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The Economics of Terroir

Hudson Vineyard's eclectic mix of grapes earns well-deserved attention, but California Cabernet isn't going anywhere
Photo by: Greg Gorman

Posted: Mar 31, 2014 1:50pm ET

Lee Hudson can grow pretty much anything he wants in his highly regarded Carneros vineyard, and he does. Albariño, Arneis, Greco, Ribolla Gialla, Riesling and Vermentino are all getting a chance there. But it's slow and go with those newbies, as they and other grapes are largely untested as marketable wines, at least on the scale many Napa wineries are accustomed to. Hudson expects they'll catch on. But for now, those plantings are more experimental than essential, underscoring the economics of terroir.

Hudson's bread-and-butter grapes are three of Napa's most popular. Chardonnay is the most widely planted of his grapes, and it can throw a large crop, though he keeps tonnage at a minimum for those who believe less is more. His Merlot and Syrah have dedicated followings, too; the latter in particular commands a hefty price. Hudson, 62, does well, but he isn't in the big-money grape business. It's not uncommon to see prices for Cabernet Sauvignon, Napa's big moneymaker, surpassing $15,000 a ton. Most of Hudson's grapes bring about a third of that price, but he's not complaining. The average price for Napa Chardonnay is only about $2,500 a ton. Merlot averages about $2,800 and Syrah about $3,100; Hudson's prices are much higher.

He's found a comfortable niche, with a diversified farm selling grapes to 30-some vintners, including Kistler and Patz & Hall, along with selling produce, meat and eggs. His first grape customer, John Kongsgaard, is still a client. Kongsgaard started buying Hudson's grapes in 1983, using both Chardonnay and Merlot for Newton's wines, where he was winemaker; the two met as students at U.C. Davis in the 1970s. Kongsgaard still buys Hudson's Chardonnay, along with his Syrah.

They were pioneers of the modern-day acreage contract, where the vintner pays by the acre rather by the ton, based loosely on the going market rate. That allows the buyer to determine crop size and the grower to earn a good return based on the vintner's desires and not tonnage. It works better with some grapes than others. Chardonnay, for instance, can produce large crops of excellent grapes; others, mostly reds like Syrah, need to be thinned and thinned. Kongsgaard sells his Hudson-grown Syrah for $160 a bottle, a handsome price. It has a very passionate but small following. He's happy he only makes 300 cases.

An acreage contract like Hudson's can really pay off in bad years, but Hudson refuses to take advantage. In 2010, sunburn ruined part of his crop; in 2011, October rains washed out entire parcels. "I took it on the nose that year," said Hudson. "I didn't ask people to pay for fruit they didn't receive."

That's a far cry from the profit Cabernet growers can wring from top Napa terroirs. Andy Beckstoffer's Beckstoffer To Kalon vineyard Cabernet grapes sell for a minimum of $17,500 a ton.

Hudson attracts a bit of a counterculture clientele, interested in making alternatives to those crowd-pleasing top-dollar Napa Cabernets. If his experimental grapes are to catch on, it will be on a small scale. And because of his faming techniques and their costs, none of them will come cheap. But they'll never approach the pay-off of Cabernet, either, and that's why no matter how good an obscure varietal from Hudson Vineyard might be, no one is going to start ripping out Cabernet vines to plant Albariño. It's simple economics.

Troy Peterson
Burbank, CA —  March 31, 2014 4:51pm ET
Driving by the To-Kalon vineyard last week gave us a chance to explain some of these economics to our family who were visiting with us for the first time. They were shocked at the variation in prices by varietal and vineyard. I think they finally understood why the wines from some vineyards (like To-Kalon) will always be relatively expensive.
Adam Lee
Sonoma County, CA —  March 31, 2014 10:38pm ET

I know a long-ago California grape grower that says that red grapes in Napa and Sonoma never commanded the prices of white grapes until the "French Paradox" appeared on 60 Minutes. I've often wondered if that really was the case, and your blog here inspired me to look back at a long-ago Grape Crush Report.

Back in 1978 (a vintage I thought was pretty fantastic), Napa Cabernet brought in $533.22 a ton. That means that it ranked behind in Napa: Cabernet Franc, Valdepenas, Chardonnay, Chenin Blanc, Grey Riesling, Muscat Blanc, Pinot Blanc, Sauvignon Blanc, Grey Riesling, and Muscat grapes grown for Raisins.

I wonder if anybody back then would have seen the rise of Cabernet to these levels? I wonder if it could be a bubble? Could another French Paradox change the entire dynamic of Napa?

All fun questions to ponder....

Adam Lee
Siduri Wines
Jason Carey
Oakland, CA, USA —  April 3, 2014 8:28am ET
even at 3100 a ton for Syrah the cost per bottle of wine is less than 3 bucks at most.. and then you can charge 160 bucks a bottle well you do the math even adding all the other winemaking costs..
Jordan Harris
Leesburg, Virginia, USA —  April 3, 2014 11:35am ET
Jason - an average ton of grapes is going to give 60-65 cases if you don't press the heck out of it. At $3100 per ton that would be $4.00-$4.30 roughly per bottle for the grapes. Once you add in new barrels, capital expenses of a small winery, COS, etc, etc it is not hard for the cost of the wine to get up pretty high. I am not saying that at $3100.00 is it going to get near $160 but with only 300 cases made it is supply and demand. There certainly are wine however that could get into the $100+ range to produce depending on the business plan and projected ROI.

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