Building the Winegrape Supply Puzzle Jeff Bitter Allied Grape Growers Building the Winegrape Supply Puzzle Livermore Valley Winegrowers’ Annual Grower Meeting March 1, 2018

Themes Equilibrium Fungibility Stability Premiumization 2015 2016 2017 2018 Fungibility Stability Themes

Supply Stability Planting at Attrition Rate (Forecast)

Production for 2018-2020 based on average yield of 7.2 tons/acre Supply Stability Production for 2018-2020 based on average yield of 7.2 tons/acre

What/where are growers planting and what are consumers buying? Trends – What/where are growers planting and what are consumers buying?

Huge preference toward reds: 28% white

Varietal Growth, by Price Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

Segmenting Supply Central Valley North Valley California Coastal AVA (Value Wines) North Valley (Daily Drinkers) California Coastal (Premiums) AVA Based (Luxury Wines) <$6/bottle $6-10/bottle >$20/bottle $10-20/bottle

Central Valley (Value Wines) <$6/bottle

Central Valley Land Use: Competing Crops & Water Reginal Market/Supply Hot Topics

Reginal Market/Supply Central Valley Declining Shipments Reginal Market/Supply Hot Topics

Rolling 52-Week Sales Comparison of Wine, by Price Central Valley Rolling 52-Week Sales Comparison of Wine, by Price Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

Central Valley

Central Valley “The bottom line is that, following the 2015 crop, we will still need to remove about 36,000 acres…”

Central Valley (Forecast)

Central Valley

Central Valley

Bright Spots/Opportunities Central Valley Production Ability Bright Spots/Opportunities Regional Floral, Off-Dry & Color Rosés? Blends? Categorical Strengths

North Valley (Daily Drinkers) $6-10/bottle

Reginal Market/Supply North Valley Zinfandel Reginal Market/Supply Hot Topics

Reginal Market/Supply North Valley Margin Compression Reginal Market/Supply Hot Topics Costs Data from Table 10, GCR. 2017 Estimated Costs arrow shown for illustration purposes only Estimate

North Valley

North Valley

Bright Spots/Opportunities North Valley Regional Bright Spots/Opportunities Premiumization Potential “Middle” of the Market Varietal Diversity

California Coastal (Premium Wines) $10-20/bottle

Reginal Market/Supply California Coastal Labor Reginal Market/Supply Hot Topics

Reginal Market/Supply California Coastal Slowing Premium Wine Growth Rates Reginal Market/Supply Hot Topics

Rolling 52-Week Sales Comparison of Wine, by Price California Coastal Rolling 52-Week Sales Comparison of Wine, by Price Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

Premium Winery Sales Growth California Coastal Premium Winery Sales Growth Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

California Coastal

California Coastal

Bright Spots/Opportunities California Coastal Regional Bright Spots/Opportunities Epicenter of Growth “Managed” Growth AVA Extenders and Alternatives

AVA Based (Luxury Wines) >$20/bottle

Reginal Market/Supply AVA Based Reginal Market/Supply Hot Topics Relationship with “The Economy”

Sales Growth Rates of U.S. Luxury Goods AVA Based Sales Growth Rates of U.S. Luxury Goods Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

Reginal Market/Supply AVA Based Wildfires and Consumer Perception Reginal Market/Supply Hot Topics

AVA Based (The day the fires broke out) AGG Stats as of October 8th (The day the fires broke out) - 78% of North Coast grapes were already harvested - 100% of our WHITE North Coast winegrapes were harvested - 100% of our PINOT NOIR was harvested - 55% of our RED North Coast winegrapes were harvested

AVA Based

AVA Based

Bright Spots/Opportunities AVA Based Regional Bright Spots/Opportunities Strong Consumer Identification AVA Promotion Domestic Advantage

Summing it up…

Supply Stability 9,000 Net Acre Reduction (-5%)

Supply Stability 9,500 Net Acre North Valley Addition (+7%) Overall Interior Acres Flat From 2016

Most of the new acres came in 2017! Supply Stability 16,500 Net Acre Addition (+7%)

Warehouse Wine Shipment Trends Consumer Pull-Thru Warehouse Wine Shipment Trends Source: With Permission - Silicon Valley Bank’s 2018 State of the Wine Industry Report

Summary With all of the supply pieces now in place, it appears we will have virtually no material growth in bearing acreage through 2020. Supply growth will only come through increased productivity and likely “larger” annual crops.