The U.S. Wine Market in 2030 and Export/Import Market Dynamics James Lapsley, Ph.D. Researcher, Agricultural Issues Center Adjunct Associate Professor, Viticulture and Enology, UC Davis

Topics to Cover Demand for wine in 2030 Population growth and possible per capita consumption changes Where will the grape supply come from? Planting dynamics in District 13 Understanding the effect of “Drawback” History and effect on bulk wine shipments Can Winegrapes Compete with Almonds?

U.S. Population Projections Millions of People 2010

2020

2030

Increase

“White”

231

255.3

267.6

36.6

Black

42

44.8

49.2

7.2

Asian

17.3

18.8

22.8

5.5

Other/Mixed

18.4

15

18.9

.5

Total Population 308.7

333.9

358.5

49.8

“Hispanic”

50.4

63

78.6

28.2

Over 20 years

224.6

249.3

269.5

44.9

Source: U.S. Census Projections

Two Straight Line Projections Total U.S. population is expected to grow from 308.7 million in 2010 to 358.5 million in 2030—a 16% increase. Table wine sales in 2010 were 278 million cases. A 16% increase would mean 322 million cases in 2030 Total adult population is expected to grow from 222 million to 269 million—a 20% increase. That projects to 333 million cases in 2030

Adults and Per Capita Consumption, 19702012

200

173

2.58

2.48

2.29 1.98

1.78

4

182

134

100

228

194

2.81

2.98 3.08

2012

2010

2005

1995

1990

1985

1 1980

1975

1.05

50

3

2

2.13

2000

150

154

147

164

211

222

5 Per Capita Consumption (gallons)

Adults Per Capita Consumption

1970

Adults (millions)

250

2010 Wine Market Council Study Percent Adult Population

Core Consumers enjoy at least one glass of wine a week or more. At 21% of the adult Beer/Spirits population in 25% 2010 they numbered about 47 million and Marginal they consumed 14% 91% of all table wine—averaging Core 70 liters per 21% person Source: Wine Market Council

Abstainer 40%

Marginal consumers drink less than 1 glass a week, although they say they enjoy wine . They drank the other 9%

Percent Adult Abstainers by Country, 2004 % Adult Abstainers

40 30 20 10

Source: WHO Global Status Report on Alcohol 2004

U.S.

Canada

Argentina

Japan

U.K.

France

Germany

0

Hispanics account for 58% of the increase in population In 2010, Core Hispanic consumers were 3% of their ethnic group. A 2005 study showed 23% of Hispanics drank some wine, lower than the general market But Hispanics under 40 years old drank one more glass a month than did the general market. Acculturated Hispanics drank more wine than their cohort Hispanics have lower levels of abstaining than the general population Source: Wine Market Council Private Study

What if by 2030??? Hispanics adopt wine as they acculturate? Abstention decreases from 40% to 25% of adult population? Wine consumption increases from 35% to 50% of adults and Core Consumers grow from 21% to 30% of adults?? Core Consumers increase from 44 million to 81 million and continue at 70 liters?

Adults and Per Capita Consumption, 19702030 Per Capita Consumption

250 200 134

249

3.56 2.81

3.8

4

5 4.2

100

2

1.05

2030

2025

2020

2015

2010

2005

2000

1995

1990

1985

1 1980

50

4 3

2.98

2.58 2.48 2.29 1.98 2.13 1.78

1975

150

147 154

164

173

182

194

211

222

239

260

270

6 Per Capita Consumption (gallons)

Adults

1970

Adults (millions)

300

Well, if that happens. . . Table wine consumption would increase by 50% to about 430 million cases We would need about 360 million gallons of wine more than in 2010 Which at 170 gallons/ton comes to 2.1 million tons of grapes Where will the wine come from? Imports or Domestic production? Both?

Percent Winegrapes Crushed 2012 The San Joaquin Valley is VERY important in supplying wine grapes

All Other Districts 34%

District 14 8%

District 11 19% District 12 9%

District 13 30%

Central Valley Supply Let’s assume that California maintains its current 61% share of U.S. Market. 360 million gallons x .61 = 220 million gallons Let’s further assume that 40% will retail under $6 a bottle and will come from the lower Central Valley. 220 x.4 = 88 million gallons This requires about 515,000 tons, which at 15 tons/acre requires 34,333 acres Since 2001, District 13 acreage has declined by 21,000 acres.

District 13 Bearing Acres Have Declined by 21% in 12 Years But yields have grown from 10-12 tons/acre to 14-15 tons/acre

80 60 40 20

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

Bearing Acres (thousands)

100

Wineries have met demand by importing inexpensive bulk wine Bulk Imports Price per Liter

1.2 1

200

0.8

150

0.6

100

0.4

2012

2011

2010

2009

2008

2007

2006

2005

2004

0 2003

2002

0.2 2001

50 2000

Liters (millions)

250

1.4

Price per Liter

300

Bulk Wine Imports and Price per Liter

Volume of U.S bulk wine imports by origin, 20092012 400 350

2009

2010

2011

2012

Liters (millions)

300 250 200 150 100 50 0 Argentina

Australia

Chile

France & Italy

World

Much Exported Wine is Shipped in Bulk Flexitank in Shipping Container

Source: OIV 2013

Percent 2012 Wine Shipped in Bulk Argentina

45

Australia Chile France Italy Spain U.S.

