Ag Unlimited Annual Grower Meeting State of the Winegrape Industry Allied Grape Growers

Ag Unlimited Annual Grower Meeting State of the Winegrape Industry Allied Grape Growers February 2013

Presentation Outline - Answering Key Industry Questions • Part 1: Today’s Planting Trends • What varieties are going into the ground, and where? • Are we over-planting….again? • What is the future supply of key varieties in specific regions? • Part 2: Production & Supply • How big was the 2012 crop? • Are wein balance now, and in the immediate future? • Part 3: The Market • Are today’s grape prices here to stay? • Will rising grape prices slow wine sales? • Conclusion: Final Thoughts

Part 1: Today’s Planting Trends

2013 Nursery Survey What varieties are going into the ground, and where?

2013 Nursery Survey • In January of 2013, Allied Grape Growers conducted a confidential & voluntary survey of California nurseries to determine up-to-date planting trends: • The data collected represents over 90% of the major varietal vine sales in the state, by variety, and region. • Dependent upon vine spacing, total potential planted acreage identified via the survey will be between 27,000 and 36,000 acres. • Data is aggregated and used only for informational purposes for the industry, with the goal being to provide relevant information in order to help maintain market stability for grapes/wine as well as vine sales.

2013 Nursery Survey • Annual Vine Sales Leaders, Based on AGG Nursery Surveys: • 2012 - Cabernet Sauvignon, then French Colombard • 2011 - Muscat of Alexander, then Cabernet Sauvignon • 2010 - Cabernet Sauvignon, then Chardonnay & Rubired • 2009 - Chardonnay, then Cabernet Sauvignon • 2008 - Pinot Noir, then Chardonnay

2013 Nursery Survey 39% White 61% Red Other Reds Include: Grenache Petite Verdot Cab Franc Rubired Syrah Barbera Ruby Cab Tempranillo Other Whites Include: Gewurztraminer Riesling Viognier Sauvignon Blanc

2013 Nursery Survey Vine sales began trending toward the coast in 2012

2013 Nursery Survey Are we over-planting…..again?

California Acreage Trends Growing Demand; Moderate Expansion Demand Good, but Acreage Peaks; Oversupply Acreage stalls; Oversupply Chronic Growing Demand, but Rapid Expansion Growing Demand; Moderate Expansion No Growth from the 1980s

California Acreage Trends Growing Demand; Moderate Expansion Growing Demand; Moderate Expansion

California Acreage Trends Growing Demand; Rapid Expansion

California Acreage Trends CAUSED THIS

California Acreage Trends THIS CAUSED THIS

California Acreage Trends Are we Entering a Period of Rapid Expansion? Growing Demand; Rapid Expansion

California Acreage Trends We know this is coming for 2015 & 2016, but is it rapid expansion? Growing Demand; Rapid Expansion

California Acreage Trends Only if we Continue the Recent Planting Trend

California Acreage Trends Moderate Planting Matches the Trend Moderate Planting Defined: +/-15,000 NET new acres per year

2013 Nursery Survey • Pros/Cons to consider when evaluating planting trends: • For the argument that we are not over-planting: • Many newly planted varieties won’t have a negative impact on the broader market: • Rubired (Expanded for use in concentrate production, not wine) • Muscat Alexander (Expanded to fill a specific need for florals) • French Colombard (Expanded only to backfill acres being lost due to age) • More domestic production brings opportunity. Not only should we fill the 3% California shipment growth each year, we should capture import market share. • New plantings have almost exclusively been done under contract, with very little spot market grapes to “crash” the market in the future. • For the argumentthat we are over-planting: • Most new plantings have been in the interior….will this region experience enough wine shipment growth (<$10/bottle) in the future to absorb new production? • Growers expect to get “unconventional” yields on new acres, increasing production more dramatically than the increase in acres suggests. • Wine shipment growth in the past was due in part to affordably priced, high value wines which were a result of chronic surplus. With wine prices trending higher and shipments slowing, will the market absorb new production at sustainable prices? • Planting contracts are offered by wineries with the knowledge that their existing supply of grapes (under shorter term contracts) can be terminated if they become oversupplied.

2013 Nursery Survey What is the future supply of key varieties in specific regions? Specifically: Statewide Chardonnay Coastal Cabernet Sauvignon and Pinot Noir Zinfandel for Red (Mid-Market) SJV Muscat of Alexander

California Acreage Trends 2016 2012 Good, Moderate Growth Displayed Here

California Acreage Trends 2016 2012 Have already experienced most relevant growth, with a little jump in 2016

California Acreage Trends 2016 2012 Conversion of “White” Acres to “Red” in Lodi

California Acreage Trends 2016 “Bye-Bye Imported Moscato.” 2012

Section Conclusions: Vine sales increased significantly in 2012. Planting only with a contract is very critical. Exercise planting to avoid oversupply from 2016 forward. CAUTION

Part 2: Production& Supply

Production Analysis How big was the 2012 crop?

