California wine producers have been dealt a cruel blow with new plantings coming into full production just as the economic downturn began to bite. David Robertson examines how California's once-booming wine industry is coping with the effects of oversupply and weak demand.

Californian winemakers are facing a troubled future as a grape glut forces them to take desperate measures in order to stay in business. Once the darling of the agricultural community, vine growing is now a blighted occupation. All over the Napa Valley, Sonoma and the Central Valley there are "For Sale" and "For Lease" signs along the roadside.

The 2002 California Winegrape Crush Report makes depressing reading for hard-pressed winemakers. The grape crush was 12% up on 2001 (3.4m tons) but prices were down by 11%. The California Association of Winegrape Growers estimates that this has cost its members US$144m in lost revenue and many farmers believe the worst is yet to come.

California has a wine heritage that goes back 300 years and the state produces about 90% total US wine production. Grapes are the second biggest agricultural product in the state, worth US$2.6 billion a year, but farmers are now pulling up thousands of acres of vines hoping to plant fruit trees and almond nuts instead.

Their problems have been blamed on a number of factors but the most significant has been oversupply. In 1995, the wine industry experienced a grape shortage and prices rocketed; this also coincided, in California at least, with the explosion in dotcom-linked wealth. Soon, over-night millionaires from San Jose were investing in Napa, Sonoma and Russian River.

These plantings finally became available for wine production in 2001 - just in time for the economic crunch and fallout from 9/11: nobody is travelling, restaurants are under pressure and expense accounts have been slashed. Suddenly wine is no longer the dream retirement pastime - it is an industry in crisis.

The average price for a ton of grapes is US$462, although this figure masks a wide variety. In the Napa Valley and Sonoma - prime real estate for wineries - vineyards are still commanding up to US$3,000 a ton. But in the Central Valley, around Fresno, they are getting just US$136.

Estimates suggest that 70,000 acres of vines have already been pulled up in the Central Valley and farmers have switched to other fruits or have had to sell the land to repay debts (and now houses are being built there instead). Many of the farmers grow Thompson grapes which can be sold as raisons, wine or for the table - but the massive oversupply has killed all of these markets.

The big-name wineries further north have fared better but there have been at least three bankruptcies in Sonoma County this year and farmers say it is likely that everyone is now carrying a huge amount of debt. If the market does not improve soon there could be a lot more closures.

"Nobody is unaffected by this," says Michael De Loach. The De Loach vineyard in the idyllic Russian River area was founded by Michael's father, Cecil, in 1975. The company boomed during the 1990s, producing 250,000 cases a year but in May it was forced to file for Chapter 11 in order to reorganise.

"We don't have a family fortune - my father was a fire-fighter in San Francisco. But a lot of people saw the wine industry as an industry owned by wealthy people who make $100 bottles of wine for other wealthy people," says De Loach. "I think that perception has created a sense of schadenfreude in the general public, not unlike when the dotcom bubble burst. There is a sense that we are all getting our come-uppance."

De Loach's survival strategy is likely to be mirrored throughout the region. The company is cutting back the number of grape varietals it produces from 48 to just 12. It is reducing its capacity to 100,000 cases a year and has sold off large chunks of land that it no longer requires. It has cut staff numbers from 80 to 52 and is, right now, bottling the very last of the "California" range, which sold for US$10 a bottle.

"We are going back to where we were in 1995," says Michael De Loach. "Our US$18 Russian River range will go back to being our core product and we will focus on Chardonnay, Pinot Noir and Zinfandel. We are going to keep it simple - that really works for us. Lots of people around here are now getting rid of the whole low-end thing. It was a beautiful thing while it lasted."

A number of winemakers have resorted to producing the dirt-cheap supermarket wines that have appeared recently but Michael De Loach says that this doesn't include the mid-sized growers.

"If we get US$2,500 for a ton of grapes and we get five tons an acre at a cost of US$500 a ton we just can't afford to produce wine that sells for US$2 or US$3 in supermarkets," he says.

Analysts increasingly suspect that the larger producers, desperate for some cash flow, are making these wines. As a survival tactic it smacks of desperation but it could have the added benefit of introducing new consumers to wine - in much the same way that the New World wines did when they came to the UK. But any such gains will be far off in the future and growers have a lot of difficulties to endure before then.