Newsletter Sign-up

Wine grapes are very sensitive to weather conditions. That's why many in the industry believe that the best risk management tool is selecting the proper site for a vineyard. Not only can weather influence the flavor and character of wine, severe weather can directly damage a vineyard, bring about plant disease or encourage insect attack. With the wine industry, location is everything.

Many vineyards have taken some of the uncertainty out of weather by partnering with research laboratories and universities. These alliances have allowed winegrowers access to extensive data from sophisticated weather models. For example, the University of California, Davis, has an extensive database that allows vineyards to see how temperature and precipitation may affect the development of their grapes. These statistical models also alert the wine industry to potential risk of disease or insect infestation.

"This is one of the most beneficial pieces of data that we receive," he says. "(In California) irrigation is probably the biggest tool we have to affect the quality of the fruit. It also helps us prevent overirrigation, which can lead to rot and disease."

Chuck Hussey, owner of Bend Vineyard in Alexander Valley, Calif., says the weather data is particularly important in spring and fall. "You make a lot of decisions in your growing practices in what you are seeing coming down today or what's in store tomorrow," he says.

Weather can be especially damaging for vineyards that grow grapes primarily to sell to juice manufacturers. "Because juice-grape growers--even in a good year--do not have a large profit margin, when they sustain a bad year, it is particularly devastating," says Tom Zabadal, extension viticulturalist for Michigan State University. "In Michigan, the predominant threats are weather related. We can do some things to manage those issues, but we still are really at the mercy of the weather."

The major California wine-producing counties have fortunately been spared significant weather-related damage for more than a decade. In 1989, a year many winegrowers jokingly refer to as the "vintage from hell," excessive rains virtually wiped out many vineyards' production of chardonnay.

In the Finger Lakes region of New York, a brutal freeze killed off crops prior to harvest in 2003 and 2004. Economic estimates found that growers suffered a direct loss of almost $6 million in fruit sales in 2004. Future reduced tonnage, replanting and retraining costs added up to an additional $3 million in damages.

BOTTLING UP RISK

While no one can control the weather, a new industry has sprouted up to help businesses with weather-sensitive risks, such as vineyards, to protect themselves from suffering a loss. Guaranteed Weather, an online weather risk management company based in Overland Park, Kan., allows companies to identify their particular risk, quantify it and hedge against their weather risks.

Businesses, such as those in energy, agriculture and construction, can purchase a weather derivative. This is an instrument whose value depends on the quality of some underlying variable, in this case, a weather index such as heating degree days, cooling degree days, average temperature or inches of precipitation.

Robert Holmes, director of marketing and origination for Guaranteed Weather, says the service was developed to serve the needs of a market that was becoming increasingly aware that weather is a risk that can, and should, be managed. The service provides larger vineyards with an alternative to crop insurance, which generally is determined over a five-year period.

"One of the niceties of this option is that you do not have to purchase a weather derivative that far in advance," Holmes says. "It allows growers to hedge against weather during grape development and other growing periods. If you are having a particularly good year in June, you can purchase a weather derivative to protect you during the last half of the growing and harvesting season."

According to the Weather Risk Management Association, by using a derivative to eliminate weather-related exposure, a winegrower can stabilize company profit levels. Revenue forecasts can be calculated with increased accuracy and predictability despite inexact grape-harvest statistics, creating an advantage over competitors. This type of tool also reduces the uncertainty of foreign-exchange risk management requirements, because a minimum amount of yield-dependent revenue is guaranteed.

ANGELA CHILDERS and JOSHUA CLIFTON are writers based in Chicago.

October 15, 2005

Copyright 2005© LRP Publications