53 37 20 31 51 43

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Bulk Wine % of Total Wine

Bulk Wine Percentage of All U.S. Wine Imports, 2000-2012

35

30

25

20

15

10

5

-

Annual unit value of U.S. bulk wine imports and exports, 2007-2012 1.4 Unit Value ($ per liters)

1.2

Imports

Exports

1 0.8 0.6 0.4 0.2 0 2007

2008

2009

2010

2011

2012

Bulk Shipments Are Not Inexpensive A container can handle about 5500 gallons (weight issues on roads) $400-450 for the bag Freight Chile to Oakland? About $1800 Freight Adelaide to Oakland? Maybe $2200 Between $0.40-$0.50 a gallon plus hauling from the port for wine valued at less than $4 gallon

So what is a “Drawback”? A return of paid duties and taxes (“drawback”) when an imported good is exported Dates back to 1789 in the U.S. Allows for “substitution” of “commercially interchangeable goods” i.e. the exporter need not export the originally imported goods on which duty and tax was paid IF the government determines the goods are “commercially interchangeable”

What does this have to do with wine? In 2001 a California winery received a “predetermination letter” from Customs and Border Protection defining table wines of the same color and within 50% of value to be “commercially interchangeable” Similar letters were issued to other major wineries and drawbacks on duties paid on imported wine were claimed when wine was exported

Defined in 2008 Farm Bill In 2007 CBP moved to withdraw the letters of predetermination In May of 2008, wine interchangeablity was written into the Farm Bill “wine of the same color having a price variation not to exceed 50 percent between the imported wine and the exported wine shall be deemed to be commercially Interchangeable”

Why is this important? It encourages trade by reducing costs Duties and excise tax come to about $0.3457/L for bottled wine and $0.4227/L for bulk wine In 2010 firms received $23 million in drawback for bottled wine and $47 million for bulk wine As a percent of value, drawback is much more important for inexpensive bulk wine and may equal 40-50% of the value

Excise tax and import duty rates in 2011 Two liters or less (bottled)

Over two liters but not over four liters

Over four Over four liters, Chile liters, MFN or Australia (bulk) (bulk)

($/liter) Import duty rate

0.063

0.084

0.14

0.037

Excise tax

0.2827

0.2827

0.2827

0.2827

Total

0.3457

0.3667

0.4227

0.3197

U.S. bulk wine imports and exports, 2000-2012 400 350

Import

250

Export

200 150 100 50 2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

0 2000

Liters (millions)

300

Drawback encourages both imports AND exports Percent Imports by Volume U.S. Sales California Exports as Percent of Production 40 35

% Imports

% Exports

30 25 20 15 10 2000

2002

2004

2006

2008

2010

2012

Friendly Competition?

2012

2011

2010

2009

Bearing Acres $/Ton

80

70 300

60 250

50 200

40

150

30

20 100

10 50

0 0

$/Ton (2012 dollars)

90

2008

100

2007

2006

2005

2004

2003

2002

2001

Bearing Acres (thousands)

District 13 Bearing Acres 400

350

World map weighted by GDP in 1960

World map weighted by estimated GDP in 2015

Average Gross Revenue Per Acre

District 13 Winegrapes vs. Fresno Almonds

Dollars per Acre

6,000 Winegrapes Almonds

5,000 4,000 3,000 2,000

Source: County Ag Commissioner Reports and Crush Reports

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1,000

Real Gross Domestic Product (GDP), with projections $100 $90

World

$80

Developed economies less USA

$70

United States Developing economies

$50 $40 $30 $20 $10

2030

2028

2026

2024

2022

2020

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

$0

1980

$ trillions

$60

The World Matters for Both Almonds and Wine Almonds

Wine

% World Production

80

7

% California Production Exported

70

17

% of World Shipments

90

4

California seems to have a natural advantage with almonds over other growing regions: Better (more reliable) weather at bloom, dry summers, and generally available water. Increasing incomes in developing worlds have led to increased consumption of “portable protein” No religious prohibitions against almond consumption.

2012

2011

2010

2009

2008

2007

2006

2005

Almonds

2004

2003

2002

1,500

2001

2000

Gallons or Pounds (millions) 2,000

Total California Shipments (Domestic and Export) Wine

1,000

500

-

The future of Winegrapes in districts 13 and 14? With average yields of 14-15 tons/acre, the region is very productive but is in competition with other bulk wine producing regions of the world. Of the 105,000 acres currently planted in districts 13 and 14, 90,000 are over 10 years old and will probably be pulled by 2030. Will those acres be replanted and another 35,000 added to meet my projected increased demand—or will wineries meet demand by importing bulk wine? Replanting is probable only if major wineries commit to long-term contracts and if California winegrapes can compete with other perennial crops.

Growers have alternative crops Sale Production Price Total Income

Pistachio 3,500 $1.97 $6,895

Almond 3,500 $1.82 $6,370

Wine Grapes 12 $400.00 $4,880

Walnuts 6,000 $1.15 $6,900

Cultural Costs Overhead Costs Harvest Costs Total Expenses

$1,680 $504 $389 $2,573

$2,140 $330 $500 $2,970

$1,132 $410 $483 $2,025

$1,186 $325 $864 $2,375

Planted Acres Income per Acre Expenses per Acre Net Income per Acre Sale Price per Acre

112.85 $6,895 $2,573 $4,322 $32,742

56.71 $6,370 $2,970 $3,400 $24,000

125 $4,880 $2,025 $2,855 $22,558

77 $6,900 $2,375 $4,525 $35,396

Capitalization Rate

13.20%

14.17%

12.66%

12.78%

Source: Correia-Xavier, inc.

Fresno County Harvested Acres Harvested Acres (thousands)

160 140 Winegrapes

120

Almonds 100 80 60 2001

2003

2005

Source: Fresno County Ag. Commissioner Reports

2007

2009

2011

Conclusion? San Joaquin winegrape growers are excellent farmers. They probably can out compete foreign producers in the long run But can winegrapes compete with other crops? It seems likely that U.S. wine consumption will increase by 50% and that by 2030 much of the wine consumed will be foreign.