The California wildfires that have killed at least 40 people and continue to burn this fall will have a lasting effect on California’s economy, including the famous wine region in and around Napa Valley.
One benchmark stock for the wine industry — Constellation Brands (NYSE: STZ), which holds Robert Mondavi, Ravenswood, Nobilo, Ruffini, Clos du Bois, Wild Horse and Arbor Mist brands, closed its tasting rooms in Napa Valley and Sonoma. “We’re working to ensure all local employees are accounted for and safe, and to assess any potential impacts to our facilities,” says company spokeswoman Amy Federman in a statement.
STZ stock is up nearly 4 percent so far this month and hit a 52-week high this week, which suggests that investors aren’t tying the wildfires into the stock prices of major wine and beverage firms — at least, not yet. There’s a great deal at stake, however.
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Signorello Vineyard, located in Napa, saw its winery effectively demolished, although its actual vineyards did remain intact. Stags Leap Winery, also in Napa, experienced heavy damage, as did White Rock Vineyards, which called the winery a “total loss.”
Experts say it’s too early to pin down the financial impact of the wildfires on California wineries, and by extension, wine stocks and vineyard investments. The California-based Wine Institute warns its too early to know what effect fires will have on this year’s harvest, and noted that the majority of grapes were harvested earlier in the season.
The California wine market had been booming prior to the wildfire.
“California wines in the U.S. market increased from 191 million cases shipped in 2006 to 238 million cases in 2016,” says Jon Moramarco, founder and managing partner of BW166, which provides advisory services to the wine and beverage industry. “The growth trend has been driven by population, which is up more than 12 percent over the last decade, and by the fact that baby boomers, traditionally the large population segment of frequent wine consumers, have been joined by millennials … who are also driving the growth in wine consumption.”
Consequently, when a major natural disaster lands in the wine capital of the U.S., investors, too, need to assess the damage and weigh it in terms of continued financial support.
“Studies have consistently shown that supply chain disruptions cause significant financial impact to the firms which experience them,” says John-Patrick Paraskevas, assistant professor of management at the Farmer School of Business, at Miami University in Ohio. “This negative financial impact does typically go beyond the profits and losses of the firm and impacts the stocks of the company.
“Studies have shown that the negative pressure on the stock price after a major supply chain disruption like this will affect the company’s stock both in the short term and the long term through the recovery process,” he says.
Paraskevas says the Napa Valley disaster is an example of a supply chain that is highly geographically concentrated, which makes industries like the wine industry highly vulnerable to a massive supply chain disruption of this type, as any event that impacts the Napa Valley will have wide-ranging impact on the entire industry.
“We have seen this before with the floods in Thailand in 2011,” he says. “Thailand is the world’s leading producer of computer hard drives and most of the factories were located in the same region which was flooded. This event lead to worldwide hard drive shortages.”
In terms of prices of wine, Paraskevas says the issue is complex.
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“If we continue to use the Thailand disruption as a counterfactual, the price of hard drives went up due to the supply shortage and this actually resulted in improved financial performance for the few companies which had factories which were unaffected by the floods,” he says. “I would anticipate the same here. While vineyards which were damaged will face financial hardship, the vineyards which escaped damage will experience less competition and may be able to increase their prices, consequently improving their financial and stock performance.”
The actual growth state of “wines on the vine” also comes into play. “Whatever grapes were left on the vine before these fires are likely unsalvageable, based on the latest word I’ve received about the fires picking up pace,” says Mary McAuley, founder and producer of Ripe Life Wines, whose grapes are grown in Mendocino, 120 miles north of Napa Valley. “In other wine-growing regions that may still have fruit on the vine (like Oregon or even South America), they can now charge more for their fruit to California wineries, who will seek to bring in fruit from afar to meet production needs.”
McAuley, whose vineyards were also greatly impacted by the California wildfires, says that, as for bottled wine pricing, the highest bidders are the more well-known wineries, so the increase won’t be passed onto the consumer because their manufacturer’s suggested retail prices are somewhat set.
“Consumers would be turned off by any extreme price jumps,” she says. “The producers, wholesalers and distributors will have to eat more of the cost.”
Long term, the news could even grow worse for vineyards.
“So far, over 12 vineyards have reported damage and at least five vineyards have reported a total loss of their vineyards,” says Andrew Denney, founder and CEO of Prosperity Financial Group, in Springfield, Missouri. “As the fires continue to move through Napa and Sonoma County, these numbers are expected to increase.” This is “bad news”, Denney states.
It could be years for some wineries to recover.
“Although California wine connoisseurs won’t face any effects immediately, the effect could start to be felt in a couple years when the destroyed crops would have produced bottles that would have been sold,” Denney says. “Also of possible concern is not just the fires that have destroyed crops, but the smoke that is settling into the vineyards. This could potentially reshape the flavor of wine for many years to come that are coming out of Napa and Sonoma counties.”
So far, the Napa wildfires have yet to dampen the stocks of wine-producing stocks like Constellation, Truett-Hurst ( THST) and Vina Concha y Toro SA ( VCO). The latter may even benefit as much of its vineyards are located in Chili and Argentine, although it does have locations in the U.S.
It’s also worth noting that most wineries are privately held. “There are three small to very small pure-play publicly traded wine companies that trade — Crimson Group, Truett Hurt and Willamette Valley ( WVVI), respectively,” says Len Rosenthal, finance professor at the Bentley University McCallum Graduate School of Business. “The first two have vineyards and wineries in Napa and Truett. Neither has commented on the effect of the fire. Willamette’s operations are in Oregon so they are not affected by directly by the fire.
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“None of these companies’ stock prices have been affected yet,” Rosenthal says. “But if anyone owns shares in these stocks, they should be a small part of one’s portfolio.”
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How California’s Wildfires Will Affect Napa Valley Wines originally appeared on usnews.com
