Wine, Grapes & Inflation; WGA Bank Top 50 Index Q3 2024
- Aug 5, 2024
- 5 min read
Updated: Jul 9
August 5, 2024 | Updated | Premium Service | Last month during a trip to wine country, we were confronted by an economic conundrum that is relevant to banks and markets as we prepare for a global equity market reset. After years of suppressed inflation and low quality economic performance, global investors have finally pressed the red button on equity valuations.
So why is the economic situation in wine country relevant to investors? Short answer: inflation. The vast majority of the 500 or so wineries in Sonoma County are small, privately-owned businesses that are not consistently profitable and generally are supported by a sponsor.
Even some of the relatively large wineries that can produce over 1 million bottles annually may not be profitable. Why? The cost of acquiring land and other inputs needed to make wine are simply too costly in the US. Vintage Wine Estates (VWE), one of the largest U.S. wine producers, filed for Chapter 11 bankruptcy last week, citing overexpansion, too much debt and a surplus of grapes as wine drinkers emerging from pandemic lockdowns drank less.
“Grapes are the highest-value fruit crop grown in the U.S., according to the USDA. “Over 70% of the grapes grown are used in wine.” There are more than 3,000 farms in Sonoma County. These farms average less than 200 acres in size and many make a living selling grapes to wineries that are not profitable. The average price of farm land in CA is just over $10,000, but land values in wine country can reach well into six figures per acre depending upon location, varietal type, and historical yields. The inflation in land prices has, in turn, increased operating pressure of wineries. See chart from USDA below.
Source: USDA
One winery we have known for many years, the Martinelli family, has been farming vineyards in California's Russian River Valley and Sonoma County since the late 1880s. Today they own 470 aces of prime vineyards and make stunning Pinot Noirs and Chardonnays. The Martinelli family are sixth-generation wine growers and farmers. They produce about 13,000 cases annually, with 32 different bottlings of Pinot Noir, Chardonnay, Zinfandel, Syrah and old-vine Muscat of Alexandria.
Martinelli Winery, Windsor, CA (July 2024)
Martinelli is very much a for-profit business focused on producing classic wines in an old world style. The single production Pinot Noir like Jackass Hill drink like French burgundy. And yet we were impressed to learn on our last trip that Martinelli sells 90% of their grape production. So is it better to make wine or sell grapes? Remember, contracts to sell grapes are often verbal and pricing can vary depending upon the quality of the grapes each year. Both the buyer and the grower monitor vineyards daily to optimize the timing of the harvest.
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