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April 2003, Volume 9, Number 2

Wine Woes

In 2001, California had 480,000 bearing acres of wine grapes, 50 percent in the San Joaquin Valley, and 90,000 non-bearing acres, 20 percent in the San Joaquin Valley. After very low prices in 2002 that resulted in many San Joaquin Valley grapes not being picked, an estimated 30,000 acres of San Joaquin Valley Thompson Seedless grapes were removed in Fall 2002. At eight tons an acre, these pullouts removed 240,000 tons of grapes or, with one ton making about 150 gallons of wine, the pullout eliminated 36 million gallons of wine.

California produced 463 million gallons of wine in 2002 that had a retail value of $14 million. The average price of wine grapes in 2002 was $462 a ton, the lowest since 1996. Imports accounted for 25 percent of US wine sales, with Australia replacing Italy as the number one source of US wine imports.

Despite depressed market conditions, the value of Napa Valley grapes rose by seven percent to a record $384 million in 2002, with the increased value primarily due to an increase in the crop size. The average price for a ton of Napa Valley grapes grew by four percent to $2,938, led by cabernet sauvignon at $4,016 per ton. Napa wines cost 61 percent more than the average California wine, and one study found that one more point on the Wine Spectator rating is worth $0.83 on a 750 ml bottle.

Some 458 million gallons of California wine were sold in the US in 2002, about the same as in 2001. Imports now account for about 25 percent of wine sold in US supermarkets. Bronco Wine Co., maker of $1.99 Charles Shaw wine, known as "two-buck Chuck," won the Winery of the Year award.

Constellation Brands (formerly Canandaigua) bought BRL Hardy in 2003 and became the world's largest wine seller, displacing E & J Gallo. Constellation is the only major seller of wine, beer and spirits; its total sales are $3.1 billion a year, including $1.7 billion from the sale of wine. Constellation has 12,000 acres of wine grapes, including 6,000 acres in Australia.

Ernest (marketing) and Julio (production) Gallo developed 65 of their 67 wine brands in house, and generally followed a do-it-in-house approach to wine production, including making their own wine bottles. E.& J. Gallo, shipped 55 million cases worth $1.5 billion in 2002, and acquired the Louis M. Martini Winery of St. Helena, California (150,000 cases a year), one of the oldest premium wineries in the Napa Valley. Martini has 600 acres of wine grapes planted in Napa and Sonoma counties.

Gomberg, Fredrikson & Associates says that, based on volume of wine produced, Gallo accounts for 30 percent of California wine shipments, followed by Canadaigua wine, 16 percent; the Wine Group, 12 percent; and Beringer and Mondavi, five percent each; the five largest producers account for two-thirds of the volume of wine. Robert Mondavi Corp announced that it would lose money in 2003- 60 percent of Mondavi's $441 million in annual sales are from its Woodbridge labels. Mondavi said it would cut 100 workers from its 1,000-strong work force.

US wine grape production has increased rapidly, from about 2.5 million tons a year in the mid-1970s to four million tons in 1997. Most of the growth has been in California, which doubled its production from 1.5 million tons in the mid-1970s to three million tons in 1998; California produced 91 percent of US wine in 1998. Prices for wine grapes produced in California rose from an average $150 to $200 a ton in the late 1970s to $600 a ton in 1998. US wine exports, most of which come from California, rose from $153 million in 1991 to $541 million in 2001.

California has 86 viticultural areas, which allow winemakers to label their wine Napa Valley or Sonoma if at least 75 or 85 percent of the grapes used to make the wine are grown in the region. The prices of grapes vary enormously from district to district- Napa county Chardonnay sold for $2,300 a ton, ten times the price paid to growers in Madera county.

The president of the California Farm Bureau, Bill Pauli, had the pesticide use permit for his Mendocino county vineyard revoked after angrily confronting an inspector on his property in June 2002 and refusing to allow her to leave.

The US Treasury Department in February 2003 restored a 1999 ruling allowing wines to include directional labels that direct consumers to either talk to their doctors "about the health effects of wine consumption" or to send for a government study on dietary guidelines. Such labels must include a sentence like, "This statement should not encourage you to drink or to increase your alcohol consumption for health reasons."

