Wine drinkers lift glass to law of supply and demand

Oenologist Asli Odman tests wine from newly harvested Syrah grapes during the maceration period at Kavaklidere wine producing facilities in the Pendore vineyard in the western Turkish village of Kemaliye in the Aegean region, August 28, 2009.

New York (Reuters Life!) - The law of supply and demand has reached the world's vineyards tipping wine prices in consumers' favor.

Pali Wine Co., a small California Pinot Noir producer which started out selling wines for $40, $50 and $60 a bottle in 2005, found itself with cases left from its 2006 crush even as it was bottling its 2007 production.

Most of its Pinot Noirs will now be sold for $19 a bottle.

"We had to do something. We had to bring our costs down. And everyone in the business was seeing the same thing," Tim Perr, Pali's founder said during a visit to New York.

Pali does not have its own vineyards, but sources its grapes from growers in Sonoma and Napa California, as well as Willamette Valley in Oregon.

Pinot Noir grapes that once fetched $5,000 a ton now sell for $2,500.

"You could now make deals with the vineyards," said Perr, 47, who started out as an actuary before taking up winemaking four years ago.

He and his partner, Scott Knight, had built a successful business and were looking for a new challenge.

"We both liked wine and we missed the challenge of building a business. So this time around, we thought we'd build something we both were passionate about."

Selling out their first vintage of 1,300 cases in 2005, when the U.S. economy was booming lulled them into believing that there would always be a market for $50 Pinot Noir.

But that market has shrunk substantially, according to Robert Smiley, director of wine industry studies at the University of California, Davis School of Management.

Smiley's annual survey of winemakers, presented earlier this month in California, found industry professionals acknowledging that decline.

"The spot market (for wine grapes) is basically dead," he said. "The wineries will be cutting back their production. And it's not just in the U.S. I just returned from Munich and there is a worldwide wine glut," he said.

Top wineries are offering discounts to their distributors in an effort to move their wares, he said.

"Winemakers don't actually set the prices that (U.S.) consumers pay. That's done by distributors and retailers for the most part. But they are lowering their prices to the distributors and offering promotions," Smiley said.

"There are generally no more waiting lists for the (California) cult wines. And some of the cult wines will even make deals with you."

Danny Brager, vice president of beverage alcohol at The Nielsen Company, said, "When we last looked at wine at price points north of $20, we saw declines at each of them. It would seem quite logical to us that consumers are stepping down from what they used to spend per bottle, to a lower outlay."

He also found consumers were quite happy with the quality of wines they were buying for less than $20.

Marcelo Papa echoed that sentiment. Papa is one of the four chief winemakers for Chile's Concha y Toro, which unlike its competitors has seen sales of most of its brands rise 30 percent this year.

"Compared to 20 or 30 years ago, wines under $20 or $15 are of much better quality today. They're just better made wines." he said.

(Editing by Patricia Reaney)