finalanalysis

(Hello, THUMP THUMP, is this thing on? OK…)

“If something cannot go on forever, then will stop.” The wine business has begun to test the limits of Stein’s Law at both the high and the low end of the market.

Last week the Winemaker’s Federation of Australia along with three other trade groups published a report that makes for dismal reading for anyone even tangentially associated with the Australian wine industry. In a nutshell, “Structural surpluses of grapes and wine are now so large that they are causing long-term damage to our industry by devaluing the Australian brand, entrenching discounting [and] undermining profitability.” This has led to an “accumulated surplus of 100 million cases of wine that will double in the next two years.” What’s more, “The problems are national – although some regions are more adversely affected – and are not restricted to specific varieties or price points.” The report suggests that 20% of Australia’s vines will need to be removed.

The EU went through this already and is set to grub vines that would otherwise produce mediocre wine that would flow into Europe’s “Wine Lake” and be subject to “crisis distillation.”

So when will this trend hit California? During the 90′s and 00′s, California’s wine growing regions have been awash in money as people who made a large fortune elsewhere try to make a small fortune in the wine business. The formula is often the same:

• Find a spot with some famous neighbors,
• hire a famous viticulturalist to plant the vineyard,
• hire a famous winemaker and perhaps an even more famous consulting enologist,
• put the wine in a bottle heavy enough to bludgeon someone with,
• label it with a multi-color foil embossed label,
• pack it in wood boxes,
• wait for the critics to fawn over you,
• repeat in subsequent vintages.

And for many people it has worked. For some, it still is. But now the “super seconds” i.e. wines that followed the formula but haven’t quite acheived cult status are languishing. Some estimate that 30% of this year’s crop in Napa Valley will go unsold. For some varietals grape prices are 20% of what they were last year. Stories abound of growers giving away fruit in hopes that, “when things turn around” the famous producers will remember them and pay them a premium once more. Under these circumstances, it is perhaps a blessing in disguise that the 2009 harvest is so light.

But in spite of this, California wine prices are still at record levels. Any discounting is being done quietly, surreptitiously. No one wants to admit that the music has stopped. But the evidence continues to build. California has it’s own “Wine Lake” but unlike the EU, where the excess wine is cheap, or in Australia, where it hits a range of price points, in California, the overproduction is solidly at the high end. Steve Heimhoff’s comments are instructive in this regard. Wineries have leftover wine they can’t sell, but they won’t discount it unless they are absolutely forced to.

Europe and Australia have looked into the abyss and are making the hard decisions that will make their wine industries sustainable in the long term. California still has a long way to go in this regard.