President Donald Trump's rhetoric could make matters worse.

By John Kell
January 24, 2017

The U.S. wine industry is poised for another banner year in 2017. Sales are projected to rise by as much as 6% and the total harvest in California—by far the largest wine-producing state—should climb 7% to nearly 4 million tons crushed. The coveted millennial generation is increasingly paying more attention to wines.

Those trends all imply that the wine industry is crushing it. Higher sales, mostly fueled by “premium” priced wines at $9 or higher, bode well for big producers like E&J Gallo Winery, The Wine Group and Constellation Brands stz .

But wine producers are increasingly focused on two lingering concerns that they worry can be problematic headwinds: Labor shortages during the harvest season and the threat of legalized marijuana as an alternative to wines. “Farm labor supply and costs will be the dominant concerns in the wine business in 2017,” says Rob McMillan, who authored Silicon Valley Bank’s annual “State of the Wine Industry” report.

Labor Shortage

For several years now, the California wine industry has faced challenges employing enough skilled laborers during the harvest season. Traditionally, Golden State wine makers relied on the flow of migrant workers from Mexico—often men in their 20s through 40s in age that have had experience working on farms. Those workers would come to California for the spring for the harvest, spend about six months working in the United States, then return to Mexico in the off season.

Why rely on foreign workers? The low-paying harvesting jobs aren’t alluring to Americans. Even President Donald Trump’s family wine business has sought to rely on foreign employees for farm and labor work.

But the flow of workers coming north from Mexico has slowed the past several years. “We don’t have the resources,” says Duff Bevill, who serves on the board of Sonoma County Grapegrowers. He says that while the number of wine grape growing acres in the county has remained steady at around 60,000 since the financial crisis, the availability of labor has been consistently shrinking.

Graphic by Stacy Jones

“It isn’t like our acreage is increasing and we don’t have the labor to fill that void,” Bevill said. And while labor shortages have hit the California wine industry in the past, in general those lulls were blamed on a hot housing market, as construction work relies on the same workforce pool that farmers use but home building pays better. “There isn’t a housing boom going on, so that isn’t causing the black hole we are seeing,” he added.

McMillan says another industry appears to be to blame: the booming marijuana sector. Wine producers say marijuana growers pay between $25 to $30—often in cash because of restrictions banks have faced to work with the industry—well over the average vineyard harvesting wage of around $20.

He adds that anti-Mexican rhetoric from President Donald Trump during the recent election campaign also isn’t helping matters. “Build a wall. It is a pretty firm message if you are on the other side of the wall that you aren’t welcome,” McMillan said. “The end result of that is when we get to harvest, it is just hard to find people.”

Marijuana’s threat

Beyond the pressure on the work force, some wine producers expressed worries about the threat of competition from drugs that are a substitute to wine. Specifically, they are worried about the movement by several states to legalize cannabis. As of today, eight states—including California—and D.C. have legalized marijuana for recreational use. More than a dozen additional states have approved the drug for medical use. Americans and Canadians have spent an estimated $53.3 billion on marijuana annually, with legal purchases on the rise.

That’s led some observers to fret that sales could decrease for alcoholic beverages. Cowen & Co. analyst Vivien Azer issued a widely cited report late last year that said there were signs cannabis sales were hurting demand for beer across several states where marijuana was legal. Domestic big beer brands like Bud Light and Coors Light appeared to face the greatest competitive threat to cannabis, while imported beers looked the most immune.

Wine producers are worried their industry could see a slowdown as well. If the trend were to mirror what some are claiming is happening in the beer world, lower priced wines could see the greatest dent to sales. Fine wines, which are often consumed for special occasions and often at expensive restaurants, will likely be less hurt by the rise of marijuana.

“It is too soon to call,” McMillan said. “People don’t drink wine to get high, they smoke marijuana to get high. I don’t think it will hurt demand.”

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