No Winegrape Shortage: Citi Report Based On Bad, Incomplete Data

Citi’s recent analyst report on Treasury Wine Estates (TWE.AX) is inaccurate and its recommendations in doubt because its foundation data was sloppy and incomplete. What’s more, the best data available indicates that California could reach over-supply conditions by 2017.

As Fearmongering In The Vineyard stated, the Citi study’s shrill, apocalyptic vision of impending doom from a U.S. winegrape shortage is at odds with both reality and the industry’s best experts and data.

What’s more, the Citi report’s flawed data rips the backbone from the study’s conclusions and casts serious doubt on most or all of its conclusions.

NOTE: Citi refused to send a copy of the study to Wine Industry Insight. We were able to write this article because one of the 127 Treasury Wine Estates executives and employees who are our subscribers sent it to us.

SUPPLY VS OVERSUPPLY: CRITICAL ECONOMIC ISSUE

The issue of winegrape supply and demand  goes far beyond speculation about Treasury Wine Estate’s share performance.

It goes right to the heart of balancing supply and demand in the U.S. wine industry. And because California produces more than 90% of the U.S. supply (according to the Wine Institute), supply data from the Golden State is the primary measure.

Similarly, seriously flawed brokerage analyst reports in the mid-1990s set the stage for the huge glut of the early to mid-2000s.

Issuing a report such as this one by Citi without properly gathering all the data could drive a similar rush to over plant.

As we’ll see, below, the best data, including massive amounts of analysis from Allied Grape Growers, shows that California seems to be on the cusp of a careful supply balance which, however, may be heading toward over-supply.

Allied Grape growers is a wine grape marketing cooperative headquartered in Fresno, but with more than 600 members from all over the state including the North and Central Coasts and Sierra Foothills.

THE CITI ILLUSION: THE SKY IS FALLING

Nothing encapsulates the Citi study’s central flaw better than this chart borrowed from Business Insider because Citi never responded to my requests for a copy of the report:

Wine Executive News Premium subscribers may click here to access more of the ridiculously amateurish Citi report which was faxed to Wine Industry Insight by a TWE executive.

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The Citi report — which repeatedly emphasizes that Treasury is poised to perform better because of the impending grape shortage — then stated that,”To meet future demand we forecast that acreage in California needs to increase by 2.5% p/a, or approximately 12,800 acres each year.”

Ironically, that Citi statement is not far off the same mark as Allied Grape Growers. The problem is that Citi got its overall acreage numbers wrong because it didn’t do all its homework.

(See related article: Analyst Or Reporter: It’s All About Reliable Data)

THE REALITY: SUPPLY FAIRLY BALANCED

 

The Allied Grape Grower (AGG) chart, above, actually offers a glance at one of the best balanced markets California has seen in decades.

This overall view, showing a possible shortage in 2013 is within the error limits of the study. Indeed, 2012 was forecast far smaller than it turned out. Most importantly, even if shortages of this magnitude were to occur, it would be a pebble in one of the industry’s shoes rather than leaping off the precipice that Citi has forecast.

Significantly, viticulture experts — and AGG — agree that any given vineyard in the state can increase production by 5 to 10% without sacrificing quality.

Jeff Bitter, AGG’s VP of Operations told WII in an email that increasing yields takes winery cooperation.

“We have to have wineries on board with higher yields,”said Bitter. ” A more aggressive management may need to take place in the vineyard to assure that higher yielding vineyards are not ‘over-cropped’ and are ‘in balance.’ This effort to increase yields while maintaining quality has to be a joint effort between the winery and grower and not a battle of ‘too many tons’.”

 

HOW DID CITI MISS THE KEY FACTS?

Citi’s problem is that they did not gather a full data set before coming to their apocalyptic prediction. The California Crush report statistics are voluntary and consistently under-reported.

According to Nat DiBuduo, President and CEO of AGG, the voluntary nature of data collection used to create the report makes its data inaccurate.

Writing in AGG’s Spring 2013 Update, DiBuduo said, “The current [Crush] report shows that total reported winegrape acreage now sits at about 480,000 acres (with 20,000 of that being non-bearing).

However, the state has also estimated the actual amount of winegrape acreage to be much higher, at 546,000 (with 38,000 of that being non-bearing).

“With the help of the state’s numbers, our market evaluation and our own independent survey of grapevine nurseries, AGG has estimated a total winegrape acreage of 590,000 (with 70,000 currently non-bearing),” the report continued.

“Third party sources have put total winegrape acreage, reported to the Department of Pesticide Regulation, at just over 600,000 acres (with no breakdown on how much of that is non-bearing).”

In an email to WII, DiBuduo stressed that the Department of Pesticide Regulation figures may be the most accurate because the reporting is required by law.

AGG estimates that more than 70,000 new vineyard acres have been planted and that the current rate is between 15,000 and 20,000 net acres per year.

According to Citi’s report, “To meet future demand we forecast that acreage in California needs to increase by 2.5% p/a, or approximately 12,800 acres each year.”

Of course, to make accurate projections on which a solid analyst report is built, one must start with good, complete data.

POTENTIAL OVERSUPPLY AT CURRENT PLANTING

“Bottom line is that we figure we have been adding 15,000 NET new acres annually for a number of years now,” said Jeff Bitter.

In an email to WII he said that, ” Within three years that will jump to 25,000-30,000 based on today’s vine sales.  This is too many new acres to plant based on shipment trends, and although we could easily absorb it for a year (or maybe two), if we continue putting in 30,000 NET new acres per year, we will experience oversupply again.”

THE IMPOSSIBILITY OF EQUILIBRIUM?

DiBuduo, writing in AGG’s Spring 2013 update said:

“There is lots of debate about whether we are currently experiencing a shortage of California grape supply, or if we are actually experiencing market equilibrium that just “feels” short because we have experienced so many years of oversupply?

“Buyers will surely identify the market as “short of supply,” citing the rapid and sustained increase in grape prices since 2010.

“Growers will argue that we are at equilibrium, because the current prices being paid are needed in order to be economically sustainable.

“Most growers are quick to point out that they are not experiencing a windfall of profit, despite the increase in prices. This is because any windfall in revenue has been offset by a windfall of costs over the last few years, coupled with a need to make up for lost investments during the “hard times.”

“The question some are asking is whether or not it is possible that we could experience equilibrium or market balance on a more permanent basis?

“History and economics tell us that it is technically impossible to stay at true equilibrium, and if you look at almost any market for any product (or service) over time, it will point to the argument that cycles always exist.

“But the silver lining to this discussion is that there is one thing that may not necessarily be repeated, and that is the severity or depth of a cycle.”

Finally, more reading from last year that might have helped Citi: Shortage? Or Not? Are Growers About To Over-Plant Again? (May 16, 2012)