During the recent grape glut, many growers felt forced to make bulk wine when they couldn’t get the prices they sought for their grapes—or couldn’t sell their crops at all. With the supply suddenly tightening, however, many have found that making bulk wine was a good decision. Some growers report that they’re making more from the bulk wine than they could have gotten for the grapes alone. Some even see it as an alternative path for the future—even if there are plenty of buyers for their grapes today.

Winegrower Michael Rowan looks at the situation that way. He owns 18-acre Wine Creek Vineyards in the Dry Creek Valley of California, where he grows Cabernet Sauvignon, Merlot and Cabernet Franc. He says that for the past five or six years the market has been unpredictable, particularly as to who would buy grapes and who would repeat their purchases. “We faced being at the end of October with no customers. We had to look at the alternatives.”

As a result, he made wine six of the past seven years. “It’s turned out to be very workable for me,” he says.

Rowan says that it’s important to make good wine. He originally fermented the wine himself, but more recently he has used Mike Draxton in nearby Windsor, Calif. “I’m very comfortable with him. We take the same approach, and I have little to add once we agree on how to proceed.”

Rowan likes the fact that Draxton is set up to offer wine to many buyers. “The wine won’t sell itself, and he has contacts.”

He says the last lot he sold (2010) took 18 months, but it was his best lot. “I netted 15% above the Sonoma County average after crush fees.”

Rowan adds that he’s already sold his 2011 wine at a better-than-average price. As a result, he’s keeping his options open. “I don’t ever intend to commit all my grapes to one form of sale or another. I’m looking for long-term contracts—both for my grapes and my wine. I think this is a viable option; it could be very attractive.”

He says that he thinks buying well-made wine from good sources would appeal to many wineries, too. “They don’t have to have grower managers and other costs of sourcing the grapes, and they don’t have to pay until closer to the time they can sell the wine.”

According to Rowan, most wineries get no benefit from identifying their vineyard sources.

Beckstoffer makes bulk wine
David Beckstoffer is a grapegrower who also has made wine. The president of Beckstoffer Vineyards says that his family’s company, which has roughly 1,000 acres in each of Napa, Lake and Mendocino counties, has made bulk wine for four or five years.

Beckstoffer makes Cabernet from Napa and Lake counties and Chardonnay from Mendocino. “We did it because we couldn’t get the prices we wanted or even sell the fruit,” he admits. “But we prefer to sell the fruit as grapes, not wine.”

He notes that the situation is fluid. “The bulk wine market has changed. There was a huge inventory and low prices a few years ago. Last year prices were up. We still prefer to sell grapes, but there’s not as much difference in return now.”

Beckstoffer uses two primary custom wineries in California: the Coppola facility (once Chateau Souverain) in Geyserville and Mendocino Wine Co. in Ukiah. They use other wineries as needed and store the wine at Safe Harbor in Napa. They sell the wine themselves or use brokers.

Beckstoffer says that a few years ago, his firm was a big player in bulk wine with “hundreds of thousands of gallons,” but except for some 2011 wine, it’s all gone now. “We have less than 100,000 gallons of inventory now,” he says, “and there’s a lot of interest in that.”

Silverado Premium does, too
Silverado Premium Properties also makes wine from some of its large vineyard holdings. Doug Wilson, vice president of winery relations,  says the giant Napa-based grower typically makes a little wine every year, but he admits that it’s tricky when a grower decides to make wine. “It works in a big crop year when the market doesn’t take all the fruit. In 2008, for example, Chardonnay was a glut on the market.”

He adds, “It doesn’t always pay off. Growers are competing with wineries trying to sell their excess, and most of them have more experience.”

Nevertheless, Wilson agrees that the market has changed dramatically in 12 months. “I’ve never seen a change so quickly. There is almost no inventory left.” Wilson says that bulk wine prices are pretty high at present, and this situation is likely to last for one to three years before switching back—hard.

Timing is critical for selling bulk wine, too. There’s a limited market after a year, particularly at smaller wineries. “Wineries want to empty their barrels and tanks and bottle the wine before they harvest the new crop.” He adds, however, that big wineries can use some portion of older wine to blend.

Wilson also cautions: “When a grower makes wine, he has to think like a winemaker, not make wine through neglect. You have to work closely with the winery.”

Silverado likes to hold some grapes back and make a little wine to help market its fruit, but Wilson finds that many of Silverado’s customer wineries will provide some wine from their own production, perhaps before blending.

One problem with custom crushing for many wineries is that it can delay payment by six to nine months. “Some banks won’t allow it for that reason, even if there is a potential upside,” he says.

Silverado Premium Properties typically uses two custom wineries in the Central Coast and two in the North Coast. “We try not to ship grapes from one region to another,” Wilson says. He adds that it’s pretty easy to use custom crushers and that they produce good wine.

Wilson emphasizes that Silverado is a grower, not a winery. “We prefer to sell our grapes. And if we make wine this year, it will be because we choose to, not because we have to. We could sell every red grape and probably white grape we grow. We don’t see a lot of growers custom crushing this year. Most wineries are signing mid- to long-term contracts now to ensure they have fruit.”

Assisting growers
Helping growers make and sell their wine has become a key business for Mike Draxton, who also has a small brand of his own, Draxton Wines, in Windsor, Calif. A winemaker with 25 years experience and a wine broker, he began assisting growers in 2008, when there was a huge oversupply of grapes.

“For many, the other choices by October were to sell their grapes at a low price or let them rot. There were just a handful of big buyers by then.”

