Sonoma Grape Expo State of the Industry Jeff Bitter Allied Grape Growers November 8, 2013

1. Sonoma Grape Expo State of the Industry Jeff Bitter Allied Grape Growers November 8, 2013

2. Answering Some Key Industry Questions…….

3. Answering Some Key Industry Questions • Question#1: Just how big was this crop? • Related Questions: • Are we in supply/demand balance? • Will our domestic supply depress imports?

4. Answering Some Key Industry Questions Just how big was this crop? Production Analysis A regional look at production Stated in tons crushed

5. Answering Some Key Industry Questions Just how big was this crop? California Production

6. Answering Some Key Industry Questions • Question#1: Just how big was this crop? • Related Questions: • Are we in supply/demand balance going forward? • Will our domestic supply depress imports?

7. Answering Some Key Industry Questions Are we in supply/demand balance going forward? 3.93 3.87 3.80 3.74 Projected Need:

8. Answering Some Key Industry Questions Are we in supply/demand balance going forward?

9. Answering Some Key Industry Questions Are we in supply/demand balance going forward? 3.93 3.87 3.80 3.74 Projected Need:

10. Answering Some Key Industry Questions Are we in supply/demand balance going forward? Balanced 2014-2016: The forecasted winegrape crush less 220,000 tons for other uses

11. Answering Some Key Industry Questions • Question#1: Just how big was this crop? • Related Questions: • Are we in supply/demand balance going forward? • Will our domestic supply depress imports?

12. Answering Some Key Industry Questions Will our domestic supply depress imports?

13. Answering Some Key Industry Questions Will our domestic supply depress imports?

14. Answering Some Key Industry Questions Will our domestic supply depress imports?

15. Answering Some Key Industry Questions Will our domestic supply depress imports?

16. Answering Some Key Industry Questions Will our domestic supply depress imports?

17. The Answers: • Question#1: Just how big was this crop? • BIG….. About 10% above recent history • Related Questions: • Are we in supply/demand balance? • YES • Will our domestic supply depress imports? • YES – it should based on inventory and exchange rates, but the timing on bulk and vs. bottled may be different.

18. Answering Some Key Industry Questions • Question#2: What are current planting trends? • Related Questions: • What varieties are hot? • What areas are being planted? • Are we over-planting?

19. Answering Some Key Industry Questions Each January, Allied Grape Growers conducts a confidential & voluntary survey of California grapevine nurseries to determine up-to-date planting trends. Data is aggregated for the purpose of discovering what is being planted, how much, and where.

20. Answering Some Key Industry Questions • Question#2: What are current planting trends? • Related Questions: • What varieties are hot? • What areas are being planted? • Are we over-planting?

21. Answering Some Key Industry Questions What varieties are hot? • 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

22. Answering Some Key Industry Questions What varieties are hot? 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

23. Answering Some Key Industry Questions What varieties are hot? • Planting considerations in the North Coast • First and Foremost – Plant according to site (climate, soils, etc.), not according to market demands. • Reasonable options: • Pinot Noir, Petite Sirah, Blenders (Primarily Bordeaux) • Shy away from: • Most whites (unless area is very well suited), Merlot, Syrah, Zinfandel (except in Napa)

24. Answering Some Key Industry Questions • Question#2: What are current planting trends? • Related Questions: • What varieties are hot? • What areas are being planted? • Are we over-planting?

25. Answering Some Key Industry Questions What areas are being planted? Note the amount of green on this chart vs. burgundy or gray.

26. Answering Some Key Industry Questions What areas are being planted? Vine sales began trending toward the coast in 2012

27. Answering Some Key Industry Questions • Question#2: What are current planting trends? • Related Questions: • What varieties are hot? • What areas are being planted? • Are we over-planting?

