Grape optimism comes with a warning
There is a definite buzz among grape growers as the 2013 harvest approaches.
Those on contracts can look forward to an around 30 per cent increase in grape prices on last year on average and lessening pressure on yield caps.
Most major wineries are offering about $1600 per tonne for sauvignon blanc and allowing up to 14 plus tonnes per hectare production.
Those without contracts are looking to make the most of what appears to be a shortfall in production.
Spot grape prices look likely to be in the region of $1800-$2000/t for sauvignon blanc, with higher examples likely.
The number of growers producing juice/wine for on-sale is likely to increase, as they seek even better returns.
Nature has played its part to date and all reports indicate at least an average year's production.
At the same time Wine NZ statistics show positive growth in export volumes and prices in both bottled and bulk sales over the past year.
This may seem like good positive stuff, however, in our view, growers need to achieve an average gross return of at least $20,000/ha to achieve a reasonable return on capital invested in land and development.
Despite improved prices, 2013 returns will on average be below this desired level.
This bubble of optimism comes after three years of low returns and shaky times for growers.
This downturn has seen a number of vineyards forced into receivership/liquidation.
In addition, financiers have ''pressured'' numerous other sales. It would be reasonable to say that a number of vineyards on the market are listed under these conditions.
Growing grapes is farming and swings in farm gate returns are to be expected. To date, viticulture has been very favourable to the grower with only the past 3-4 years showing poorer returns.
As with all farming, vineyards of economic size and strong equity have survived. A large number of vineyards operated at a little better than break even over the troubled times.
Vineyard failures are not over.
The improved conditions likely for the 2013 harvest will not be enough to save vineyards with low equity and/or poor management that are at the ''top of the cliff'' with financiers waiting to give them a push should the 2013 results not prove to be the elixir required.
Some of these vineyards produced their own wine labels in an attempt to increase returns, only to become more indebted as they struggle to finance wine stocks that have not sold to expectation.
Judging from our client base, we do not consider the number of vineyards in this position to be significant.
A major concern going forward is that the grape price/grape supply and demand does not fluctuate widely. The long-term viability of some vineyards will depend on strong and steadily growing grape prices.
No-one expects a return to the days of $2500 per tonne for sauvignon.
However, it would be very desirable not to have jagged highs and lows as supply and demand move in and out of balance.
The challenge here is to the winemakers. Market growth has been strong and this will need to continue with strong marketing plans and efforts.
The talk is that next year's crop could be well above average.
Hopefully wine companies can ensure market growth is sufficient to absorb a bumper year.
It is also important that the companies hold steady on yield caps.
While modest increases would seem sensible, to remove yield cap requirements in a low-yield year will have a negative effect when the pendulum swings the other way, not to mention quality issues.
A word of warning and advice there are deals being made out there. There is a scramble for grapes in 2013.
Be aware of who you are dealing with. If you are selling to an unknown party, make sure that at the very minimum you retain title to your grapes until fully paid.
Even better of course is payment on delivery or a letter of credit. Failure to pay the grape grower was a reasonably common occurrence in 2008-2009. Fortunately in our client base this has not been an issue over the more recent years but this is not something to be complacent about credit
Greg King is a director of Winstanley Chartered Accountants Ltd. firstname.lastname@example.org;
The Marlborough Express