Market Scene : Bubble Bursts for Champagne Makers : With demand down, the French have stockpiled nearly a billion bottles. They are bittersweet over a good harvest.

Driving past his vineyard of ripening Champagne grapes recently, Pierre Cheval brought his old Volkswagen to an abrupt halt and raced into the field.

“Wonderful!” he exclaimed, cradling a heavy bunch of deep-purple Pinot noir grapes in his hands. “I’ve never seen it like this before. Never!”

“But, of course,” he added wistfully, “it’s a pity.”

Indeed, Champagne faces one of the deepest crises in its 300-year history. Demand for the world’s most famous wine, which peaked at record levels four years ago, has plummeted. And, for the first time in memory, overproduction has left the tiny Champagne region of France choking on its own bubbles.

In the vast underground caves of Epernay and Reims, the famous Champagne houses of France have stockpiled nearly 1 billion bottles of the bubbly--enough to meet world demand for the next four years.

And the stocks are swelling even more as the annual vendange , or harvest, goes on this month in cool vineyards, where the crop never looked bigger or better--and no one is celebrating.

Some of the larger houses, including Moet & Chandon, which produces half the French Champagne consumed in the United States, have shed workers with early retirement packages--the industry’s largest such labor reductions in modern history. And some smaller producers, desperate for cash, are dumping lower-quality Champagne on the market at bargain prices.

“Champagne has known other crises, but this is probably the most serious because it’s lasting so long,” said Francoise Parguel, a wine analyst for Revue Vinicole Internationale, an independent trade newsletter in Paris.

“For the last decade, Champagne makers were euphoric with high prices and demand,” she added. “They didn’t prepare for this profound slump, and now it has unsettled the entire Champagne world.”

In recent months, Champagne growers and producers have taken unprecedented measures to protect both their industry and the lofty image of their world-renowned product.

Growers and producers recently agreed to bottle only two-thirds of this year’s harvest as Champagne, saving much of the rest in giant vats for better days. And farmers reluctantly agreed to sell their grapes, still the most expensive in the world, for about $2 a pound, the lowest price in two decades.

Some of the most important Champagne makers--who were paying $3 a pound for grapes back in 1989 and still couldn’t make enough wine to quench the world’s thirst--have slashed retail prices, to a break-even $10 or $12 a bottle. And they’ve even entered into quiet agreements with major restaurants in Paris to lower lofty menu prices of Champagne in hopes of enticing diners away from more reasonably priced wines. The French already consume more than half the Champagne in their country--more than five bottles a year per adult.

“The sad fact is, our grapes are produced by Mother Nature--without regard for the needs of the public,” said Andre Enders, head of the chief Champagne regulatory body, the Comite Interprofessional du Vins de Champagne.

The drop in Champagne’s fortunes, though, has been greeted with little panic in the bucolic, rolling hills of the region in northeastern France from which the wine takes its name. The 30,000 people in 300 small villages who earn their living in the industry are tough, stoic people for the most part; they and their ancestors have endured repeated invasions by foreign armies over the centuries. And, like farmers everywhere, they are accustomed to battles both with nature and the marketplace.

But ever since the monk Dom Perignon, as the story goes, invented Champagne near here in the hillside abbey of Hautvilliers, this region, which covers less than 2% of France’s territory, has cherished its special role in the world’s festive occasions.

Even today, Champagne producers shy away from discussing the grim state of the industry. To them, this crisis is a simple matter of economics, which history can be counted on to correct. But, they say in tones of reverence, the Champagne endures, in good times and bad.

“Champagne will always know periods of crisis,” said Philippe des Roys du Roure, spokesman for Moet & Chandon, which has been in business for 250 years. “But it’s not the Champagne itself that’s the problem. And we must always be careful to protect our product.”

In fact, that resolve has driven farmers, who grow the grapes, and bottlers, who buy them, into an uneasy truce.

Their relationship had reached a low point in 1989, when demand was high and farmers revolted against low fixed prices for grapes. Today, the farmers are free to make their own deals with the Champagne houses. But the price recommended by the annual meeting of growers and Champagne makers is usually followed.

And the one thing that they both agree on now is the need to maintain standards.

“People here are resigned,” said Cheval, who represented growers in his region in the annual bargaining. “But we believe we have touched bottom and things can only get better. And we’re taking advantage of the fact that there are so many grapes to make a better-quality Champagne.”

This year, for the first time in memory, farmers culled lower-quality grapes from their fields a few weeks before the harvest, hoping to improve the grapes that remained to ripen. The Champagne houses also agreed to increase the weight of grapes used for each bottle of the wine.

And the current surplus of bottled Champagne, though expensive to maintain, means that, for now at least, much of the region’s Champagne will be aged three years, rather than the minimum 18 months.

“The quality-price ratio has never been so good for consumers,” said Enders, of the industry’s governing body.

Worldwide Champagne sales steadied during the first half of this year, but industry experts say the figures reflect increased sales of lower-quality petits Champagnes produced by a few smaller houses in financial straits. And larger producers worry that flooding the market with a cheap product will threaten the industry.

“The word Champagne still is absolute magic,” Enders said. “And we want to avoid destroying the image. We are the cream of the best, and we have to resist setting prices too low. If we do that, we will progressively kill ourselves.”

The image has been carved out over the centuries, thanks in part to vines grown in a near-perfect climate and a chalky subsoil that protects their roots from frost. It is enhanced by strict limits on the size of Champagne’s vineyards and no small amount of marketing skill.

If Champagne is, as Moet & Chandon’s director, Yves Benard, says, “a barometer of happiness,” then the world was extraordinarily happy in 1989 and 1990. Now almost everyone in the Champagne district agrees that the surge in demand, which peaked at 249 million bottles, drove prices too high, both for the grapes and the finished product.

Then, the 1991 Gulf War, a worldwide recession and inroads by other sparkling wines, such as those from California, caught Champagne producers by surprise. Sales dipped, but prices kept rising.

“We now realize Champagne was too expensive for people in 1990,” said Cheval, a bespectacled 44-year-old who runs a 15-acre Pinot noir vineyard that has been in his wife’s family for two centuries. The Cheval family uses half their grapes to produce 30,000 bottles a year under their own label and sells the remainder to the Bollinger Champagne house.

The glory years of 1989 and 1990 may be gone for good. But farmers and producers have long memories, which have made them eternal optimists.

“There is no reason to stop drinking Champagne,” Cheval explained. “Why would our children be more sad than us? No, I don’t think so. There will always be celebrations. And Champagne will always represent the finest of life.”

Paris bureau researcher Sarah White contributed to this report.