Californias wine producers may not be having as good a time of things as recent figures suggest

California's wine producers may not be having as good a time of things as recent figures suggest

This month, wine commentator Chris Losh heads to California and discovers a wine region buoyed by healthy figures but weighed down by matters below the surface.

These must be contradictory times for the Californian wine industry. On one hand, it's earning more money than ever before, has a booming domestic market and, after some decent winter rainfall, has finally called an official end to its troublesome six-year drought. Yet, on the other, economic and political issues are combining to create looming problems that threaten ongoing growth.

Let us start with the positives, which in this case are most compellingly about value. 2016 was a record year for California's wineries, bringing in US$1.62bn of sales, marginally up on 2015, itself a record year.

That the increase compared to a year as recent as 2010, when sales were $1.14bn, is striking. As, too, is the performance of the domestic market, which, bar the odd annual blip, appears to be on a course of relentless growth.

Having a 400m-case wine market outside your cellar door - and one, moreover, that shows no sign of slowing down - is a huge advantage. The beleaguered wine producers of Europe, you would think, must be, variously, vert, verde and grün with envy.

And yet, as so often with these issues, the devil is in the detail. Those vert/verde/grün producers? They're probably busy exporting to the US. Wine imports to the country have soared from 30m cases in 2000 to 162m cases last year. Over the same period, Californian wine sales at home grew markedly less, from 160m cases to 238m. Foreign wineries, in other words, are taking an ever-bigger slice of the US wine market and, barring protectionist trade measures, it's hard to see this situation changing any time soon.

Across the globe, the domestic markets of big wine-producing countries are flat or falling, and that wine has to go somewhere: The biggest, richest wine marketplace on the planet seems an obvious destination, especially with the super-strong dollar making imports look like particularly good value.

The priapic nature of the currency might be an inconvenience for California's wineries at home, but it has the potential to become a major problem in export markets. Since 2014, the dollar has risen by roughly 30% against all of its key export currencies. It's spent most of the last 18 months close to a ten-year high against everything from the Euro to Sterling to the Canadian Dollar.

This might explain the record receipts coming in over 2015 and 2016. It's also the most likely reason why the volumes of exports of Californian wine fell last year, from 50m cases to 46m.

This drop can't be blamed on one big market having a hissy fit; eight out of the top ten export markets (the EU is considered one market in the figures) saw a decline in volumes last year, five of them double-digit. No, this suggests markets consistently struggling with exchange-rate-induced higher prices. That's bad news for an industry under attack from foreign invaders at home that knows it needs a solid performance abroad.

The official line from California is that the higher value growth suggests consumers are buying into the Golden State's premiumising message. But, there is a world of difference between consumers electing to spend more by moving up the brand ladder and consumers simply having to pay more for the same thing; just ask any producer whose wine has gone smashing through sensitive price points in the UK as a result of ten years of duty increases.

The biggest concern is probably Canada. California's largest export market saw an 11% volume dive last year and, with European parliaments in the process of ratifying the Canada/EU Comprehensive Economic Trade Agreement, things are unlikely to get easier.

The difficulty for California's wineries is that they are being buffeted by economic conditions over which they can have no control and which they can do little to mitigate against beyond cutting their prices to keep rises to a minimum. Room to manoeuvre regarding the latter, however, is limited because costs at home are rising - with labour the most obvious problem. This year, the state upped the minimum wage to $10.50 per hour and cut the maximum weekly hours. This, obviously, has a negative cost association for wineries.

In fact, the situation is even worse.

Unemployment is currently very low in California and wine is having to fight with dozens of other industries (many of them agricultural) for workers. To secure hands, many are having to pay significantly more than the minimum wage.

$15 an hour might be tolerable for Napa growers whose grapes go for $2,000+ a ton, but the sums don't stack up for their counterparts in the Central Valley. It's little wonder, then, that there have been reports of farmers pulling out vines to plant crops that are less labour-intensive.

So, why the shortage? Trump, as one wine insider put it, "doesn't help". But, the bigger issue seems to be that a healthy Mexican economy means fewer potential field workers are making the trek northwards in the first place, while others are returning home.

One winery owner was candid: "We are not getting all the people we need when we need them right now, and we think it will be more difficult later in the year."

Many are looking to save on labour by increasing mechanisation in the vineyards for tasks like, say, leaf-plucking. But, this has obvious quality implications and is not an ideal solution.

At 4.2m tonnes, last year's crush was the joint-biggest ever, so the issue isn't shortage of supply. It's getting that huge crop off the vines and into wineries in a way that makes economic sense, when rising production costs are being further amplified abroad by a turbo-charged currency.

At the less price-sensitive end of the market, California's wines are winning over critics, sommeliers and retailers across the globe. But, down where price points matter, the pressure is starting to tell.