by Jeff Miller of Artisan Family of Wines (Seven Artisans, Sly Dog Cellars, Red Côte)
While going through my posts for the week, I came across this one from SVB On Wine:
Oversupply and a Bubble Forming. Now What?
While the gist of the post is how to deal with a situation of oversupply (the suggested best course of action is to cut your losses early), I want to talk here about the nature of the problem to begin with.
Most businesses that produce a product can make some reasonable prediction about demand and adjust their production accordingly. Agriculture in general, and winemaking in particular, are in the unfortunate situation that nature dictates their production, at least in the short term, irrespective of demand.
So we are constantly struggling with oversupply and undersupply. When the great recession hit, it had a negligible impact on overall wine consumption (although a significant impact on pricing). But we were hit with what seemed like a never ending series of bountiful harvests which the industry struggled to offload. The combination of excess supply and tepid demand was a killer.
As things started to recover, we were hit with a series of short harvests. If we could have flipped the situation, we would have, but nature does not give us that option.
Now we have had two large harvests and are probably looking at a third. We may get grapes than we neither need nor want, but somehow they need to go away.
So what do you do? Taking the industry as a whole, SVB on Wine’s outlook is probably pretty fair. If you have too much, in one way or another you need to discount it to blow it out. Unfortunately, unless that results in an increase in demand, it’s basically a race to the bottom. Not a happy situation. The winners of the race are none too happy. The losers are even less happy still. But that is the situation of individual producers who have little choice but to match their competition.
As a small producer with primarily direct to consumer sales, all of this is not nearly as much of a concern. The difference in production may not be enough to really impact things all that much.
Of course, the person who takes the brunt of all this is the farmer. The winery probably has some wiggle room to buy more or less grapes unless it is locked into contracts which require their purchase. However, most contracts have maximums which protect the winery to a great extent. But the farmer has no such protection.
If the farmer is in a prestigious appellation, such as Napa Valley, he is not in nearly the predicament of a lesser appellation, or a farmer who must sell his product as California appellation. Since there is only a limited ability to process so much wine, all Napa Valley grapes will get processed. Each more prestigious appellation will bump the less prestigious until those at the bottom of the pecking order may have no place to go. That has happened in the past, though I don’t know if it is happening more recently. There is some capacity to absorb larger production, but then, as I say, it results in oversupply which creates its own set of problems.
For the large scale producer, which may be looking at a world market, overproduction in one place can get balanced out by shortage in another. But that only goes so far. And over the long term, the only solution for overproduction is ripping out vines, which in fact has been happening on a large scale in Europe. In the long run, that is probably a good thing as supply and demand are brought into better balance, and the grapes removed from production are of lower quality.
But short of being able to control nature, the problem of alternating over and undersupply is not going to go away. It is a problem built into the business, and, unfortunately, introduces unpredictability in everything that we do.