Global Perspective. Wine is one of the world's oldest drinks, but production and consumption remain very concentrated in France, Italy and Spain. These three countries have 155 million people, three percent of the world's population, produce 52 percent of the world's wine, and consume 43 percent- an average 22 gallons of wine per adult a year. Americans, by contrast, consume an average 2.2 gallons or 11 bottles a year--one gallon is about five 750-ml bottles.

In 2000, the French consumed about 920 million gallons, or 16 percent of the world's 5.8 billion gallons of wine; followed by 14 percent or 805 million gallons for Italians; and 9.4 percent or 540 million gallons for Americans.

Europe produces about 70 percent of the world's six billion gallons or 30 billion bottles of wine, some 4.2 billion gallons in the late 1990s, from 8.5 million acres of grapes. The Big Three wine producers are: France, 20 percent; Italy, 19 percent; Spain, 13 percent; the other major European wine producers are the ex-USSR, four percent of world wine production; Germany and ex-Yugoslavia, three percent each; Romania and Portugal, 2.5 percent each; Hungary and Greece, about two percent each. Each one percent of world wine production is 60 million gallons or 300 million bottles.

The US is the world's forth-largest producer of wine, accounting for 10 percent of world production. Other major New World wine producers are Argentina, five percent; South Africa, three percent; Australia, two percent; and Chile, two percent. The Dynamic Trio are Australia, Chile, South Africa. They collectively produce 10 percent of the world's wine but have just one percent of the world's population, which means that most of the wine they produce must be exported.

In Old World Europe, grape growing and wine making tend to be fragmented. There are thousands of grape growers, many with fewer than five acres of grapes, and most send their grapes to co-op wineries--the famous Chateaux that grow grapes and make and bottle wines with their own labels are exceptions. Most European wines are a blend of several varieties of grapes, and the wine is labeled to reflect the region in which the grapes were grown, such as Bordeaux or Burgundy. European grape growers and vintners are subject to a long list of rules and regulations that restrict, for instance, how much they can irrigate.

Some 17 billion bottles of wine are bottled each year, and seven to eight percent use synthetic stoppers, not cork, because of the risk of TCA (2,4,6-Trichloroanisol) contamination. Cork is a $1.3 billion industry in Portugal, and accounts for three percent of Portuguese GDP. Cork trees can be harvested every nine years, reach full maturity in 40 years, and can produce cork for 200 to 250 years.

Global retail wine sales in 1999 were $102 billion, with 10 percent going to grape growers; 30 percent to the winery; 37 percent to wholesalers and retailers; and 23 percent for taxes and tariffs. Wine accounts for only about a half of one percent of global household consumption, and wine consumption has been trending downward even as interest in wine has increased.

US retail wine sales were about $20 billion in 2000; about half of US wine is sold in supermarkets and discount warehouses such as Costco. Premium wine accounts for a small share of volume, but a higher share of value. For example, in the US in 2000, 20 percent of the wine was sold for more than $7 per 750 ml bottle, but this premium wine accounted for 43 percent of the value of wine. The share of premium wine by volume tripled between 1980 and 2000, from seven to 20 percent. Costco, with 350 stores, sold about $600 million worth of wine.

Most Americans do not drink wine regularly. There were about 190 million adults 21 and older in 1998, and they drank an average 2.2 gallons or 10-750-ml bottles a year, a total of 420 million gallons. The 30 million of Americans who drink wine regularly drink 90 percent or 370 million gallons of wine, an average 12 gallons each (one gallon is about five 750-ml bottles). [Another source puts wine consumption per adult at 2.8 gallons per person each year, compared with 16 gallons per resident in France and Italy. By contrast, US residents drink an average 54 gallons of soft drinks and 30 gallons of coffee a year].

About 35 percent of the world's wine produced (by value) is exported- only 25 percent of wine by volume crosses borders, since premium wines are most likely to be traded. By value, Old World European producers accounted for 79 percent of wine exports in 1999. Leading exporters were France 42 percent of wine exports by value; followed by Italy, 17 percent; Spain, nine percent (Big 3, 68 percent); then Australia, five percent; Portugal and Germany, four percent each; and Chile and the US, three percent each. The leading importers by value in 1999 were the UK, 21 percent; US, 14 percent; Germany, 13 percent (Big 3, 49 percent); and then Japan, Belgium, and Switzerland, five percent each. New World wine is expected to surpass Old World wine in the UK by 2005.

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