Dan McFadden | Mar 10, 2015

My name is Daniel McFadden. My wife Beverlee and I have lived on Soda Canyon Road since 1991, and we vote and pay taxes in this county. Our property was first developed as a vineyard by Luis Banchero in 1870, and we have replanted his vineyard and restored his ghost winery. I am an economist by profession, an emeritus professor from the University of California, Berkeley, and currently a Presidential Professor of Public Policy and Economics at USC. In the past, I have served as President of the American Economics Association, and in 2000 I received the Nobel Prize in Economics for my research on methods for predicting travel demand for BART.

Over the past thirty-five years, Napa County has prospered from a dramatic expansion in its wine industry, and hospitality industries. In recent years, the pace of development has accelerated, with new wineries permitted or proposed throughout the county, and large new tourist facilities proposed in various locations. A critical question for the Board of Supervisors is whether further development at this pace is economically and environmentally wise for these industries and for the residents of the county. A little arithmetic shows the magnitude of the problem. If the rate of growth of hotel rooms in Napa County continues at its pace over the past decade, then 35 years from now, Napa will have 30,000 hotel rooms, about half the size of Las Vegas today. The number of tourist visitors will rise more than five-fold, to 16 million per year. Wine production will increase more than three-fold, and more than 90 percent of wines made in Napa will be using grapes trucked in from outside the county.

The Napa wine industry has been notably resistant to government regulation, unrelentingly optimistic about its future, and dismissive of its impacts on the environment and county infrastructure. However, there are some good reasons for the industry, and the economy built around it, to be cautious about the future. Since the Judgment of Paris in 1975, Napa has benefited from a reputation for producing some of the world’s best wines. This brand reputation is the reason that Napa grapes command prices two or three times those in neighboring counties. But brands have to be defended, not only from rival producing areas who aspire to exceed Napa quality, but also from operators who would try to exploit the brand by selling inexpensive everyday wines with a “Made in Napa” label.

For the past few decades, Napa winemakers whose definition of quality is “best in the world” have held sway, but this brand reputation is fragile. A few significant tastings in which Napa loses to wines from traditional rivals such as Burgundy or Bordeaux, or new ones such as Australia’s Margret River, Washington’s Red Mountain, Oregon’s Willamette Valley, or even Sonoma County, could drain away Napa’s cachet and customers. So far, only Burgundy and Bordeaux have been able to measure in centuries the duration of their reputations for quality. They have done it through stringent environmental regulation, production controls, and aggressive defense of their brands.

What are the prospects for defense of the Napa brand? While the rigid regulation of growers and wineries employed successfully in France is neither possible nor desirable in Napa, there are things that Napa County can do to prevent unsustainable and eventually self-destructive winery development. First, note that Napa County at this point has nearly exhausted agricultural acreage suitable for vineyards. Additional acreage would mostly have to come in environmentally sensitive remote areas that are extremely expensive to develop and would stress available water supplies. Existing wineries have ample capacity to process Napa grapes, in fact enough excess capacity to process a great deal of fruit trucked in from other growing areas. The new winery capacity permitted or planned in the county is either going to go unused, or is going to be supplied directly or indirectly by imported fruit.

Many of the new wineries permitted or proposed will be extremely expensive to develop and operate, and are not economically sensible as pure winemaking operations. Their developers may envision them as “crush and party pads” for wine tourists, or may simply see them as a way to park assets until the wineries can be flipped in the current speculative market. A prime example is a new winery being developed next door to me on Soda Canyon Road. The site is remote, access is tortuous, the water supply is from deep wells and requires reverse osmosis, the land does not perk so that all waste water has to be trucked out, and there are no grapes grown on the property. The business model of this winery, and others being planned, appears to assume that wine tourism will be sufficient to offset high operating costs. But tourists are fickle, and direct wine sales to tourists are costly to generate and sustain. I think most of these wineries are in the process of verifying the adage that the best way to make a small fortune in the wine business is to start with a large fortune.

Perhaps the county need not concern itself with the business success of winery developers and owners, but it should think carefully about the environmental and infrastructure damage to the county caused by winery construction, the pressures that excess winery capacity will create for legal or illegal imports of grapes from other counties, and the impact on the Napa brand of increased production in the county of everyday wines from non-premium fruit and other cost-cutting measures.

I think the county faces a clear choice. If it wants to protect the Napa brand and preserve the character of Napa Valley, it needs to clamp down on expansion of winery capacity that cannot be supplied by Napa County fruit, enforce its restrictions on grape imports, and resist debasement of the brand by operators using a “Made in Napa” label. It needs to account for the environmental damage and congestion costs of more wineries, more wine tourists, and more low-wage workers commuting into the county to work in the wine and hospitality industries. The wine and hospitality industries have been good for Napa County, but it is in their interest as well as all our interests that they continue to thrive on a sustainable path without self-destructive over-development. Currently, the County development plan, and ordinances to channel and regulate growth, have failed to restrain growth of the wine and tourist industries to sustainable levels. To achieve prudent growth levels, the Supervisors have to tighten their current planning and permitting procedures. Here are some specific possible actions:

1. Ask AFT to reduce confusion of Napa production and Napa AVA wines by requiring all producers to label their products with the percentage of Napa County fruit.
   
2. Keep separate production statistics for large everyday wine producers like Sutter Home that rely primarily on non-Napa fruit, and the wineries who do rely primarily on Napa fruit. These types of wineries are very different, and their growth should be regulated separately.
   
3. Declare a partial moratorium on winery and hotel expansion, limiting them to growth rates of one percent per year.
   
4. Give priority to estate wineries and wineries that are scaled in proportion to their grape supply.
   
5. Give priority to wineries who commit to using Napa fruit, and can establish a source.
   
6. Give preference to wineries that locate in current industrial areas rather than in the ag preserve.
   
7. Give preference for visitor programs to wineries who locate their tasting facilities near major tourist centers.
   
8. Increase minimum parcel size for a winery, and require that wineries replace any vineyards destroyed or damaged by construction or operations.
   
9. Improve monitoring and audits of wineries to ensure that they meet the Napa fruit requirements and do not abuse the Napa environment.
   
10. Give wineries substantial freedom to run their visitor programs as they wish, but strictly limit annual visitor numbers, taking into account traffic congestion, safety, and neighborhood nuisance factors.

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