State of the Industry Piecing Together the Wine Industry Supply/Demand Puzzle

1. Jeff Bitter Allied Grape Growers State of the Industry Piecing Together the Wine Industry Supply/Demand Puzzle Lodi District Grape Growers Association May 10, 2018

2. Presentation Pieces California Wine Shipments California Supply Trends Lodi Crop/Market Update

3. Wine Shipments: What are consumers buying?

4. 2017 Wine Shipments Quote from the Annual Gomberg Fredrikson Report (GFR): “The U.S. market saw good growth with an increase of 9.7 million cases or just over 2% in 2017.”

5. Wine Shipment Highlights Gomberg Fredrikson Report, 2017 • Overall: • U.S. market grew to 407.2 million cases of wine • California wines to the U.S. market were up by 1% • Imported wines to the U.S. market were up by 7% • California wines were down overall by 1% • Imports/Exports: • Bottled imports were up 3% • Top importers (in order) were Italy, France, Australia, Chile, Argentina, New Zealand and Spain • Bulk imports were up by 19% • Top importers (in order) were Chile, Australia, New Zealand, Argentina, Italy and Spain • Bottled exports down 16% • Bulk exports were flat

6. Wine Shipments Are Premium Wine Growth Rates Slowing?

7. Wine Shipments Is Premium Wine Growth Slowing? Rolling 52-Week Sales Comparison of Wine, by Price Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

8. Wine Shipments Are Premium Wine Growth Rates Slowing? Premium Winery Sales Growth Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

9. Wine Shipment Highlights For 2017, as compared to 2016 • As reported by Neilsen • <$4/bottle - down 4% • $4-8/bottle - down 4% • $8-11/bottle - up 1% • $11-15/bottle - up 7% • $15-20/bottle - up 10% • >$20/bottle - up 8% • As reported by the GFR • <$3/bottle - down 7% • $3-7/bottle - up 1% • $7-10/bottle - flat • $10-14/bottle - up 12% • $14-20/bottle - up 9% • >$20/bottle - up 8%

10. Wine Shipment Highlights Gomberg Fredrikson Report, 2017 • Varietal Volume Performance • (scan data in food stores only) • Chardonnay flat (value up 2%) • Pinot Grigio up 4% • Moscato up 2% • Sauvignon Blanc up 8% (value up 10%) • Other whites down 6% • White Zinfandel down 5% • Cab Sauv up 3% (value up 6%) • Red Blends up 2% • Merlot down 6% • Pinot Noir up 7% (value up 10%) • Red Zin down 6% (value down 1%) • Other reds up 3%

11. Value Change, by Variety, for >$8/Bottle 2017 as compared to 2016 Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

12. Volume Growth by Variety and Price Range Source: With Permission - Danny Brager, Nielsen Company

13. What about “trade wars?”

14. Supply Trends: What is our winegrape supply future?

15. Supply Stability Planting at Attrition Rate (Forecast)

16. Supply Stability Production for 2018-2020 based on average yield of 7.2 tons/acre

17. Huge preference toward reds: 72% red 28% white

18. Segmenting Supply Central Valley (Value Wines) North Valley (Daily Drinkers) California Coastal (Premiums) AVA Based (Luxury Wines) <$6/bottle $6-10/bottle >$20/bottle $10-20/bottle

19. Central Valley (Value Wines) <$6/bottle

20. Central Valley

21. Central Valley “The bottom line is that, following the 2015 crop, we will still need to remove about 36,000 acres…”

22. Central Valley Doesn’t equal 36,000 acres (Forecast)

23. North Valley (Daily Drinkers) $6-10/bottle

24. North Valley (Forecast)

25. North Valley Regional Bright Spots/Opportunities Premiumization Potential “Middle” of the Market Varietal Diversity

26. North Valley

27. North Valley

28. California Coastal (Premium Wines) $10-20/bottle

29. California Coastal

30. California Coastal

31. California Coastal Regional Bright Spots/Opportunities Epicenter of Growth “Managed” Growth AVA Extenders and Alternatives

32. AVA Based (Luxury Wines) >$20/bottle

33. AVA Based Reginal Market/Supply Hot Topics Relationship with “The Economy”

34. AVA Based Premium Winery Sales Growth Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

35. AVA Based Sales Growth Rates of U.S. Luxury Goods Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

36. AVA Based

37. AVA Based

38. Summing up Supply…

39. Supply Stability 9,000 Net Acre Reduction (-5%)

40. Supply Stability 9,500 Net Acre North Valley Addition (+7%) Overall Interior Acres Flat From 2016

41. Supply Stability Most of the new acres came in 2017! 16,500 Net Acre Addition (+7%)

42. The Lodi Winegrape Market Hot or Not?

43. Winegrape Crop Potential

44. Whites: High level of interest in Sauvignon Blanc Buyer interest/activity in Generic Whites Average interest/activity on Chardonnay Virtually no interest in Pinot Grigio Strong interest in florals with some offers/activity (mostly south) Blush/Rosé Potential interest in reds for Rosé programs (Demand moves south) White Zin stable (mediocre) due to pullouts, early year activity Reds: Strong interest in Pinot Noir (virtually none on the market) Relatively strong interest in Cabernet Sauvignon Pockets of interest for Petite Sirah/Teraldego and other blenders Extremely mild activity on Zinfandel No “current” interest/activity for Merlot Winegrape Market Activity

45. Domestically Continuing decline of wine shipments <$10/bottle “Ample” supply of Central Valley grapes Slowing growth rates of premium wines? “Skittish” purchasing behavior by buyers (Result is an inconsistent or non-fluid marketplace) Globally Generally negative consumption patterns Competitor cost advantage Trade wars? What Are Our Challenges?

46. Summary • Wine consumers continue to be very fickle; they are not particularly loyal to California, readily looking to foreign alternatives. • Premiumization will continue as the dominate wine industry trend, as consumers trade up in quality, all while being value conscious. • California will experience no material growth in bearing acreage through 2020, but higher yields and larger crops are likely. • Producers will continue to adjust regional supply, in response to continually changing consumer preference.