NEW YORK, Sept. 28 /PRNewswire/ -- According to a new report by Rabobank, the wine market in the United States is steadily growing, but California faces challenges from imported wines to keep its market share. The report, "The future of the California wine industry: A 'perfect storm' of imports brewing?" states that since 1995, imports have grown 184 percent. However, while California produces 90 percent of U.S. wine, and the growing consumption of wine has benefited California more than any other state, the current market is not without challenge. "Currently, nearly all the major wine-producing countries are developing plans to increase sales to he U.S. market, targeting the high-value market, where California producers have had more success fending off competition in recent years," said Rabobank Food & Agribusiness Research Vice President Stephen Rannekleiv. Domestic Supply and Demand The United States is emerging as one of the most attractive markets in the world for high-value table wine due to the size and continued growth of the industry. Between 1994 and 2006, consumption rose more than 50 percent, with the strongest growth among wines valued at over $9 a bottle and particularly at those over $12 a bottle. Below $9 a bottle growth was sloth and low value jug wines had negative growth, but still is the largest segment of wine sales by volume. There are three main trends driving consumption: 1. Health consciousness: Wine has benefited from growing evidence that states moderate wine consumption (1-2 4 oz. glasses per day) can have beneficial effects. Between 2000 and 2006 the percentage of the population that claims to drink wine at least once per week increased 70 percent. 2. 'Trading up': Higher incomes have lead many to seek out affordable, everyday luxuries. This is evident in the growth of higher-value wines, while lower cost wines have decreased. 3. Eagerness for new products: Consumers are expanding their horizons and experiencing different cultures by trying new products. "Supply of U.S. wines has also been strong, but faces a complex set of challenges, including surpluses and shortages as pressure on prices, due to increased competition from imports, and rising production costs," Rannekleiv said. The 2005 California harvest was more than 20 percent above the average yield and 34 percent higher than the average yield of previous years. However, this appears to be a short-term fluctuation and in the process of righting itself as the reserves began to be sold off in 2006. "This phenomenon appears to be stifling market signals of shortages of key varietals that would normally stimulate an increase in production," Rannekleiv said. Instead, some evidence suggests that there is a pending shortage of Chardonnay, Zinfandel and Cabernet. The key remains that most of the opportunity to increase production will be for higher-quality wines particularly in the North Coast - Napa and Sonoma where higher quality grapes are grown, but only accounts for 10 percent of the state's total production. Grapes from this region are worth 1000 percent more than the grapes from the Central Valley, where 70 percent of California's wine grapes are grown - mainly for basic wines. Additionally, the Central Coast enjoys average grape prices that are approximately 500 percent higher than Central Valley prices. And while demand for wines from these regions grows, the cost of expansion is prohibitive. California faces some of the highest average land costs of all the competing wine producers in the world. An acre of land in Napa costs an average of more than $150,000 with virtually no land available to expand. Additionally, increased border patrols and efforts to control illegal immigration make it difficult to find low-cost labor. As a result, many must hire labor full-time rather than seasonally to ensure availability. Surging Imports "The pending shortage of specific varietals combined with California's challenges for expanding production of ultra premium wines may be creating an opportunity for imports to gain further share of the U.S. market," Rannekleiv said. "European imports made significant process in gaining share of the super and ultra premium segments. This trend may be poised to continue, as most wine-producing countries are focusing their efforts at selling higher priced wines into the U.S. market." Over the years, imported wines have been consistently increasing their share of the U.S. market. Last year, imports outperformed the overall wine market with a 9 percent growth in volume and 10 percent in value. The trend of import growth appears to have accelerated in the first quarter of 2007, as California wine sales were flat (-1 percent) compared to the first quarter of 2006, while imports rose 24 percent. The leading sources of imported wines are Italy, France and Australia, which account for 77 percent of the value and 71 percent of the volume of imports in 2006. Italy is the largest import source in terms of volume, while France leads in value. Australia is the second largest importer by volume, but lags in value. Historically, the market share of imports has been cyclical, and imports fill gaps that California wines are able to retake eventually. However, over the years, some structural changes in supply and demand have altered that cycle. A key change is the consumer as wine consumption from the Millennial generation (born 1977-1994) has embraced wine consumption more quickly than previous generations. While only about half of the generation is of legal drinking age, they are increasing their wine consumption more quickly than other generations. "Millennials are very internet savvy, regularly read reviews, educate themselves about different wines and enjoy experimenting. As these Millennials research their wines, they often feel that California wines are not the best value - finding equally good from other states or countries at lower prices," Rannekleiv said. As a result, Millennials are drinking much more imported wine than other generations. Additionally, wine supply has changed in recent years. Many of the California wine companies have evolved into international companies, and are increasingly seeking to offer consumers a broad portfolio of wines at a wide range of price points. To achieve this, these companies are increasingly sourcing wines from abroad. A result has been the introduction of 41 new brands in 2006 alone by the top 10 wine companies - 17 were imported. "In short, the large U.S. wine companies are now some of the main importers of foreign wines," Rannekleiv said. Outlook Established growers and wineries on the North Coast are in good shape for the current context of the U.S. wine market. "At a time when many U.S. consumers are trading up, the North Coast, particularly Napa, symbolizes quality and aspiration," Rannekleiv said. However, as demand for high-quality wine grows, the North Coast faces a significant land constraint, which opens the doors for importers. The key to success in Napa and Sonoma is to maintain its premium image, but must be supported by a quality product. The Central Coast may benefit from the shortage of land in the North Coast. While the Central Coast still has only 3 percent of the California wine market, its growth rate in 2006 was well above other regions, and even better than the growth rate of imports. However, it must continue to build its quality image while improving its production efficiency. Currently, there is no evidence to suggest that the trends toward trading up will slow down, which will keep the market for premium wines growing - baring any major economic disruptions. In general, however, imports will continue their strong growth and will target the premium segment more fiercely forcing California producers improve their competitive strengths. Rabobank Group is a financial services leader providing retail and institutional banking and agricultural finance solutions in key markets around the world. From its century-old roots as a finance cooperative founded by Dutch farmers, Rabobank has grown into one of the 25 largest banks worldwide with approximately US$730 billion in assets and operations in over 35 countries. Rabobank is one of the few private banks in the world with the highest possible credit rating from both Standard & Poor's (AAA) and Moody's Investor Service (Aaa), and is ranked as the world's third safest bank by Global Finance magazine. In the Americas, Rabobank is a specialist in sophisticated, customer-driven solutions in the Global Financial Markets and Corporate Finance arenas and provides banking services to corporate food and agribusiness clients; retail and commercial banking services in California; leasing; and a full range of agricultural finance products to American agricultural producers.