The wine industry is grappling with uncertainty in a rapidly changing economic landscape, leaving winery owners, grape farmers, and wine sales teams in a state of flux. Wineries were already coping with a demographic shift towards younger generations less interested in wine than Boomer enthusiasts when the pandemic catalyzed market disruption.

When bars, restaurants and tasting rooms closed, consumers stocked up on budget-friendly wines, and value wine sales briefly surged. Then, with extra cash from government stimulus checks, they began buying premium and luxury wines. Small wineries adapted by introducing curbside pickups and digital wine tastings and utilized their phone and email lists to reach potential customers which helped shore up losses from tasting room closures. Unfortunately, two and a half years post-pandemic, sales remain disappointing despite reopened tasting rooms and other hospitality businesses.

Economist Chris Bitter, Ph.D., Terrain's senior wine and grape analyst, explains, “Since the pandemic ended, we've seen wine sales falling across all sales channels and price points. This broad-based decline was initially normalization but now is entrenched. Distributor depletions to retailers in the three-tier channel show sales down about 7% through August relative to the same period in 2022, and direct-to-consumer shipment volume fell 8%.” A team of ag economists, Terrain provides exclusive insight and confident forecasting for customers of American AgCredit and other participating Farm Credit Associations.

Climate Change and Rising Costs

Climate change has also created turbulence in vineyards. California’s 2020 wildfires, followed by two years of hot weather, droughts, and water shortages, yielded three consecutive years of smaller-than-average crops. However, rains in 2023 have turned it into one of the coolest, wettest vintages in many, many years. Despite delayed grape harvests, compressed harvest schedules and traffic jams in vineyards and wineries, many growers report that they are bringing in a larger crop this year.

While slowing wine sales translated to reduced demand for grapes, three years of small grape crops drove a substantial increase in grape prices in 2022. In 2023, the expected larger harvest, coupled with falling wine sales, is softening grape prices across most regions and varietals. “The spot market has been slow, and buyers have shown little appetite for accepting overages,” Bitter adds. “While the slowdown in demand has been broad-based, there are still a few pockets of strength, including white varietals from Sonoma County.”

Meanwhile, winery and grower expenses have been steadily rising for several years. These include increasing interest rates, construction costs, vineyard development expenses, as well as labor and regulatory fees. According to agriculture lender American AgCredit’s appraisal department, vineyard farming costs in the North Coast are up 30–35% over the last four to five years, and the cost of replanting a vineyard in Napa and Sonoma now exceeds $50,000, up from $35,000 to $40,000, with high-end wines on Napa hillside vineyards up to $150,000.

This combination of rising costs, lower grape prices and declining sales impacts winery profit margins and risks stalling new planting and construction financing.

Solving for Financial Instability

Banking concerns have added to the financial woes of the wine industry, starting with the bankruptcies of Silicon Valley Bank, First Republic Bank and Signature Bank in March. Ruth Edwards, Regional Banking Manager for the Northern Calfornia region of American AgCredit, explains that, "Many banks fund their loans using customer deposits. When not deployed in loans, the deposits are invested in securities with varying maturities in their investment portfolios. Rising interest rates led to significant unrealized losses in their investment portfolios, surpassing their capital. When there was a run on their banks, depositors rushed to withdraw funds, and once the run on deposits started, the banks realized those unrealized losses and wiped out their capital and so they went bankrupt.”

Edwards highlights that US banks still report unrealized losses of at hundreds of billions of dollars held in securities across the commercial banking industry. This situation has raised concerns about the stability of the banking industry outside of the systematically important US banks, including some of the many smaller banks across the country which number about 4,000. American AgCredit, however, offers stability amid the wine industry's economic challenge. It is a member of the Farm Credit System, founded by Congress in 1916 to provide financial stability to American agricultural farmers and ranchers at a time when there was no reliable and steady source of credit. Instead of funding loans with customer deposits, they issue Federal Farm Credit Bonds, rated as investment-grade by the credit rating agencies. This unique funding source allows them to offer flexible solutions and debt options not found elsewhere, such as long-term loans with competitive interest rates and repayment schedules that match the agricultural business cycle.

“American AgCredit has been in business for generations and has multi-generational relationships with many of its customers,” Edwards says. “Our teams live and work in the communities we serve, building long-term relationships with our customer-owners that are not a transaction – they are a partnership. We partner with Northern California wine customers through the evolving value chain to help them achieve their goals, protect their legacies and grow the industry’s next generation.”

Wineries and growers looking for loans customized to their needs should reach out to Ruth Edwards and her team at American AgCredit with confidence at redwards@agloan.com. American AgCredit customers seeking guidance in the chaotic economic environment should look for Terrain’s market and industry updates at terrainag.com.

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