Lodi’s Stake in the World of Wine Lodi Vineyard & Wine Economics Symposium Lodi’s Stake in the World of Wine Jeff Bitter Vice-President Allied Grape Growers June 29, 2017

A few points to make about winegrape production: World winegrape production is mostly flat Lodi – 20% of California, about 2% of the world

Worldwide Wine Production Chart Source: OIV

A few points to make about winegrape production: World winegrape production is mostly flat California production is forecasted to be flat in the near future Lodi – 20% of California, about 2% of the world

California’s Production History and Potential “Average” Yield

A few points to make about winegrape production: World winegrape production is mostly flat California production is forecasted to be flat in the near future Most wine regions of the world (like Lodi) constitute just a fraction of global production Lodi – 20% of California, about 2% of the world

The ongoing challenge is to understand So what’s my point? The wine world is a large, diverse place with competition from many different countries, regions and appellations, none of which really have a specifically dominant position. The ongoing challenge is to understand your position in this big picture, and more importantly, position yourself for success.

How is Lodi Positioned From the Supply Side and Within the California Market? First: Current allocation of grapes based on bottle price Next: Lodi’s opportunities/challenges in relation to supply and “neighboring” California wine regions Next: Changing supply of major Lodi varietals Last: Success factors for Lodi in the future

Allocations – Grapes & Wine

….so if the northern interior’s production matches the volume of wines from $7-10 per bottle, what should Lodi grapes be worth?....

Using the 100 X’s bottle price methodology, Lodi grapes should be receiving $700-1,000 per ton. In 2016, only 26 out of 59 varieties purchased in Lodi averaged over $700/ton. Those 26 varieties only represented 31% of the tonnage. (And over half was Zin)

….so what exactly has been holding Lodi back from receiving higher grape prices?....

Lodi has been flanked by sufficient supplies in the coast and excess supplies in the southern interior in recent years.

Production Breakdown

....so what are projections for the coastal situation in the future?….

Note: Change stated cumulatively Annual attrition rates estimated

Note: Change stated cumulatively Annual attrition rates estimated

what about the southern interior?.... ....so that summarized the coastal situation and its past and potential influence on Lodi; what about the southern interior?....

Planting Trends

....at the same time, look what was happening to wine sales below $7/bottle….

....the combination of increased southern interior production and slipping shipments below $7/bottle caused a fairly major acreage correction….

Statewide Vineyard Removal +/-40,000 grape acres removed between the 2015 and 2016 harvests (estimate 18,000 winegrape) As of March 31, 2017, in the San Joaquin Valley, 20,000+ grape acres removed since 2016 harvest, with about 1/3 being winegrapes Estimate 12,000-15,000 winegrape acres will be removed statewide by the 2017 harvest.

this is what the California winegrape acreage base transforms to…. .....so as the world turns, this is what the California winegrape acreage base transforms to….

Evolving California Acreage Base Lodi is uniquely positioned to provide reliable, quality supply into the future at various price points, including those above $10/bottle. Compare these net gains/losses in acreage to wine shipment growth rates by category

So what’s my point? Lodi (or more broadly, the northern interior) has experienced a relatively stagnant market in recent years mostly due to supply issues that have been out of the region and out of its control. It appears that is behind us.

.....what specifically is projected to grow (or shrink) in the northern interior, in terms of today’s major varieties?..….

Note: Change stated cumulatively Annual attrition rates estimated

Talking Points for the $7-10/Bottle, Northern Interior Market This is a mostly stable retail price range, and on a very strong base (i.e. lots of volume in this tight price range). The quality in this price range has been well established and strengthening for both grapes & wine. There is interest from wineries to contract grapes multi- year and discuss continued expansion of programs. More and more, “coastal” wineries are looking to northern interior grape and wine supply when considering alternatives to control costs and expand program volumes. This is a solid place to be in the future, as the demand for high quality, affordable wine expands.

...so what is driving the wine business today? Wrapping it up…. ...so what is driving the wine business today? Premiumization empowered by the economy Behavior Catalyst

Take-Home Points Although there is no shortage of total winegrape acreage in California, coastal regions could experience tighter supply, which will create opportunity for the northern interior. The supply pressure created by excess southern interior grapes/wine over the last few years is now mostly diminished. Lodi (northern interior) is positioned well to supply the solid $7-10 segment of the market while enjoying demand from buyers looking to source grapes for wines above $10. “Reliable” and “stable” market trends since 2012 have allowed us to plan on increasing supply in proportion to projected increases in demand, by region and by variety. Remember…..it’s the economy, the economy, the economy.

Thank you!