Assessing Fire Damage to the 2020 Wine Grape Crop

Fire
Justin Sullivan/TNS

Lightning strikes during a heat wave in a bone dry state make for a lot of devastation. This is what happened in California in August 2020, taking lives and livelihoods, causing billions of dollars of damage, and filling the air with toxic smoke.

In this article, I estimate that wildfires reduced the value of the wine grape crop by about 30% in Monterey, Napa and Sonoma counties. At the time of the fires, I argued that smoke taint unlikely have large effects on California wine because most grapes were not close to fires. This take may be correct in aggregate, but it has become clear that wine grapes in some areas suffered significant wildfire damage, whether due to smoke-damage or burned vineyards. 

California Wildfires

 

One way to see the damage is to look at crop insurance records, which you can easily view on our US Crop Insurance data app.

First, some background. Crop insurance liability on grapes increased substantially in 1995 and again in 2014. In recent years, the Federal crop insurance program has carried liability of just over $1.5b on grapes annually. 

Grape Crop Insurance Liability
Source: Our US Crop Insurance data app

 

Most insured grape acres are in California, although there are some in Washington and a few elsewhere. After all, every state in the union has a wine industry. The crop insurance program covers grapes grown for wine, juice, raisins, or canning, so it includes more than just wine grapes. Table grapes are covered under a separate program.

Grape Acres Insured in 2020
Source: Our US Crop Insurance data app

 

Crop insurance is designed to be actuarially fair, meaning that over time the average premium equals the average indemnity. In 2020, the program paid out indemnities almost 5 times the amount of premium received. Before 2020, the highest loss ratios were 1.20 in 1994 and 1.14 in 2015. Many farmers could have held insurance for many years before 2020 and never once made a claim. 

Grapes loss ratio on crop insurance
Source: Our US Crop Insurance data app

 

Most of the insurance premiums on grapes are paid by the Federal government. In 2020, growers paid 35% of the premium cost and the government paid the other 65%. This graph shows why crop insurance coverage increased dramatically beginning in 1995 - it was because of a large subsidy increase.

Grape Crop Insurance Subsidy Rate
Source: Our US Crop Insurance data app

 

In the late 1990s, most crop insurance coverage for grapes fell under the catastrophic risk protection (CAT) program. CAT covers production below 50% of the average production history (APH) for a grower, and it compensates those shortfalls at 55% of the established price. Although CAT provides only partial insurance, it was initially appealing to growers because the government pays the entire premium. Growers pay only a fixed administrative fee, currently $655 per crop per county.

Over time, many growers have switched to policies that give more coverage, known as buyup policies, which have subsidy rates around 60%.  The most popular buyup policies for grapes in 2020 were at coverage levels of 70% and 75% of APH.  Growers choose the price at which they are compensated for production below the coverage level. For example, if production is 30% of average and the grower chose the 75% coverage level, then they would receive compensation equal to 45% of average production multiplied by the elected price. 

Grape Crop Insurance Coverage
Source: Our US Crop Insurance data app

 

Most of the grape crop insurance indemnities paid out in California in 2020 went to three counties:  Monterey, Napa, and Sonoma.  Growers in Napa and Sonoma each received $75m in indemnities and Monterey growers received $35m.

Grape Crop Insurance Indemnity
Source: USDA RMA Summary of Business Report and R Code linked at end of article

 

Almost all the indemnities paid out in the three hardest hit counties were due to fire damage: $32m in Monterey, $71m in Napa, and $63m in Sonoma.

Grape cause of loss
Source: USDA RMA Summary of Business Report and R Code linked at end of article

 

And almost all the indemnities were paid out for damage that occurred in August, which is when the major fires occurred. The fires in 2017 and 2019 occurred in the fall after most grapes were harvested, which reduced their impact on the crop. 

