Wikinvest Wire

Trouble in the California vineyards

Monday, March 08, 2010

It has long been a source of amazement to me that the California wine industry hasn't already collapsed given that $15-$25 bottles of wine have got to be at or near the top of the list of things that once-home-equity-rich natives can cut back on now that housing ATMs have stopped dispensing thousand dollar bills.

This Bloomberg report tells of the latest developments for grapes in the Golden State.

Vineyard Defaults Surge, Lost Land Values Undermine Napa Wine
In California’s Napa Valley, producer of the most expensive U.S. wines, 2010 may be a vintage year for foreclosures as the industry is squeezed by falling land values and a consumer shift to cheaper brands.

As many as 10 wineries and vineyards in Napa will change hands in distressed sales or foreclosures this year and next, up from none in 2008, according to Silicon Valley Bank. In a bank survey of vintners, 7 percent called their finances “very weak” or “on life support.”

“We have 250 vintner clients saying this downturn is the worst in 20 years,” Bill Stevens, manager of the bank’s wine division in St. Helena, California, said in an interview. “Anybody who was late to the party won’t have staying power.”
It's funny that, just a few years ago, it seemed everyone and their brother was trying to grow grapes and open up a winery throughout the state.

When we first visited Murphys, California about six or eight years ago they had two wine-tasting rooms on Main Street and, by the time we moved there in 2007, they had 17.

While we never visited Napa much, in the foothills of the Sierra Nevada mountains it was fairly common to see small landowners plant grapes out back and then put up a hand painted "Wine Tasting" sign inviting passersby into an old farm house to sample their product.

Those days are apparently over...
Napa winery and vineyard loan defaults rose fourfold to 18 in the year through January, according to San Diego-based research firm MDA DataQuick. In the survey by Silicon Valley Bank, whose clients are mostly high-end West Coast wineries, 71 percent of respondents said credit is harder to get.

The recession has set in motion a “secular change,” with budget-conscious consumers trading down to less expensive wines, said Peter Kaufman, managing partner at Pleasanton, California- based Bacchus Capital Management LLC, a private-equity fund that provides mezzanine financing to wineries.
“No more is it about stocking wine cellars with 5,000 bottles of Screaming Eagle,” said Bacchus Capital’s Kaufman, referring to a Napa “cult cabernet” that can sell for $750 or more a bottle. “High-rollers are discovering that there are lots of drinkable $20 to $40 bottles of wine.”
More than 30 wineries are for sale in California, Oregon and Washington, the most ever, according to Rob McMillan, executive vice president and founder of the wine division of Silicon Valley Bank, a unit of SVB Financial Group in Santa Clara, California. The properties have too much debt, were new arrivals to the wine market or have owners who are looking to retire as competition rises and profit margins fall, he said.
I remember visiting Paso Robles back around 2005 or 2006 - at the very peak of the California housing bubble - and chatting it up with some of the locals while doing some wine tasting and they'd casually mention something like, "Yeah. We only had eight wineries here about five years ago, now we have 80".

Anyone paying just a little bit of attention could see this coming a mile away.

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cgbarbeau said...

Not only crashed agricultural land values but the price of a bottle first was 30% off then 50% off...
Luxury fine wines can't get restaurants to stock premium bottles because attendance in restaurants is down.

I don't see a value in purchasing wine futures today either

C G Barbeau

Wayne said...

Yeah, old Al made some mistakes, but he was only one of many Fed Chairmen who led us down the garden path. The premise of the Federal Reserve System is that the banking system can be effectively managed by a central authority. That is, as opposed to a dispersed, free market banking system. The Fed, because it is politically influenced, can not help but create disaster (e.g., the Great Depression.) Read Murray Rothbard's "Mystery of Banking" to learn what's wrong and how to fix it.

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