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December 2015 WINES&VINES 35 VIEWPOINT Cabernet Sauvignon in Napa OK, so maybe you buy my spiel on overplant- ing, but you're in Napa and you saw me at the Vineyard Economics Seminar. I said that my projections show 1.3% annual growth in bear- ing Napa Cabernet Sauvignon acreage and demand increasing at 2% or more per year for at least the next several years. So, what is there to worry about? True, my forecasts show that, even though demand already outstrips supply for Napa Cab- ernet Sauvignon, the gap between supply and demand will widen. I do not believe that we are on the path to overplanting in Napa. Still, there is a great deal of systemic risk stemming from the past two decades' increase in the concentration of bearing Napa vineyards planted to Cabernet Sauvignon. That concen- tration has risen from 30% to 43% since 1995. For one, macroeconomic fluctuations not only have the potential to depress prices overall but to shift consumer spending between price points. For the most part, this has had less of an effect on the "one-percenter consumers" and on the "one-percenter wines," but this may not always be the case. More importantly, we as humans can fore- cast the future based only on our historical experiences. If something has not happened in the past, we have very little ability to imagine that it could happen in the future. I already touched on "Sideways" and the Great Reces- sion, but we can generalize this a bit. The pe- riod between ordering plant material for a vineyard and replanting that same vineyard can easily span 30 years. There are people reading this right now who were single and loving it 30 years ago and are now loving grandparents. Thirty years ago, Mikhail Gorbachev took the reins of the Soviet Union, which still occupied Afghanistan. Steve Jobs was fired from Apple, and computers still used big, tape-based floppy disks. A great deal can change in three decades, and we have very little ability to anticipate these changes, but these changes have a great ability to affect us. Thirty years ago, did you know you would be a grandparent now? Did you know that you could Instagram selfies of yourself from the Kremlin? Are you still sure that, over the course of a vineyard's lifespan, nothing could ruin your investment in Napa Cabernet Sauvignon? Clearly, the best investment opportunity in Napa is Cabernet Sauvignon. That does not mean you should allocate to it 100%. Yes, di- versification reduces expected return, but it also reduces revenue volatility and, therefore, risk of ruin. So what should you do? Diversification As with almost everything in this business, there is no one-size-fits-all solution for solving the problem of varietal concentration. I al- ways recommend using regression-based grape price forecasting and computerized simulations to determine optimal allocation strategies, just as a Wall Street mutual fund might. What that means and how to do it is beyond the scope of this article, but I do have a few simple suggestions. First off, if you are making money and you are heavily concentrated in one variety, then you should be saving money. Yes, it is good to reinvest in your operations, but you want to make sure that you have a good cash cushion for down times. That way, if your Cabernet Sauvignon can no longer sell at profitable lev- els, you can weather the storm and, if neces- sary, switch over to another variety. If you are planting outside of Napa, I would strongly caution against putting all of your hopes on Cabernet Sauvignon. Consider diver- sifying varieties that are better suited to your site, such as Sauvignon Blanc in Lake County, Calif., and Petite Sirah on Merritt Island in the Sacramento–San Joaquin River Delta. Though you may have a lower expected return than you would if you planted only Cabernet Sau- vignon, you will reduce your exposure to changes in consumer tastes and improve your viticultural outcomes. You should also chart per-acre revenue, which can be derived from the relevant USDA reports, for any variety you are considering for diversification. Look for price movement that does not correlate too closely to that of Caber- net Sauvignon. This can be quantified using simple, linear regression. After doing this re- search, you may even decide against planting Cabernet Sauvignon. If you are in Napa, you have less to worry about. You may want to take the approach mentioned earlier of saving up money to re- spond to changes in the marketplace. You could also plant Petit Verdot, Malbec or Cabernet Franc. These varieties offer less diversification, as their prices correlate closely to Cabernet Sauvignon's, but the revenue they generate is roughly equal—slightly less or slightly more, respectively. Most importantly, think through what you are doing. Look at the publicly available data. My website (vineyardfinancialassociates.com) includes a free Excel-based tool that makes it incredibly easy. Make a decision based on facts and not a feeling in your gut, and reach out to someone who can help you balance risk and reward considerations. Gabriel Froymovich is proprietor of Vineyard Financial Associates in Healdsburg, Calif. VFA provides financial and business consulting services to wineries, vineyards and investors in the wine industry. Whitehall Lane replanted this block of Millennium Vineyard in 2008 to match the soil profile in this spot. Consider planting a variety of cultivars suited to your region rather than a monovarietal vineyard.