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As the Grand Crus are identified, prices will go even higher

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Those who read this blog and hear me speak know that I have been predicting the discovery or uncovering of small, stellar blocks within existing great vineyards in California and Oregon—blocks that can be called “grand crus” were we to adopt that French terminology. This process will take decades, but clearly it’s underway.

I have argued that this evolution of a vineyard into greater and lesser blocks or climats is inevitable. It happened in France and in Germany, and for the best of reasons: grower/vintners, usually monks, discovered over hundreds of years that some sites were naturally superior to others. These, they gave special names to, and when a market-based system of supply-and-demand replaced the old feudal system, these special blocks were prized, and priced, the highest.

Why this development is inevitable and unavoidable is because of the nature of wine: something in it, and in us, makes us sensitive to the slightest differences. We seek those differences, make judgments as to their relative merits, collectively decide which blocks are the best, and reward them, as the free market allows and even encourages.

Is this rewarding, this hierarchizing, justifiable? Is it based on true qualitative differences in the wines, or is it only the critical perceptions that we know can be shaped by marketing? Undoubtedly, a little of both. Great marketing cannot make a silk purse of a sow’s ear. It can, however, take two silk purses, both near each other in quality, and make one Prada and the other Sears.

As if in evidence of this line of thinking, Domaine Trimbach, the well-known Alsace winery, just announced that, for the first time, they are taking advantage of Alsace’s Grand Cru appellation system to market their wine, something they have been reluctant to do until now. Why? [W]e cannot today escape the grand cru any more because with all the media, with all the fuss and the buzz and whatever around the system,” says Jean Trimbach. Around the world, he argues, people know the names of the Alsace Grand Crus and demand them. The implication is that it’s not because a Grand Cru is better than a regular Alsace AOC wine, it’s because people “know exactly what the top grand cru[s] are, so you cannot escape the grand cru game any more.”

The grand cru game…is that all it is, a game? Is there any relevance to inherent quality? Or have the Alsatians, like the Bordelais and the Burgundians, been hoisted on a petard of their own making?

Being a fair-minded journalist, I must admit that the answer is not that simple—although we all wish it were. Those of us reared in this “game” of comparative terroirs have it emblazoned into our DNA that some plots are better than others. To deny that this is true is one of the few heresies of wine connoisseurdom. This is why land in Vosne-Romanée is much more expensive than land in Beaune, why land in Oakville is much more expensive than land in Paso Robles, even though, in a blind tasting, I can assure you that some Paso Cabs would give Oakville a run for its money.

Indeed, such is the power of appellation—or, I should more correctly say, the awareness of appellation—that we have a situation in which the price for an acre of “the choicest land” in Napa Valley is now $310,000, up a remarkable $40,000 over 2014.

“The wine grape vineyard market continues to operate in a universe of its own,” says an expert in land prices in yesterday’s Napa Valley Register, referring to a phenomenon known as “the pedigree of the parcel,” in which the “pedigree” is conferred as much by subjective factors as objective ones—and perhaps even more so.

Once a vineyard has been prized so astronomically, there’s only one direction to go: To find little pieces within the vineyard that can be priced even more astronomically. This is the basic duty of capitalism: to test what the market will bear. And, as another expert in the Napa Register article said, “Actual sales [i.e. prices] can go even higher.”

In other words, unless there’s a bubble—and I don’t see one coming—we’re in for more and more expensive wines from California and Oregon at the highest levels. There’s nothing to stop it. It is, indeed, inevitable.

  1. “and I don’t see one coming”

    The thing about bubbles is that you never see them until they’ve popped.

    Having said that, $310,000 isn’t a ridiculous amount of money for an acre of prime Napa vineyard land. Let’s say you borrowed $310K @ 5% interest and paid a vineyard management company $8K/year to manage it for you. That’s $15.5K+$8K=$23.5K/year. Further, assume you get an average of 3.5 TPA of Napa Cab you sell for $8K/ton. That’s $28K/year. You’re still making money.

    As long as bottle prices hold up, land will.

  2. Bob Henry says:

    For those who didn’t take a course in accounting or finance in college, let me make more overt Michael’s calculations:

    Present Value (PV) of one acre of land = $310,000 (loan principal)

    R is the annual interest rate on the loan principal = 5%.

    T is the number of annual periods the loan is outstanding = 1 year. (In this case, the first year of land ownership.)

    Future Value (FV) of $310,000 (PV) invested at 5% annual loan rate for one annual period = $325,500.

    Formula: FV = PV (1+RT)

    FV of $325,500 less PV of $310,000 equals the first year’s 5% interest rate debt service payment of $15,500.

    Assume the Cabernet Sauvignon mature vines yields 3.5 tons per acre.

    Sold as a cash crop at $8,000 per ton, that represents $28,000 in gross revenue.

    The vineyard manager annual fee is $8,000.

    $28,000 gross revenue less $15,500 debt service interest payment less $8,000 vineyard manager annual fee equals a nominal $4,500 net profit on the $310,000 land investment.

    There are other annual vineyard operating expenses that reduce that nominal net income.

    But I will let seasoned vineyard managers/vineyard owners — say, Bill Dyer or David Scheidt — or CPAs who habitually read Steve’s blog chime in here with a litany of those expenses.

    Longer term, there is no assurance that you will always yield 3.5 tons of Cabernet per acre. (Think the vagaries of Mother Nature afflicting the 2011 North Coast vintage with mold and mildew. Think vine disease.)

    No assurance that you will always command $8,000 in gross revenue for each ton of healthy Cabernet fruit.

