Ben Slaughter, ARA

San Joaquin Valley Wine &

Grape Industry Forum

December 5, 2012

Fresno, CA

Ben Slaughter, ARACorreia-Xavier, Inc.

The Rest of the State

• Napa:

– Those guys are fine

– Strong crop in general

• Sonoma:

– Those guys are fine too

– Strong crop

– Although, some wineries didn’t take “excess”

tonnage

– Others paid cheap prices for “excess”

The Rest of the State

• Central Coast

– More plantings

– Strong and Stronger Values

– Paso Robles has water problems

• May be facing adjudication of water basin

• Water will limit new vineyard in Paso

• “Secondary” North Coast (Lake & Mendo)

– Solid prices

– Excess tonnage hard to find a tank

So, what does that mean?

• The rich are still rich

– And buying Napa wine

– Some buying high-end Pinot in Sonoma

• With back to back big coastal harvests:

– Were wineries really out of tank space?

• Where there is a will, there is a tank?

– Or do they see their wine demand as fixed?

• And don’t want to create excess supply?

And now, the rest of the story

• With all that coastal stuff out of the way

• How about the rest of the state?

• You know, where most of the wine comes

from…

How do Central Valley vineyards

compete?• Challenge number One:

– Imports

• Challenge number Two:

– Cost of production

• Labor

• Water

• Land

Imports

• Panama Canal Expansion

– Target 2015

– Major ports are dredging for new ships

– Current Panamax Class Ship

• 3,000 – 5,000 containers

– New Panamax Class Ship

• 12,000 – 15,000 containers

That’s a lot of wine!

Imports

• New class of ship:

– Predicted to cut cost by 60% per “ton-mile”

– Good for export crops

• Uh, perhaps almonds?

– Bad for crops competing with imports

• Uh, Central Valley wine?

Imports

• August 2013, Journal of Commerce:

– Shipping company Hamburg Süd launched a new

3,800-TEU (20-foot container) ship for back and

forth trade between:

• California and Australia

– Ship’s sponsor?

• Ofelia Gallo…

Imports

• As the dollar strengthens, imports will get

cheaper

• Imports of inexpensive wine…

• ARE NOT GOING AWAY

What to do?

• Produce like hell?

• Or get the hell out of the way?

Cost of Production

• Farming Costs

• Is there any more cost we can trim?

– Water?

• Use less water?

• May not have a choice…

• What’s left is more expensive

• Energy (pumping cost) going up

Cost of Production

• Is there any more cost we can trim?

– Labor

• Robotic eyes?

• Robotic vehicles?

Cost of Production

• What is, truly, the cost of production?

– Build a new asset

– Earn a “reasonable” or “sustainable”

return on that asset

– Last year I left with the question:

– Can you buy $12,000 dirt and grow $300 grapes?

The Almond Example

• Land: $12,000

• Development: $5,191

• Total Cost: $17,191

• Yield: 2,500

• Price: $2.00

• Gross: $5,000

• Cost: $3,000

• Net: $2,000

The Almond Example

• So, we invested $17,200 to earn $2,000

• That’s a 12% return(a very over-simplified example)

• But, Ben, I can’t buy land for $12,000!!!

The Almond Example

• Land: $14,000



• Yield: 2,500

• Price: $2.00

• Gross: $5,000

• Cost: $3,000

• Net: $2,000

The Almond Example

• At $14,000/acre land

• That’s a 10.4% return

The Almond Example

• Land: $14,000



• Yield: 2,500

• Price: $2.25

• Gross: $5,625

• Cost: $3,000

• Net: $2,625

The Almond Example

• At $14,000/acre land and only $2.25/lb

• That’s a 14% return

• This is over-simplified

• Your mileage will vary

• But, it leads to…

$0

$2,500

$5,000

$7,500

$10,000

$12,500

$15,000

$17,500

$20,000

'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Sales of Open Land

Demand for Nut Crops

Cost of Production

• Winegrowers forced to compete with nut

growers

• Land pricing at $10,000 to $15,000

• Development costs $14,750 (UC)

• Total Cost $25,000 to $30,000

• But what’s a reasonable return?

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

20

0

6

20

0

7

20

0

8

20

0

9

20

1

0

20

1

1

20

1

2

Permanent Planting Cap Rates

Pistachios

AlmondsCitrus

WalnutsWinegrapes

How about 8 to 12%?

The Winegrape Example

• Land: $14,000



• Rate Return: 10%

• Target Net Income: $2,875

• Cost: $2,700

• Gross: $5,575

• Tons per Acre: 12

• Grape Price: $465

Cost of Production

• In this example:

– If you pay $14,000 for dirt

– You need $465 per ton to make a return

competitive with Almonds

– Does not mean if you buy dirt and plant vineyard

it’s worth $28,000

• Lots of variables

• And yes, I realize I’m preaching to the choir

• And please don’t go run out and plant almonds

• Our time is coming…

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Pri

ce P

er A

cre

Central Valley Vineyard Sales

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Pri

ce P

er A

cre

Wine Grape Vineyard Sales

0

20

40

60

80

100

120

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Nu

mb

er o

f T

ran

sact

ion

sTransaction Volume

WG Vineyard

Raisin VineyardOnly 4 Sales in 2013

The Winegrape Example

• Land: $4,000



• Rate Return: 8%

• Target Net Income: $1,500

• Cost: $2,700

• Gross: $4,200

• Tons per Acre: 12

• Grape Price: $350

The Moral of the Story

• For now, nut crops look better than wine

• Grape prices must continue to rise to spur

larger-scale planting at current land price

• Water scarcity could change Nut/Wine balance

The Moral of the Story

• If (when?) the Fed slows the printing press:

– The dollar strengthens

– Imports more affordable

– Nuts less valuable

– Borrowing get more expensive

– Downward pressure on land prices

– The only constant is change…

– I’m sure I’ll be proven wrong by next year!

Thank You!

Ben Slaughter, ARACorreia-Xavier, Inc.

www.c-x.com

Business

Ben Slaughter, ARA