Wine Industry Escapes Glut

California's wine glut is apparently over, which comes as a huge relief to an industry whose sales are falling along with prices.

Thanks largely to frost last year that destroyed some crops and yielded small grapes in some instances, the grape crush in California was down 6 percent in 2008, according to a report by the California Department of Food and Agriculture and the USDA. In Napa County, production fell by 20 percent, and in Sonoma County, 20 percent.

If the glut had continued, it could have spelled disaster for an industry that is struggling with falling retail prices and, in some cases, falling demand. Restaurant wine sales were off between 10 percent and 12 percent last year. People are still buying wines in stores, but they tend to be bargain hunters and are pushing prices down, sometimes by as much as two-thirds.

This is the first recession in years that hasn't—so far—done big short-term damage to the wine business. "The last few times we had a recession, we also had huge inventories because of vineyard plantings and large crops, and that hurt prices," wine broker Steve Fredericks told the Los Angeles Times.

Among California wines, just two varietals were responsible for most of the shrinkage in volume. Production of cabernet sauvignon grapes fell by 24 percent, while merlot was down 26 percent.

Grape prices are slightly up, but that doesn't much affect the retail price. It does, however, allow growers—who have suffered mightily from thin margins in recent years—to take more of the profit share away from wineries.

There is a downside to smaller harvests. Wine broker Steve Turrentine told the Sacramento Bee that producers risk losing some market share to imports.

"On the other hand," he said, "we have the chance to gain margins. Particularly coming out of seven years of excess, that looks pretty good."

The situation is a bit different in New Zealand, one of the fastest-growing wine regions in the world. There, producers are being forced to cut production to avoid a glut that would otherwise surely have come this year thanks to good weather and falling worldwide demand. The total harvest might drop as much as 4 percent as growers trade off quantity for quality, which could help prevent the bottom from falling out under prices.