Dana Merrill looked out over 10 acres of ripening cabernet sauvignon grapes near Paso Robles and worried: Would anyone buy them?
“I think we might have a couple of hundred acres of cab and another several hundred of syrah that we will just drop on the ground this year,” said Merrill, who manages a total of 6,000 acres of Central Coast wine grape plantings for 15 clients.
At best, he may get $300 a ton on the spot market for the cabernet by the time the luscious purple fruit is picked in late September. That would cover about half his costs. If Merrill had contracts to sell those grapes to wineries, he might have earned as much as $1,200 a ton for the same fruit.
Wine grape growers from Temecula to Mendocino are scrambling this fall to lock in eleventh-hour contracts for their crops. “We are calling the wine brokers, we are following up every lead in every local region,” said Merrill, president of Mesa Vineyard Management Inc. “And we are following up on any rumor we hear at all. Most of the time they are dead ends. Every other grower is doing the same.”
With just days to go before the harvest starts, an unprecedented amount of fruit hasn’t been spoken for, even though the yield -- projected at 2.9 million to 3 million tons -- will be less than last year’s 3.05 million.
Some California wine grape growers say they will end up selling a third to half of their vintage at the last minute on the spot market, and in many cases at a loss. Experts say most of the spot grapes will find its way onto store shelves in $2-to-$5-bottles of wine.
“It has been at least 10 years since I have seen this much fruit on the spot market,” said Andy Hoxsey, managing partner of Yount Mill Vineyards, a Napa grower.
There are a lot of reasons for their predicament. For one thing, because there has been a surfeit of fruit-producing vines throughout the state for three seasons, wineries have more leeway than they did in the late 1990s, when there was a shortage. And winemakers are under pressure to cut costs, to compete with popular imports from Australia, Italy and other countries.
Yet many also blame what they say is California’s archaic method for setting contract grape prices. Critics say that it works to maintain higher prices at times of surplus and makes the state’s $14-billion wine industry less competitive worldwide.
“There is no question that we have a failing, dysfunctional system for determining price,” said Bill Turrentine, president of Turrentine Wine Brokerage in San Anselmo, which arranges the sale of about $100 million of varietal wine grapes and bulk wine annually.
Wineries own only 30% of the vineyards in California, estimates Rich Cartiere, editor of the Wine Market Report, an industry newsletter. For most of the premium grapes they need, wineries rely on a cadre of independent growers who typically have sold their fruit under long-term contract at what is based upon a district average reference price, calculated by the California Department of Food and Agriculture. That price is figured by averaging what the same variety from the same region fetched the previous year. Other factors, such as the grower’s reputation, the location and the relative quality of the vineyard influence price.
The widespread reliance on the district average reference system has worked, in effect, to help regulate prices, giving growers -- and, almost as important, their lenders -- some certainty about the per-ton value of their crop each year.
But as the industry recently has learned, Turrentine said, the system “has no mechanism to adjust contract prices to real-time supply and demand.”
For instance, despite the 2002 glut, the district average reference price for cabernet sauvignon grapes, the gold standard of the industry, rose last year nearly 7% to $3,921.19 a ton.
This year, on the spot market, Napa cab is going for $1,500 a ton.
Back when there were too few grapes to meet demand, Peak Wines International, a commercial winery that produces the Geyser Peak and Canyon Road labels, bought 95% of its grapes under contract, mostly through rolling three-year obligations based on the previous year’s average district price. This year, the Healdsburg-based company plans to purchase almost a third of what it needs on the spot market. It also is negotiating short-term contracts.
“We are now moving to contract with year-to-year pricing,” said Daryl Groom, Peak Wine’s executive vice president. “We will sit with the grower in May or June and negotiate the price.”
Some major wine producers, including makers of the Fetzer, Mondavi and Kendall-Jackson brands, are asking the growers with whom they have contracts for a 15% cut in either the amount or price of grapes grown outside the prestigious regions of Napa and Sonoma, wine industry sources say.
Nearly half of the 132 growers who responded to a recent survey by the Wine Market Report said they have held price renegotiations with wineries.
Growers realize that they don’t have much room to maneuver: If they had refused to renegotiate, it would only hurt the industry in California, which produces more wine than any other state. “It doesn’t do any good for us to make them sell wine for $10 to $12 a bottle when the Aussies are going to do it for $6,” Merrill said.
So they’re girding themselves for a 2003 harvest that will yield lower prices. This year, 80% of the grapes grown in the Central Valley will be sold on short-term contracts or on spot, said Steve Schafer of Schafer Ranch Inc., a 700-acre vineyard near Madera.
“Every year here in the Central Valley, contracts are running out and wineries are not renegotiating,” he added.
Schafer figures that 50% of his crop of 5,000 to 6,000 tons will sell on the spot market for about two-thirds less than it would have under the contracts he used to have with winemakers. His cabernet sauvignon grapes will fetch $100 a ton, if he’s lucky, as opposed to the $300 a ton they recently commanded.
In Sonoma’s Alexander Valley, one of the state’s premier vineyard regions, many growers find themselves in the same shoes as Joe Ramazzotti, who lost a longtime client this year when Benziger Family Winery canceled its contract with him, ending a 15-year business relationship.
“They just didn’t want the fruit,” said Ramazzotti, owner of Ramazzotti Vineyard. “Most of the wineries are not even returning my phone calls this year.”
Ramazzotti predicted that 20% of his 500-ton yield of Alexander Valley cabernet franc, syrah and chardonnay will move to the spot market -- or not be sold at all. “It is the highest amount of surplus grapes I have ever had,” he added.
For some varietals, and for some growing areas, it’s worse. A UC Davis survey of 60 growers found that as much as 37% of the California chardonnay and 25% of the cabernet sauvignon crop will be sold on the spot market this year.
During the grape shortage in the late 1990s, it wasn’t unusual for growers to land contracts that lasted 15 years or even longer. And some wineries still see value in long-term contracts.
“If you have a vineyard with very high-quality fruit, I would still sign a long-term contract,” said Tom Selfridge, chief executive of Chalone Wine Group in Napa. “I am willing to put up with paying more in a time of oversupply like this.”
Growers who don’t have dedicated buyers such as Chalone are reaching for increasingly creative ways to dispose of their fruit.
Rather than let his grapes rot on the vine, Ramazzotti is considering harvesting his surplus fruit and having it crushed and fermented into wine. For varietals such as chardonnay and syrah, he’s working on a deal with several small grocery chains that would retail his wine for $9 to $11 a bottle.
“That’s a pretty good deal for a single vineyard Sonoma wine,” he said. “If I can get $3 or $4 a bottle for it, I will almost make my money back.”
But a speculative venture like that “only makes sense if a grower has really good fruit,” said Turrentine, the wine broker. “If it is hard to sell as grapes this year, it is going to be even harder to sell wine.”