The skinny on wine grape prices in Sonoma County
I went to an interesting seminar the other day where they laid out the “mechanics” of wine and grape pricing. Here goes. The retailer marks up a bottle of wine about 1.5 times. The distributor marks up the bottle of wine about 1.33 times. And the winery needs about a 50% margin. The actual grapes constitute about 50% of the actual cost of the bottle of wine – the rest going to the bottle, case, cork, label, marketing, etc. So for a $50 bottle of wine, if you do all the math, the grapes are worth about $6.25 a bottle – which if you do some more math comes out to about $4,500 a ton if you assume 60 cases to the ton. (the astute reader will notice that these numbers don’t correlate exactly to those mentioned elsewhere on this web site. Both sets are right in different situations). That works out to just about ‘price per ton = 100 times the bottle price at retail’. So the grapes for a $20 bottle of wine should sell for about $2,000 a ton.
But…very, very few grape growers get paid according to bottle price. Many get paid in relation to the Sonoma County average price which is recorded in the USDA’s annual Crop Report for grapes usually called the “Crush Report”.
The Crush Report
The USDA, by law, tracks every lot of wine grapes sold. They track the tonnage, the sugar content and the price. All this information is collected together after harvest for the state by region and presented as a report in March of the following year. This report contains every lot of grapes sold in California. To say the least it is big. The report for just Sonoma County alone is large. If you want all the details go to the USDA’s site and view the latest crush report. We are district 3 and table 8 shows all the detail and table 10 shows the summary.
The Average Price
From the Crush Report report, an average price is establish for each variety of grape sold in each region/county. This average becomes the primary benchmark for contract negotiations in each County. The average for a particular variety can vary significantly from County to County and it is a good education in the value of vineyard real estate in different counties to review the differences in averages. It is important to note that average means that the County’s entire revenue for a particular variety is divided by the entire crop for that variety. Varieties which have large segments that are sold at low prices – like varieties that end up in champagne (which are sold at a much lower in price than the same variety sold for still wine) or blush wines (like white zinfandel) have their average skewed lower. The average also does not include the value of all grapes grown by wineries for their own use. If there is no cash transaction, there is no record kept.
So How are Contacts Written?
Most grape contracts are 3 to 5 year evergreens. That means they automatically renew every year unless one party cancels. And usually cancellation takes 2 to 3 years to take effect. This gives everyone time to find someone else to contract with.
It used to be that most contracts were written relative to the Sonoma County average price. But that seems to be fading away as market volitility has made it less attractive to wineries. You can still see many contracts written for average, 90% of average, 120% of average, the 75th percentile of the report but we are also seeing contracts written at specific prices with specific incrases over time.
The average price for a variety in a county does not really reflect the spot price for that variety in that county that year. In Sonoma County 90% of the grapes are sold under long term contract. The other 10% is sold on the spot market. Because so few grapes are sold on the spot market, it tends to move around widely while the average price – which includes all the long term contracts that aren’t moving that much – moves much more slowly. This has the general effect of stabilizing the market. However, it can make it very difficult to set the price for varieties that are experiencing large increases (or decreases) in price over several years. Especially if there are large blocks continuing to sell at old prices holding the average down.