Grape prices driving vineyard values

The value of a grape vineyard is determined by many factors, a key element being the value of the grapes and, in turn, the value of the wines made from them, says Tony Correia, a veteran specialist in vineyard appraisals.

Correia, who is based in Sonoma, detailed appraisal methods during a vineyard valuation seminar held in Lodi by the California Chapter of the American Society of Farm Managers and Rural Appraisers.

Vineyard valuations are essential for a number of reasons, such as borrowing, sale or purchase, disputes between partners, or taxation, he said.

Yet another reason, financial reporting is gaining in importance as the U.S. adopts international valuation standards associated with the global wine market. As a consequence, he predicted, there will be increasing demand for vineyard appraisals.

Using a comprehensive collection of data to determine value, appraisers often start by considering the vineyard location, which encompasses its region (for temperature), state district, appellation, and federal American viticultural area.

Specifically critical for high-end wines are the vineyard’s climatic conditions of temperature ranges, precipitation, microclimate, and mesoclimate.

The soil’s general characteristics along with its fertility, limitations, and erosion also come into play. “Keep in mind the importance of the soil in producing high-end quality grapes when the vines are stressed,” Correia said.

For water, the source, cost, and timing of availability are not the only considerations. The distribution system (both above ground and below), drainage, and erosion control are critical. “And remember to watch for permits, licenses, and reservoirs. Having all the legal rights to the water in place is very important,” he said.

Appraisers watch for availability of support systems, such as vendors, management, labor, crushing and winemaking facilities, and homesites, and even proximity of competing operations.

Among the living components of the vineyard are specific varieties and clones, rootstocks, vine density, production history, age and condition, and the presence of phylloxera, Pierce’s disease, nematodes, or other pests.

Non-living improvements, or the trellising, irrigation, and frost protection systems, are taken into account.

Other characteristics are partial ownerships, topography and access, zoning for a potential winery, and contracts for the grapes. “As a vineyard becomes more expensive,” Correia noted, “the land value becomes a much higher percentage of the total value.”

The appraisal methodology used can vary. Price per acre is one way, but price per ton of grapes, or even price per foot of cordon might be alternatives.

The value of the homesite component has been escalating in recent years, to a greater extent on a smaller acreage. For example, a few years ago the components on a 20-acre vineyard estate were 34 percent for the land, 29 percent for the vineyards, and 37 percent for the homesite. However, for a 14-acre estate, the proportions were 29 percent for the land, 25 percent for the vineyards, and 46 percent for the homesite.

The difficulty for the appraiser is the homesite values have softened in more recent years, while the vineyards reflect the amount they can earn.

According to Correia, buyers today are looking more at the ability of the property to generate income than they have in a long time.

The trick, he said, is for the appraiser to spend enough time with sufficient data to extract the homesite value from the overall market value.

An appraisal can be based on a cost approach which treats the land as a capital cost. However, Correia warned that in developing vineyards the first three or four years are without return. He also noted it is not sound to develop new vineyards when values are not going up.

Imposing uncertainties over the analysis are the components of market trends. These include industry cycles, consumer preferences, and media influence on consumer markets. “And then there’s the general economic trend, which is the 8,000-pound gorilla in the room. Where is the economy going and what will it do to the wine market? The wine industry today is a global market. We sell to the entire world, and we buy from the entire world,” he said.

Recalling the numerous boom-and-bust cycles of the California wine grape industry’s history, Correia said the current period is just another of the same, with signs of the wine glut being absorbed and potential shortages looming.

The big question is how the industry will replace acreage to meet the new demand in view of high land costs, abiding water issues, environmental constraints, materials and labor costs, and even the dismal California economy.

And, he observed, this time “high-end” California wineries, particularly several on the North Coast, also face in the next 10 years or so a “generational transition.” This entails complicated estate taxes and planning that will involve appraisals of property as it passes to younger generations.

Correia said vineyards are “lazy” assets that require “patient capital” and tend not to work well for public companies that demand quarterly results.

Another new issue is the need for the California industry to rise to meet global competition. “Can we afford to plant? Can we afford not to plant? If we don’t plant to supply our wineries with grapes, they will be displaced by imports.”

As an example of the global scope, Correia said he recently saw “Down Under” Chardonnay, imported from Australia and marketed by California vintner Fred Franzia, selling for $39 a case in a Sonoma supermarket. Franzia captured headlines some years back with his popular Charles Shaw label, dubbed “Two-Buck Chuck” for its $1.99 a bottle retail price.

In view of the uncertainties, Correia said the vineyard market for the first quarter of 2009 was characterized by “fewer sales, fewer buyers, fewer sellers, and crowded sidelines, waiting …” with sellers thinking is was 2007 (during high values) and buyers thinking it was the 1930s.

TAGS: Grapes
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