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Is California Facing a Grape Shortage?

Grape prices are going up, but consumers have grown accustomed to bargains

California’s grapegrowers finally have something to cheer about—grape prices are going up. But does that mean higher prices for consumers? Winery owners are trying to cut costs so they can keep prices low at a time when drinkers still want value.

After nearly three years of sluggish sales and an oversupply of wine, vintners have cleared their cellars of older vintages and are looking to increase their grape purchases. But two small harvests and an absence of new plantings mean they are competing for a smaller amount of fruit. That demand is pushing up grape prices and bulk wine prices. “If you are buying wine on the bulk market, or you’re a négociant, your costs are going to go up,” said Adam Lee of Siduri and Novy Family wines. Larger producers like E. & J. Gallo are actively signing long-term contracts with vineyard owners to guarantee grape supplies at a set price.

Grape costs can vary depending on the vineyard, its location and the size of the harvest. On average, the price of all California grape types rose in 2011. The average cost of red grapes increased 12 percent per ton while white grapes jumped by 8 percent compared to 2010, according to a preliminary report on the 2011 grape crush by the U.S. Department of Agriculture (USDA).

At the height of the recession, California’s wine industry faced an excess of wine. Sales of bottles priced at $20 and above slumped as consumers traded down to cheaper brands. Winery cellars backed up with unsold wines as restaurants and retailers tried to move existing inventory. Many winemakers had to change their tactics to stay afloat. To stimulate sales, producers and négociants turned to bulk wines and created second labels to meet consumers’ taste for values. Many looked to the state’s Central Valley for inexpensive grapes and processed juice.

Vintners attributed the surplus of wine during the recession to slow sales, not an excess of grapes. “The reasons for these oversupplies have been primarily economic, not due to particularly bountiful harvests,” said Cameron Hughes, founder of the eponymous négociant, which purchases surplus juice from wineries and bottles it under its own labels.

Wineries are now selling off that inventory. Over the past year Americans consumed more wine and reached for more expensive bottles. Wine Spectator sister publication Impact Databank reported that sales increased in volume by 1.7 percent in 2011. With cellars now empty, wineries are scrambling to buy grapes. “For the first time in three years most varietals across California are in demand,” said Brian Clements, vice president of California wine brokerage firm Turrentine.

“Some growers are already saying they are sold out [of their 2011 harvest] when a few years ago they were begging to sell fruit,” said Bill Brosseau, winemaker at Testarossa Winery in the Central Coast. Like many small and medium-size wineries, Testarossa relies on growers for most of its grapes.

Some of California’s largest producers are flexing their financial muscle to secure access to fruit. Winery giant E. & J. Gallo has signed long-term contracts with grape growers for 90,000 acres and announced that it plans to add 10,000 more, mainly in the Central Valley, over the next year. “With our forecasts for projected growth in the wine business, we are and will continue to make major long-term financial commitments to the California wine industry,” said Joe Gallo, E. & J. Gallo’s president and CEO.

A pair of challenging vintages is adding to the pressure to find good grapes at good prices. Data in the USDA’s 2011 grape crush report show that the grape harvest was down 3 percent in 2010 and nearly 10 percent last year compared to the 2009 harvest. “Yields have been down pretty dramatically and for all varieties as well,” said Siduri’s Lee. The 2011 vintage brought cold and wet weather throughout the growing season and a late frost in the Central Coast.

Another issue facing wineries is that the number of new vineyards being planted has slowed since 2006. “No one is planting right now,” said Ed Sbragia of Sbragia Family Vineyards. “So as demand for these wines grows, grape prices are going to go up; as a winery owner you’re going to have to pay more.”

But some argue that the shortage is not as severe as has been reported. “California wine shipments have grown steadily throughout the last decade but that growth is not outpacing supply,” said Hughes. He argues that shipments to wholesalers have outpaced wine sales, emptying cellars and creating an illusion of a shortage. And even though 2010 and 2011 were smaller harvests than 2009, they were still some of the largest in California history. Hughes worries any price increases would be very bad for sales right now.

If the shortage is real, wineries may have to raise their prices or change how they operate to offset the rising costs. While the economy is recovering, most customers are still price conscious—and many got used to discounts during the tough times.

Vintners are looking for ways to save money in their wineries so they don’t scare off customers. Brosseau said Testarossa is focusing on direct-to-consumer sales instead of going through distributors or wholesalers, who buy wine at reduced cost. “We’ve gone direct to restaurants and retail and are stimulating more sales in the tasting room, to offset higher grape prices.”

How wine drinkers will respond to potentially higher prices remains to be seen. And with analysts predicting that California’s shortages could last for several years, wineries will have to consider their options carefully. Grape prices could stay high because of demand even if the state sees a large harvest in 2012. “If we had a bumper crop this year it would be absorbed no problem,” said Clements. “Across the board there are more buyers than sellers.”

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