Grape cause of loss by month
Source: USDA RMA Summary of Business Report and R Code linked at end of article

    Growers in the three hardest-hit counties have mirrored the aggregate data by migrating away from CAT coverage towards buyup coverage to obtain higher coverage levels. In 2020, insured acreage was:

    • Monterey:  32m acres, or about 70% of harvested acres
    • Napa:  26m acres, or about 60% of harvested acres
    • Sonoma:  40m acres, or about 70% of harvested acres

    For harvested acres data, check out our CA Crops Data App.

    Grape Crop Insurance Coverage
    Source: USDA RMA Summary of Business Report and R Code linked at end of article

     

    The above plot shows low insured acreage for 2021. However, growers do not have to report insured acreage until May 15, so this number will likely increase.  In fact, the number of policies sold for 2021 is about 5% higher than in 2020, so insured acres are likely to also be higher in 2021. 

    In February, I documented the massive drop in the value of wine grape production in California in 2020. Some of this drop stemmed from reduced demand due to the COVID-19 pandemic and some came from reduced supply due to wildfire damage and hot early-season weather. How much did wildfires reduce the value of wine grape production in these counties? 

    The 2020 crush in Napa was 61,000 tons less in 2020 than in 2019, which was a normal yield year.  At the pandemic-depressed price of $4600/ton, this implies losses in Napa county of $281m, which is about 4 times the insurance payout.  However, only 60% of Napa acres were insured, so it's likely that growers with insurance recovered much more than a quarter of their wildfire losses. For Monterey, insurance indemnities for fire damage were over half the estimated losses and for Sonoma they were a third of losses. Further details on these calculations at the end of the article.

    Value of Wine-Grape Production Losses (Source: CA Crush Report)
    County 2019 Crush (000 tons) 2019 Price ($/ton) 2020 Crush (000 tons) 2020 Price ($/ton) Est. Loss ($m) Acres Insured (%) Indemnity for Fire
    Monterey 240 1400 188 1100 57 70 32
    Napa 160 5800 99 4600 281 60 71
    Sonoma 230 2800 148 2400 197 70 63

     

    There are plenty of reasons why these numbers may over- or under-estimate losses due to wildfire damage. Some of the losses were likely due to early-season heat rather than wildfire (over-estimate). The damage may also have depressed the price below what it otherwise would have been (under-estimate).  2019 may not be an appropriate estimate for what production would have been without wildfires, etc.  

    However, we do know that wildfire losses significantly exceeded insurance indemnities because crop insurance is not designed to restore revenues to their normal level. Depending on the product, indemnities don't kick in until the production drops below 50-85% of average, with most policies at the lower end of that range.  Growers who lost 25% of their crop but had insurance at 70% coverage would receive no payout.

    This all suggests that the estimates in the above table, a total of $535m or about 30% of the typical value of production, are a reasonable approximation to the 2020 wildfire losses to wine grape growers in Monterey, Napa and Sonoma.  

    Scientists at UC Davis and other institutions are studying how smoke affects wine quality. This work may lead to methods to mitigate smoke losses in the vineyard or during the winemaking process, which may reduce the effects of the inevitable future wildfires. 

      

    Yesterday, I participated in an ARE Discussions webinar on on Wine and Wildfire. Questions raised there prompted me to look into crop insurance for this article.

    Most of the figures in this article come directly from our US Crop Insurance Data App.  Check it out!  I generated the county level figures using this R code.

     

    More details on calculations

    What would production have been without the wildfires? Demand reductions cause prices to drop. In most markets, producers respond to lower prices by supplying less. However, the pandemic arrived too late in the season for growers to reduce 2020 reduction in response. Let's take 2019 as a benchmark year and assume that 2020 production would have been the same as 2019 if wildfires had not occurred. Thus, I attribute the entire 2019-20 drop in production to wildfire damage.  To the extent that early-season heat mattered, it would reduce the losses attributable to wildfire.

    What would the price have been without the production decline?  Let's assume that the demand for wines from these counties is perfectly elastic. This means the price doesn't drop when production declines. People have a price they are prepared to pay for, say, Napa Valley wines, and they will buy at that price and they will not buy at a higher price. 

    With these assumptions, we can estimate the loss as the 2020 price multiplied by the drop in production from 2019 to 2020.