How lower euro value helps, hurts Wine Country businesses
It's good news for U.S. travelers and companies. It costs less to travel to Europe and buy products from there.
Yet it's also a challenge for North Coast businesses dependent on international travelers and for the region's wine business suppliers that buy raw materials for corks, barrels and other items to be made.
The U.S. Dollar Index, which tracks the value of American currency against six currencies, has increased 11.3% this year to a two-decade high, the Associated Press reported. The euro was worth just under $1.02 as of July 20, down from $1.18 a year earlier.
At Rivercap USA, a Solano County-based distributor of tin capsules used to cover the neck and cork in wine bottles, the cost of raw materials doubled in the past two years, causing a price rise of 60% to 100% per capsule, according to Jeremy Bell, general manager.
"The benefits are you’re bringing it in from Europe, so your costs go down," Bell said about the benefit of the lower value of the euro. "Problem is that with tin the raw material is priced in dollars, so the manufacturer overseas is buying the tin in dollars, so it's costing them more to buy the tin. You win on one side, and you lose on the other side."
While the price of raw tin has retreated from the peak of $50,000 a ton on March 10 to roughly $25,000 since early May, European capsule manufacturers have to pay more euros to buy the tin.
And because the capsule makers pay up front to buy the raw tin on the London Metal Exchange and Rivercap pays cash on delivery, Bell said that prevents the use of a common currency-exchange risk mitigation strategy: forward contracts.
Forward contracts are a common international currency hedging tool that allows the buyer to lock in an exchange rate to be paid at a specified time commonly up to 12 months later. A company wins if the contract rate is lower than that of the time of payment but loses if the rate is higher.
"It would be nice if we could stock up," Bell said. "But unfortunately, (tin capsules are) a custom product."
Tin is typically the capsule of choice for vintners of ultrapremium wines, or that which retails often for over $30 a bottle and certainly over $20, Bell said. The cost per such capsule roughly has moved from 20 to 25 cents each up to 40 cents then back down slightly.
Lower-priced wines often use plastic capsules or aluminum screwcaps, though the latter have been increasingly adopted for higher-end bottles. A major factory for screwcaps in the world is in Ukraine and has been offline since the latest conflict with Russia began earlier this year.
Higher-end vintners tend to customize their capsules, and a common order involves something specific to the vintage on the capsule, Bell said.
"We can't stock up on a vintage-dated product," Bell said.
Another premium production item North Coast vintners import from Europe are oak barrels. Higher-priced ones coming made with French wood, but Eastern European oak has been gaining traction.
The lower value of the euro to the dollar has allowed Tonnellerie O in Benicia to spend less when buying French oak staves and barrel alternatives such as chips, according to Josh Trowbridge, CEO.
"This is the strongest the U.S. dollar has been in my career, but it is offset by the shipping costs," Trowbridge said. "With the strength of the dollar, we’re considering buying more. We’re having a record year for barrel sales. It's challenging to keep staff on to make them."
In a 10-hour shift, the crew of about a dozen at the cooperage assembles, toasts and finishes about 53 barrels. The operation's oak alternatives facility, which toasts staves and chips for barrel and tank inserts, is more automated and operates around the clock.
Char 3 in action! Ever wonder how we apply a char for our Spirit Industry customers....check this out! Josh Trowbridge
The company's international exchange strategy is to use dollar-cost averaging, which smooths out wins and losses on the rate over time.
And the life cycle of a wine barrel starts long before it rolls into a winery. Tonnellerie O buys the wood from French suppliers two to five years before the coopers take over, so the green wood is stockpiled to season.
"It doesn't make sense to do currency contracts," Trowbridge said. "It's a lot like a winery that builds up inventory for a few years before release, so we want to conserve cash and lower debt. If we buy currency contracts, it is immediately on your books as debt."
And then the European wood staves are transported to the U.S. for coopering, rather than shipping empty finished barrels.
Last year, a standard 40-foot shipping container that fits 285 barrels’ worth of wood staves cost $6,000 to ship from Europe to the Port of Oakland, but now it's $14,500, Trowbridge said. And the cost to truck a container with the equivalent of 220 barrels of American oak from Virginia costs $8,500 now, up from $3,000, largely because of much higher diesel prices and fewer drivers available.
Valued a decade ago at about half of that of a euro, the U.S. dollar's gain against the euro has given Americans more reason to travel overseas.
The currencies have hovered a cent or two apart this month, with the dollar achieving parity with Europe's exchange for the first time in 20 years.
States like California rely on tourism as an economic driver, with its world-renowned visitor attractions and regions like Marin, Sonoma and Napa counties. Consequently, tourism officials are dealing with more than economic uncertainty caused by other major factors like inflation and a lingering pandemic. Some are now keeping an eye on the impact of the euro's drop in value on visitation in the United States and particularly California.
"A lot is going on. The shift in the euro (against the dollar) is going to make America more expensive. We’re not sure of the impact yet, but it could be a psychological barrier," said David Bratton, founder and managing director of Destination Analysts, a San Francisco-based tourism market research firm.
Still, Bratton added it was good to see forward progress in the United States’ efforts to attract and welcome international visitors, a $28 billion business. Last fall, the U.S. government lifted its pandemic-spurred travel restrictions, essentially opening the door for more visitors to take in U.S. sights.
In the first half of 2022 from January to June, the tourism analyst looked up deplanements at the United States’ 10 major airports and noticed a 150% increase (27.6 million) compared to those in the same period from a year ago.
"Certainly, the door is open now, and more people are traveling. But this (exchange rate change) complicates things," Bratton said.
Linsey Gallagher, president and CEO of Visit Napa Valley, noted she's thankful Napa County has achieved high level of vaccination levels in California to gain back visitors who might otherwise balk at traveling to far-flung places. According to county officials, vaccination rates stand at 82%.
It also helps that the North Bay climate where the county is situated lends itself to outdoor living.
"Because Napa Valley is a rural, four-season destination that lends itself naturally to socially distancing and al fresco experiences, combined with the fact that Napa County has one of the highest vaccination rates in California, we are in a more fortunate position than other more urban destinations winning back more than our fair share of visitors," she told the Business Journal.
But challenges still exist, and Gallagher predicts the tourist-heavy region won't return to pre-pandemic levels for attracting international visitors until 2024.
Then again, pent-up demand may win out since travelers have grown weary of postponing their trips. And people in Europe have made taking long, summer excursions a tradition.
"(While) economic conditions here in the United States and abroad are on the minds of some travelers, keep in mind though that the strength of the currency is only part of the story," she said. "Many European travelers have banked weeks of vacation through the pandemic and are holding unused travel vouchers, (as in) unused flights, with expiration dates."
Jeff Quackenbush covers wine, construction and real estate. Before coming to the Business Journal in 1999, he wrote for Bay City News Service in San Francisco. Reach him at [email protected] or 707-521-4256.
Susan Wood covers law, cannabis, production, tech, energy, transportation, agriculture as well as banking and finance. For 27 years, Susan has worked for a variety of publications including the North County Times, Tahoe Daily Tribune and Lake Tahoe News. Reach her at 530-545-8662 or [email protected].