And that is why, says Deep Tank, "you're about to see a shitstorm of epic proportions."

WINE TALK
#1

The Coming Carnage in the California Wine Industry : Vinography" onclick="window.open(this.href);return false;

#2

I liked the line, “from a balance sheet perspective there is a single word to describe this situation: fckd.” Quite to the point.

#3

Good, the wineries that were taking the dirty money from mortgage lender and hedge fund managers will feel the effects of an ill-conceived short term profit making strategy.

I will buy when they set the price right . . . .

#4

Intense article. I think it is likely true, for the most part, but a bit overblown.

#5

I kind of figured there would be a shake down of all the custom crush wines at some point. The economic crash is obviously going to make that a secondary concern.

This was scary with all the European wine out there from the last couple vintages also.

A few weeks ago I was walking through one of California’s largest wine warehouses, and it was unbelievable what a shitpile of wine is sitting in there. I’m talking big name wineries with unbelievably huge levels of stock. I looked closer and it’s 06’s, 05’s, and rows and rows, pallets and pallets of this stuff. Wines priced anywhere from thirty to a hundred dollars, mostly Napa but a lot of Sonoma too. Hundreds and hundreds of thousands of cases. And I’m thinking to myself, ‘God, this is not good.’ People are waiting for some big day to come when they’ll be able to sell this wine, and it’s just not going to come. It’s never going to come. And I’ll tell you another thing. > There’s no way Wine 'Til Sold Out or any of those other places could possibly sell all this stuff. It was that much wine.

#6

Costco to the rescue.

#7

and Trader Joes

#8

I’ve told a number of the local wine makers that I like to go to Costco so I can see who was in trouble. They always told me I nuts until about nine months ago. Now they tell me the same thing.

#9

Thanks for posting this link Roberto.

#10

Very interesting article.

In there, it links to an article in the Chronicle about foreclosures. Next to it, is this photo:

Who is this? It looks like Gary Busey playing a winery owner.

#11

Were Cali banks really giving [secured?] loans to people to purchase barrels and fruit [with the barrels and fruit as the collateral]?

#12

Huh - apparently so:

“What I’m most surprised at,” he says, “is just how many banks aren’t freaking out as bad as they should be. A number of them don’t seem to want to admit just how bad the situation is. These banks have been giving away money according to a stupid mathematical formula about how much your wine should theoretically be worth but those numbers have no basis in today’s reality. Eventually the banks are going to realize, ‘Holy Christ, what have we done. We’ve been putting money into the shittiest industry possible for the last 10 years.’”

#13

Bill Harlan.

#14

I’m sure glad we got out when we did. I think the article is pretty spot on. Anyone who’s carrying a decent debt load is gonna get (or already is) in trouble.

Isn’t that pic of Bill Harlan?

#15

I worked as CFO of a winery in California - I won’t say where, and I was only there about six months - long enough to bring their financials up to date (they were two years behind) and tell them that they couldn’t afford me.

We could borrow on the following basis:
Grapes and barrels were not usable as collateral - only finished (through fermentation) wine. We could borrow against finished wine in barrel at the rate of 50% of the bulk wine’s value (IIRC, Ciatti’s report gave us three values, we used the middle one). We could borrow against bottled wine at 50% of FOB (FOB is roughly half of retail). Bulk wine prices were pretty low, so we could borrow a lot more against bottled wine - of course, you need to find the money to do the bottling… I think our deal was pretty similar to others. I felt that it was a little too generous to be prudent, and it was easy to get into trouble with the Bank’s money.

Obviously one of the real problems is that if bulk wine values or FOB drops, your ability to borrow declines, and if you’re already at your limit, you’re screwed. If there are enough people in this position, you could end up with liquidations pushing prices lower, which in turn drops borrowing limits, which forces more liquidations, and so on.

#16

Thanks. I thought from the context that it might, but I couldn’t see where it said that.

Perhaps he is so well-known in SF that a caption isn’t required, like a photo of Obama or Bush in Washington? [shrug.gif]

#17

Have you SEEN recent pictures of Gary Busey?

More like


#18

Wow - I had always just kinda naively assumed that people started small and self-financed.

The idea that you would get into the grape-juice-distillation bidness as more of a speculative endeavor strikes me as incredibly, well, ah, “risky”?

[I would say “insane”, but I don’t want to step on too many toes around here…]

#19

newhere

To some degree, and in hindsight, possibly. But really this fits the typical bank asset-based lending model, which generally works fairly well as long as there isn’t a once-in-a-generation economic catastrophe. It’s not much different than, say, making a loan to a small newspaper publisher to purchase a printing press. Your collateral is the printing press and I guess the newspapers it prints…not worth a whole lot if the loan defaults. As long as the business is successful and cash flows the loan will be fine, but if the business starts to suffer then the bank is looking at a loss. In fact in the example above I’d say a bank lending 50% of the bulk/discounted value of the collateral is pretty conservative.

It seems like half the people in this country are mad at banks for making too many loans, and the other half are mad at them for not making enough…

#20

It’s definitely risky to make wine, but more so when you’re making brandy. [berserker.gif]