Production Analysis A regional look at production Stated in tons crushed

California Production

Production vs. Shipments Are we in balance now, and in the immediate future?

Production vs. Shipments Grapes crushed for wine, NOT winegrapes crushed. Average difference = 200,000+ tons

Production vs. Shipments 2015 Need 3.85 I Est. 3.80 2014 Need 3.79 I Est. 3.68 Given average crops and the current demand trend, we could only be 300,000 tons short over three years. 2013 Need 3.73 I Est. 3.58

Production vs. Shipments What happens when our production falls short of our shipments?

Production vs. Shipments 2008 shortage = 360,000 tons of bulk wine imports in 2009 2011 shortage = 575,000 tons of bulk wine imports in 2012

Section Conclusion: The large 2012 crop was a blessing, not a curse. The immediate future looks relatively balanced regarding supply/demand. A short 2013 crop would encourage imports.

Part 3: The Market

The Winegrape Market Are today’s grape prices here to stay?

The Winegrape Market What were the driving factors behind the increased grape prices of the last two years? We have identified five major factors driving price now, and likely in the future

The Winegrape Market What were the driving factors behind the increased grape prices of the last two years? • #5: The relatively weak dollar • Thwarts imports and encourages exports • Thought or tip: • Despite the current bulk import/export trends, which are contrary to those associated with a weak dollar, think about how magnified it would be if the dollar had been strong the last three years. • Outlook: • Most economists don’t anticipate immediate or sudden changes to the value of American dollar.

The Winegrape Market What were the driving factors behind the increased grape prices of the last two years? • #4: Competition from alternative crops • Almonds primarily, but all ag crops in general • Thought or tip: • All ag is doing good right now, in part because of our global price competitiveness (weak dollar). Growers look at alternative crops due to lower cost of inputs and development, relative to grapes. Low interest rates have also encouraged development of land into “other” ag uses. • Outlook: • Can you say $3/pound? For how long? • Many market forecasts from the almond industry point toward unfilled market capacity in the short term.

The Winegrape Market What were the driving factors behind the increased grape prices of the last two years? • #3: Forethought by buyers • Buyers have needed to secure mid-term supply as inventories balanced • Translates into competition for existing grapes • Thought or tip: • Growers have had the opportunity to “play the market” a bit the last two years. While less grapes on the spot market creates higher spot market prices, at some point wineries choose to go without or look at alternative supply sources when the price for “those last few tons” gets too high. • Outlook: • Price seems to be stabilizing based on supply/demand factors. External factors may limit further substantial price increases.

The Winegrape Market What were the driving factors behind the increased grape prices of the last two years? • #2: The re-establishment of the “mid-market” following the recession • Wineries depleted inventories in response to the recession. • Consumers moved down the price chain, but that trend will likely reverse. • Thought or tip: • Don’t underestimate the importance of the entire wine market, from $3 to over $25. Imbalance in any one sector has specific impacts on others. • Outlook: • Large Lodi and coastal 2012 crop will help supply the > $7 programs. Demand for SJV fruit will come in the interest of averaging down price, not necessarily in the interest of filling supply shortage.

The Winegrape Market What were the driving factors behind the increased grape prices of the last two years? • #1: Overall supply “shortage” • Not only domestically, but globally. • Thought or tip: • California has only added acreage at a moderate pace in recent years • Outlook: • Planting will continue. Speculative planting will be at a minimum, while contracted planting should be “controlled.” • With the exception of a few “smaller” world producers, most winegrowing regions are not expanding their acreage. • Does anybody know the size of the 2013 crop? Please advise if so.

The Winegrape Market Will rising grape prices slow wine sales?

The Winegrape Market Every $100 in grape value = $.12 in the bottle

The Winegrape Market It is not our belief that rising grape prices, alone, will have a significantly detrimental impact on wine shipments. The problem is with how that small price increase gets multiplied through the supply chain.

Section Conclusion: Factors that drive winegrape prices have been in the grower’s favor lately. Higher bottle costs due to shorter supplies (not so much grape price alone), may slow shipment growth.

Take Home Message Our industry will continue to face the everyday pressures of global competition, economic uncertainty, regulation and taxation, fluctuating crop sizes (Mother Nature) and indecisive and fickle consumers. The underlying factors that create a stable market look to be in our favor, at least for the foreseeable future, but we must maintain quality grapes/wine and offer value in order to remain successful.

Ag Unlimited Annual Grower Meeting State of the Winegrape Industry Allied Grape Growers