Are Napa Valley Grape Prices Sustainable?
Napa Valley growers often tie grape prices to wine market prices, using a rule of thumb that 1 ton of grapes ought to be priced at 100 times the retail price of the bottle they go into. Using this guideline, Cabernet Sauvignon grapes priced at the 2019 district average of $8,000 might be expected to be used exclusively in wines selling for $80 per bottle. After skyrocketing between 2012 and 2018, however, average Napa grape prices fell off in 2019 and plummeted in 2020 because of wildfires, in some instances leading to significant discounting at retail. We just need to be careful we dont get too far out ahead of ourselves on grape pricing, Robert Nicholson of International Wine Associates (IWA), a boutique M&A firm, told Wine Business Monthly. Nicholson was one of the speakers participating in an online seminar focused on vineyard values presented by Napa Valley Grapegrowers last week. During the seminar, appraiser Tony Correia and Nicholsons IWA colleague Josh Grace both called attention to Napa Valley Cabernet Sauvignon that sells in Costco stores for $12.99. If we're worried about protecting the brand of Napa Valley, is this a good thing? Correia asked. Yes and no, he said. It's moving a lot of that bulk wine through the pipeline and getting it out of the tanks, but if the consumer gets used to seeing that Napa Valley Cabernet for $12.99 are they going to be willing to pay $70 two years down the road when the world is restored?  Slide provided by Tony Correia  Slide provided by Tony Correia  The graphic below looks at Napa grape prices, tons and equivalent cases produced. It indicates Napa Cabernet Sauvignon prices rose by 26 percent per year between 2005 and 2019, while Merlot grew by 15 percent annually and Chardonnay prices rose by 13 percent annually. According to the CDFA/NASS's California Grape Crush Report, the average price of Cabernet Sauvignon in Napa County exceeded $8,000 per ton in 2019. The table below indicates that about 3 million cases of Cabernet Sauvignon annually produced in Napa would need to fetch at least $80 per bottle using the previously mentioned one-percent rule of thumb. Information provided by IWA  Adding up the case volumes of the top 22 Napa-based brands by volume indicates 1.2 million cases of Cabernet sold for an average of $47 per bottleless than one might expect given where Napa grape prices were in 2018 and 2019. That, in turn implies that another 1.6 million cases of wine produced from other brands would need to sell for an average of $103 per bottle under the 1 percent rule. There is a significant amount of value leakage if you think 1 percent is the right economic metric for valuing grapes, Grace said. It appears it's probably on the winery side, which begs the question: are wineries taking on too much risk and are growers going to be encouraged or pushed by the market to lower prices?  via IWA  Napa Valley Vineyard Market Areas    The Prime Market covers the heart of the Napa Valley and the surrounding hills, including some of Napas most recognized appellations (Oakville, Rutherford, St. Helena and Stags Leap), in addition to the surrounding hillside appellation or geographic areas (Howell Mountain, Spring Mountain, Diamond Mountain, and Prichard Hill). The Secondary Market generally covers the northern and southern ends of the Napa Valley, plus the hills bordering the Prime areas. To the north is the Calistoga appellation, with Yountville, Oak Knoll, and Coombsville to the south, plus the surrounding hills,including Atlas Peak, Soda Canyon, and Mt. Veeder. The Outlying Market includes the remaining vineyard areas in the county, but generally outside of the Napa Valley proper. This includes Chiles Valley, Pope Valley, and other unclassified areas. Beginning with last years Trends report, Los Carneros AVA was reclassified from the Secondary Market to the Outlying Market. Via Tony Correia - Source: TRENDS in Agricultural Land & Lease Values; California Chapter of Farm Managers and Rural Appraisers https://www.calasfmra.com/trends.php  The chart above shows the net price per acre for Napa vineyard sales across the prime market, secondary market, and outlying market areas with the net price per acre of individual transactions by American Viticultural Area (AVA). The chart below shows values by location category compared to grape prices in those prime, secondary and outlying areas. Tony Correia said theres been considerable activity in Oak Knoll and in Yountville, a few transactions in Rutherford, and that more recently theres a lot of activity in Carneros, which had been very slow for many years. The highest vineyard prices in Napa Valley exceed $550,000 per acre for a very small, super premium vineyard on top of the Oakville Ridge on the east side of the valley. Correia said vineyards going for $500,000 an acre come with established histories of very high grape prices for very expensive bottles of wine. Conversely, he said not every vineyard in a high-priced AVA such as Oakville or Rutherford is a super-premium vineyard. Correia said theres been a little bit of a downturn in vineyard values in Oak Knoll in the past year but said that is probably a function of the market stabilizing after a big run-up in pricing in the boom years of 2012 to 2018. There's always buyers for Napa Valley vineyards, Correia said, In good times and bad. They may change their perspective and what they're willing to pay, but there's always buyers for Napa Valley.  The thing we need to remember is that nature and the wine industry are incredibly resilient.  Via Tony Correia  How Napa Stacks Up Against Bordeaux  The first table below lists most of the recent vineyard transactions in Napa. Robert Nicholson said the buyers are all growers except Stags Leap Wine Cellars, reversing the trend of the last decade where wineries most often were the acquirers. Nicholson said foreign buyers continue to be interested in Napa Valley. Of Napas 45,000 planted acres, 30,000 acres are planted to Bordeaux varietals, including whites, Grace said. If you sum up all of the top regions of Bordeauxthey add up to roughly 25,000 acres, so production coming out of Bordeaux is comparable to Napa in size. Transactions, which tend to be less frequent in Bordeaux than in the Napa Valley, are based on the Chateau model, involving a winery, vineyards, inventory, case goods, library, wine in barrels, brand name and intellectual property - and very often a large and substantial old house, the Chateau. Typically that total value is then divided by the gross vineyard acres. It makes for pretty spectacular pricing per acre. The second table below looks at recent winery transactions in Napa using the Bordeaux model for an average price per acre. Nicholson said it indicates that on a comparative basis, perhaps Napa doesn't have quite as far to go in terms of catching up with Bordeaux as most people might expect. source: IWA  Watch the replay below, including presentations by John Tuteur, Napa County Tax Assessor, Tony Correia and International Wine Associates.