"While demand for premium wine will increase this year, there are clouds on the horizon that should be considered," the bank said. "We believe total and per-capita wine consumption in the U.S. will drop for the first time in more than 20 years due to emerging generational shifts in consumption patterns that we see accelerating in the near term."
SVB's forecast also looks for "tens of thousands of additional grape acres" to be permanently pulled from the California's San Joaquin Valley, an agriculture region hit by the drought and where many grape growers have looked to convert some or all of their acreage to more lucrative nut production. The pullouts also reflect old vineyards that are no longer economically feasible due to the lack of production and the lack of demand because of low prices for certain varietals.
"If we can get back into supply and demand balance, the overall price of grapes down here should rise," said Peter Vallis, executive director of the San Joaquin Valley Winegrowers, a group representing approximately 60 percent of the state's total grape crush. "It should rise because right now the pricing … and market for grapes is relatively at production cost."
Vallis insists that the drought hasn't been the biggest factor affecting Valley grapes nearly as much as the weak price due to what some analysts have called as "a worldwide glut," particularly of cheaper wines from New Zealand, Australia, Chile and Argentina. "The strong dollar does have an effect on the low end of the market but also has an effect on every end of the market."
The California Department of Food and Agriculture's preliminary wine-grape crush report released last week said the state's total crush was valued at $2.5 billion in 2015. By volume, the statewide grape crush was down 7 percent to 3.86 million tons but still was the fourth largest harvest on record.
"There's plenty of wine," said Gladys Horiuchi, a spokesperson for the Wine Institute in San Francisco. "And it's extremely high quality."
In 2015, the Napa region accounted for just 4 percent of the statewide wine production, but due to its premium prices it represented about 21 percent of California's total crush value (revenue to growers). The state's figures show the Napa Valley region's 2015 tonnage fell by 29 percent from 2014. Unfavorable weather hurt the Napa harvest last year. Vintners say they are hopeful for a better crop this year but it's too early to tell.
A lighter harvest in 2015 and strong demand for luxury segment wines is encouraging some Napa region vintners to raise prices this year.
"We held our pricing the last few years," said Michael Honig, president of Honig Vineyard & Winery in Rutherford. "People seem to be somewhat receptive as long as you don't become egregious and take huge markups."
Emma Swain, CEO of St. Supery Estate Vineyards & Winery in Rutherford, said her winery is feeling the effects of decreased harvest in 2014-2015. "We had two short years and we've really been trying to not increase pricing, but essentially what we've had to do is remove some of the ways we do business for by-the-glass (with restaurants) and things like that because we just don't have enough wine to do it."