California's wine industry is struggling to find a balance between production and demand in certain price tiers following rapid vineyard expansion and a shift in demand in recent years, according to a new report by Rabobank.

"Too much of a good thing?" published by Rabobank's Food & Agribusiness Research (FAR) group reports that the most challenging dynamics are found in the San Joaquin Valley, where approximately 45 percent of California's wine is produced. Demand for the region's wines, many of which are priced at less than US $10 per bottle, is down mainly due to declining consumption among baby boomers, core drinkers of low-cost, large-format wines. Millennials, whose income levels and affinity for higher-priced wines are rising, are gravitating towards more premium wines priced $10 to $25.

While demand for wines under US $10 continues to drop, supply in the San Joaquin Valley is on the rise. Rabobank's report states that approximately 57,000 acres of vineyards have been added in the region since 2012, and are set to come into production by 2017. Due to declining demand, growers have already begun removing vineyards in the San Joaquin Valley, and unless demand for low-priced wines rebounds, or regional producers capture a larger share of the $10 to $25 price segment, up to 40,000 more acres will likely be removed over the next three years.

"The degree to which fruit from the SJV (San Joaquin Valley) -- particularly the northern SJV -- is used in wines priced $10- $25, will reduce the structural excess and the need to remove vineyard acreage..." conclude the report's authors, Stephen Rannekleiv, executive director, Food & Agribusiness Research at Rabobank, and Vernon Crowder, senior vice president and senior analyst and manager at Rabobank.

Their report also examines production and other dynamics in California's two other main wine regions -- the Central Coast and North Coast. In contrast to the dynamics in the San Joaquin Valley, supply for key varietals in California's North Coast is expected to remain relatively tight. In the Central Coast, grape production capacity may be slightly ahead of demand at the moment, but this situation should correct itself fairly quickly in the coming years.

The full report is available exclusively to clients of Rabobank.