanism for compensating third parties who are hurt when water is transferred from farming areas, including farm workers as well as local businesses. Since 1976, when Tehama county enacted an ordinance to require third-party compensation, 23 of 58 counties have adopted ordinances affecting out-of-county water transfers.

A study of farmer responses to higher water prices in Arvin showed that higher value perennial crops such as citrus and grapes replaced lower-value field crops such as cotton, and that the percentage of perennial crops irrigated with water-saving drip methods rose [when gravity irrigation is replaced by drip in citrus, water usage falls 50 percent]. When water prices rise 25 percent to $72 an acre foot, average water usage per acre falls from an average three to 2.7 acre-feet.

The Metropolitan Water District announced an agreement with the 100,000 acre Palo Verde Irrigation District to free up 111,000 acre feet of water a year for urban consumers [An acre-foot is enough to supply two single-family homes in California for a year]. The 80 farmers would be eligible for a one-time payment of $3,170 an acre, and then receive $602 for each acre they fallow, with each farmer fallowing seven to 29 percent of his irrigated acreage.

Global Perspective. There is plenty of water around the world, but clean water is often not available to poor people in developing countries (97 percent of the world's water is seawater, and two-thirds of the remainder that is fresh water is locked up in glaciers and icebergs). The longer-term problem is managing water supplies as irrigated agriculture expands, given the tendency to "give water away rather than sell it."

The clean water challenge is stark: "at any given time, close to half the population in the developing world are suffering from one or more diseases associated with inadequate provision of water and sanitation services: diarrhea, ascariasis, dracunculiasis (guinea worm), hookworm, schistosomiasis (snail fever) and trachoma," but the payoff from improved sanitation is often higher than for cleaner water.

Wine. Wine grape prices are expected to be much higher in 2004 than they were in 2002 and 2003- Gallo offered $200 a ton for Thompson Seedless grapes that were to be concentrated for concentrate. Since four tons of grapes dry into a ton of raisins, grape growers are hoping that raisin grape prices will also rise in 2004 to perhaps $1,000 from $810 in 2003.

The US Supreme Court in May 2004 was asked to intervene in a long-fermenting war between wineries that want to sell directly to consumers and state regulators and their licensed wholesalers. Some 24 US states prohibit direct-to-consumer wine sales, and wineries contend that freedom of commerce trumps a clause in the 1933 amendment to the Constitution that allows states to regulate alcohol sales. If the wineries win, the current "three-tiered system" of licensed wholesalers, retailers and consumers is likely to be dismantled.

There are about 2,000 US wineries, at least one in each state, half in California. Most are small; the largest 25 California wineries account for 90 percent of wine shipments. A Wine Institute study found that the retail value of California-produced wine rose from $11 billion in 1998 to $15 billion in 2002, when 623 million gallons or 3.1 billion bottles of wine were sold at an average retail price of $5 a bottle. There were 15 million visitors to wineries in 2002.

Fred Franzia, owner of Bronco Wine Co. of Ceres and marketer of Charles Shaw or Two Buck Chuck wines sold for $1.99 at Trader Joe's grocery stores, said that Bronco's annual sales are $300 million from 10 million cases of wine, including five million cases of Two Buck Chuck. Bronco is California's fourth-largest wine grower, crushing 300,000 tons of grapes annually, controlling 30,000 acres of vineyards, owning four wineries and more than 30 labels, from Rutherford Vintners to Napa Ridge (Napa vintners sued but failed to prevent Bronco from selling wine labeled Napa Ridge that has no Napa-grown grapes). Franzia says he is looking for a national restaurant partner to sell an exclusive line of wine for less than $10 a bottle.

Domaines Barons de Rothschild (Chteau Lafite-Rothschild), a fabled name in French wine, in May 2004 announced plans to buy the rest of the Chalone Wine Group with Constellation Brands. Chalone has wineries in Napa, Sonoma and Washington state, and sells 675,000 cases annually at an average price of $17 a bottle.

French Chateau d'Yquem, maker of dessert wines made from botrytised grapes, which are infected with a fungus that intensifies the sugar in the fruit, was bought by LVMH Moet Hennessy Louis Vuitton in spring 2004. Chateau d'Yquem is the only wine from the Gironde to be classified as Superior First Growth, which puts it, in theory at least, a class above the five leading reds: Latour, Lafite, Margaux, Haut-Brion and Mouton Rothschild, which are all Premiers Crus.

Italy's largest wine producer, Caviro, and France's second largest, Groupe Val d'Orbieu, in May 2004 announced an alliance to conduct research and development, and coordinate transportation and marketing. Caviro represents 20,000 growers, and had 2003 sales of $267 million. Val d'Orbieu, with sales of $423 million, is 15 cooperative wineries, 135 privately owned cellars and 2,000 producers.

The Italian olive oil industry imports oil from Spain, Greece and Tunisia and exports it with "Imported from Italy" labels. Spain is the world's largest olive oil producer, and Italians argue that they add value by carefully refining and blending imported oils.

Mike Dunne, "By the Gallon," Sacramento Bee, April 28, 2004.