28. Answering Some Key Industry Questions Are we over-planting? 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

29. Answering Some Key Industry Questions Are we over-planting? Growing Demand; Moderate Expansion Growing Demand; Moderate Expansion

30. Answering Some Key Industry Questions Are we over-planting? Growing Demand; Rapid Expansion

31. Answering Some Key Industry Questions Are we over-planting? CAUSED THIS

32. Answering Some Key Industry Questions Are we over-planting? THIS CAUSED THIS

33. Answering Some Key Industry Questions Are we over-planting? Are we Entering a Period of Rapid Expansion? Growing Demand; Rapid Expansion

34. Answering Some Key Industry Questions Are we over-planting? We know this is coming for 2015 & 2016, but is it rapid expansion? Growing Demand; Rapid Expansion

35. Answering Some Key Industry Questions Are we over-planting? Only if we Continue the Recent Planting Trend

36. Answering Some Key Industry Questions Are we over-planting? Moderate Planting Matches the Trend Moderate Planting Defined: +/-15,000 NET new acres per year

37. The Answers: • Question#2: What are current planting trends? • Cab in the coast and slowing in the interior • Related Questions: • What varieties are hot? • Mostly Cabernet Sauvignon, Pinot, Blenders • What areas are being planted? • Previously the interior, now the coast • Are we over-planting? • Coast – not likely; Interior – possibly

38. Answering Some Key Industry Questions • Question#3: What does the future hold? • Related Questions: • Will California grape prices hold steady? • Will today’s higher grape prices slow sales?

39. Answering Some Key Industry Questions What does the future hold?

40. Answering Some Key Industry Questions What does the future hold?

41. Answering Some Key Industry Questions What does the future hold?

42. Answering Some Key Industry Questions What does the future hold?

43. Answering Some Key Industry Questions • Question#3: What does the future hold? • Related Questions: • Will California grape prices hold steady? • Will today’s higher grape prices slow sales?

44. Answering Some Key Industry Questions Will California grape prices hold steady? We have identified three major factors driving price (demand) over the last 2-3 years.

45. Answering Some Key Industry Questions Will California grape prices hold steady? • #3: The relatively weak dollar • Thwarts imports and encourages exports • Thought: • Despite import trends over recent years, which are contrary to those associated with a weak dollar, think about how magnified it would be if the dollar had been strong. • The price of imports creates a ceiling on domestic prices. • Outlook: • Most economists don’t anticipate immediate or sudden changes to the value of American dollar.

46. Answering Some Key Industry Questions Will California grape prices hold steady? • #2: Forethought by buyers • Buyers have needed to secure mid-term supply as inventories balanced • Translated into competition for existing grapes • Thought: • Growers have been able to “play the market” the last 2-3 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: • Two large crops, providing sufficient inventory for the immediate term, will dampen growers’ ability to “play the market”. • Winery capacities currently a huge factor in purchase decisions.

47. Answering Some Key Industry Questions Will California grape prices hold steady? • #1: Supply/Demand was out of Balance • Many wineries depleted inventories in the wake of the recession, then experienced the short crop of 2011, leaving a hole in supply. • Thought: • The North Coast has not added substantial acreage in recent years, making it likely that we won’t experience a chronic surplus. • Outlook: • Planting will likely continue in the coastal regions • With the exception of a few “smaller” world producers, most “competitive” winegrowing regions are not expanding their acreage. • 2014 prices will depend more on 2014 crop size than any other single factor, because we do have sufficient inventory for current demand.

48. Answering Some Key Industry Questions • Question#3: What does the future hold? • Related Questions: • Will California grape prices hold steady? • Will today’s higher grape prices slow sales?

49. Answering Some Key Industry Questions Will today’s higher prices slow sales? Every $100 in grape value = $.12 in the bottle

50. The Answers: • Question#3: What does the future hold? • Big Picture: No shortage • Coast: Market stability • Related Questions: • Will California grape prices hold steady? • Yes, but more likely in the coast • Will today’s higher grape prices slow sales? • Not necessarily, but it may mean lower winery margins