Draxton says that Sonoma County growers were being offered prices as low as $1,000 per ton (down from the $2,000 they previously received.) He offered an alternative, turning the fruit into wine.

“There was risk,” he says, “but many growers were willing to take that gamble.”

He says that making wine extended the sales cycle by many months and opened up the wider market of smaller wineries. “Now they could sell in lots from 100 gallons to 5,000 gallons. The growers could hold off for a better deal. They weren’t desperate anymore.”

Working with Ciatti Co., a leading wine and grape brokerage in San Rafael, Calif., to determine the typical prices, Draxton created a financial model that worked. As an example he quoted Alexander Valley Cabernet Sauvignon. “We looked at the minimum we would get for bulk wines. It was $10 to $11 per gallon.” How did that compare to getting $1,000 per ton for Alexander Valley grapes?

It turned out that $10 per gallon yielded the grower the same return as $1,000 per ton, based on 170 gallons per ton and after subtracting a $600 per ton production cost, 2% broker commission and eight months storage fee at 8 cents per gallon per month. So $15 per gallon equaled $1,800 per ton and $20 per gallon equaled $2,600 per ton. 

“This worked out well for most of my growers,” Draxton says. In 2009, the wines typically sold for $15 or $16 per gallon, so the grower ended up with the equivalent of $1,800 per ton—far better than if he had sold the grapes for $1,000.

The next year, 2010, had a smaller crop, and growers typically got $20 per gallon. This year, he believes it will be closer to $2,500-$2,600 per ton.

The scheme works better in lean years than when there’s a glut, of course, and right now growers who made bulk are doing especially well.

Continuing during shortage
Draxton believes many growers benefitted enough that they’ll continue to make some bulk wine, but he doesn’t recommend that they turn all their grapes into wine, just make some to balance their assets. “Most growers prefer not to make wine, after all.”

Still, wineries are offering $2,000-$2,200 per ton, less than the growers might get for bulk wine.

Draxton recommends that they turn perhaps 15%-20% of their grapes into wine. “It gives them options, and they can use the value they receive to negotiate prices for the other grapes.”

He also notes that large wineries are moving to broader appellations and just-in-time inventory systems, wherein they contract for about 85% of their needs in advance and adjust production by buying the last bit on the bulk market. “They can afford to pay a bit more since it’s only for part of the wine,” he says.

Draxton started the new business when case goods sales fell in 2008. It has grown from processing a couple hundred tons in 2008 to more than 3,000 tons last year, and he now works with more than 30 growers—most of them in Alexander Valley, Dry Creek Valley, Russian River Valley and Sonoma Valley, but also Lake, Mendocino and Napa counties.

Draxton makes wine at three facilities and has a bond at two of them. He admits that many in the industry used to think that growers who were forced to make wine must have something wrong with their grapes, but now people realize the market has changed.

Bin to Bottle, a custom winery in Napa, actually developed a special program for growers forced to make wine. Bin to Bottle processed the grapes into wine with no up-front costs, then spilt the proceeds with the growers when their wine sold. In 2009, the grower got 70%, but the program worked so well that managing partner John Wilkinson raised their share to 80% in 2010.

In 2010, Bin to Bottle had 300 tons in this program. Wilkinson expects it to drop to 250 tons this year, but he also says that many smaller growers may see the benefits of turning some of their fruit into wine. “They can do well, particularly with the tight supply.”

He says that few growers want to lock themselves into long-term contracts with prices rising, adding that some hold back 30% to turn into bulk wine.

Wilkinson adds that small growers tend to like the fact that they don’t have to put money up front, while bigger ones are more likely to just pay the processing costs and sell the wine on their own.

As for selling the wine, if Bin to Bottle handles the deal, there’s no commission, but other brokers charge 2%, deducted before the split.

A view from brokers
Glenn Proctor of Ciatti Co. recently met with 35 growers in Mendocino who all made wine last year and discussed making and selling bulk wine. “It’s been difficult to market grapes the last few years, but that’s changing,” he says.

Proctor notes that while growers once made wine only if they had to, that’s changed. “They’ve jumped in the pool and learned to swim,” he says. “Now, with experience, they’ve learned how to do it. They’ve learned that they can sell grapes or they can sell wine.” He calls these people “the new sellers,” and they’re entering the market with more options.

Still, he notes the risks of making bulk wine: It affects cash flow and delays payment for the grapes. “Some growers who made wine early on lost money, but growers who took that risk in 2011 did well.”

He also recommends certain custom wineries over others based on his experience. “In a year like last year, the winemakers had to be good to get good results.” He won’t share his recommendations except with customers, however.

Brian Hendrix of H&H in St. Helena, Calif., is another broker who sells bulk wine. “The process has worked well recently,” he notes. “Bulk wine prices have really increased.”

Though the vineyards’ locations and wine quality matters, he says that a grower might have received $30-$60 per gallon for 2010 Cabernet from Sonoma, $75 for vineyard-designated wines or $15-$23 for wine from Lake or Mendocino counties. He says 2011 Napa Cab hasn’t hit the market yet.

He adds that there is still some 2008-09 wine around, but generally prices drop after bottling time, which is now for premium 2010 reds. Whites must be sold within the year. Interestingly, he says most Central Valley bulk has already been sold.

With a changing market, growers’ desperation has turned into opportunity. Most growers, custom crushers and brokers we interviewed agreed that making bulk wine can make sense—even when growers have customers for all the grapes they grow. We can expect to see this continue.