    Earning a $4,500 nominal net profit on a $310,000 land investment yields a 1.45% Return-On-Assets.

    Formula: ROA = Net Profit ÷ Average Total Assets

    Less than the 5% Cost of Capital represented by the interest rate on the land loan.

    Not a particularly compelling investment, given how easily it could all “go south” due to bad weather or declining cash crop prices or vineyard disease.

    (“Opportunity cost”: investing that same $310,000 in certificates of deposit insured by the FDIC paying a 1% interest rate earns you annual interest income of $3,100. With zero risk to your principal. Whereas that $310,000 land investment earning a projected $4,500 net profit is high risk — the land value could go down; cash crop prices could fall, reducing your net profit — all in search of a measly +$1,400 annually.)

    Of course, if that $310,000 buys you an acre of land in Andy Beckstoffer’s To-Kalon Vineyard, which commands a selling price of $25,000 per ton of Cabernet . . . that’s much different.

    Excerpt from The Wall Street Journal “Off-Duty” Section
    (March 19, 2011, Page Unknown):

    “The Most Powerful Grower in Napa”

    http://www.wsj.com/articles/SB10001424052748704893604576200842057088206

    By Lettie Teague
    “On Wine” Column

    “The Beckstoffer pricing formula calls for the price of a ton of To Kalon Cabernet grapes to equal 100 times the current retail price of a bottle. (This is true of all his heritage vineyards.) For example, if a bottle of Paul Hobbs Beckstoffer To Kalon Cabernet Sauvignon costs $250 (as it did at my local store) then Mr. Hobbs paid $25,000 for a ton of the fruit plus a base amount per acre that may vary. By contrast, the average price per ton of (average) Napa Cabernet is just north of $4,000.”

  3. Bob Henry says:

    It is sobering numbers like the above that elicit observations like this:

    “West Coast Wineries Are Up for Sale — Quietly”

    http://www.winespectator.com/webfeature/show/id/49221

    “… ‘I’ve never seen more wineries for sale in California than there are today,’ [said Charles Banks, who through investment groups such as Terroir Selections purchased Qupé and Mayacamas Vineyards] … Banks … estimates that between 30 to 50 percent of California wineries are either in financial difficulty or aren’t as profitable as they could be.”

  4. Patrick says:

    Maybe we should start quitting the use of French terms for new world wines. Instead of Grand Crus, why not just call them the best vineyards. (And I think the proper plural is Grands Crus)

  5. Bob Henry’s math is good, but I’d like to add some additional variables:

    Is the land currently planted in the varietal desired? If not, what varietal? More money and zero production for 3 seasons. If the land doesn’t have an existing vineyard, assume another $50,000 acre to plant a vineyard. Uh oh Scooby, there went our profits for the next 10 years and lower production in the vineyard until the vines mature.

    What’s your water situation? How is the well performing? These dry years have caused some wells to decrease or stop output. Digging a new well or a deeper well isn’t cheap. More money.

    Is this a conventional, sustainable, organic, or biodynamic vineyard? Each of those farming techniques has different costs associated. $8000 vineyard management is probably accurate for a sustainable or conventional vineyard manager, not for organic or biodynamic certified.

    As Bob/Mike notes, 3.5 TPA is an estimated average that would be nice to count on each year, but also, highly variable. Yields have been declining in many of my Cabernet vineyards since 2012, due to higher temps and less water. It makes for great fruit, but less yield for the vineyard owner.

    Is the $8000/ton picked and delivered price? Probably not reflected in the $8000 vineyard management price per year.

  6. Farming costs of $8k per acre per year may be an accepted average for grapes grown as a commodity, but it is way too low for grapes grown to make high-end wines. That’s pretty close to our farming costs, but we do a significant amount of the work ourselves, and have no supervision or management costs. Its been about 3 years since I last worked with a vineyard management company for a client, but even then it was about $12k a year per acre (this was to do the quality viticulture one has to do to maximize wine quality—multiple passes for canopy management and so on). Then along comes a year like 2011 where our farming costs were the highest ever, doing lots of remedial work vs. rain effects, only to have no income from the vintage as insufficient quality prevented us from releasing the wine. As to bottle pricing, I should probably stay out of that conversation as there are some marketing psychologies I have not mastered (as evidenced by our neighbors across the road with the same soils and climate with almost triple the bottle price—and yet I see that the marketing to maintain that is not so easy). But certainly there is a chicken and egg question as which comes first, the price or the attention).

  7. I was simply giving rough numbers to show that $300K isn’t so completely crazy for prime Cab acreage in Napa. You can tweak interest rates, farming costs, yields, grape prices and some scenarios will be profitable and others not so much. But, given the high price that Napa Cab wine – and thus Napa Cab fruit – commands, $300K an acre is not necessarily financial ruinous.

    As far as the general economics of running a winery… well, I’ll leave that to you nut cases. 😉

  8. Bob Henry says:

    Michael, like the saying goes, California is the land of fruit and “nuts.”

    Who are Bill Dyer’s neighbors across the road?

    https://www.google.com/maps/place/1501+Diamond+Mountain+Rd,+Calistoga,+CA+94515/@38.564284,-122.5761407,17z/data=!3m1!4b1!4m5!3m4!1s0x8084437b080ab781:0x674ef192a6b2ade2!8m2!3d38.564284!4d-122.573952

    (Use the left facing arrow tab to “collapse the side panel” superimposed by Google.)

  9. The aforementioned JeanTrimbach worked for me as an intern at Sterling when he was a college student in the early or mid-80’s–not really relevant to this conversation, but I suppose it affirms my high mileage.

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