Minnesota wineries are locked in a battle over legitimacy

Photo by Bill Bartlett
Alexis Bailly Vineyards owner Nan Bailly on her 13-acre Hastings vineyard.

Vintner Nan Bailly has been making wine since 1977. In 1980, as a way to support agro-tourism and provide farms with an avenue to diversify, Minnesota passed the Farm Winery Act, which mandates that to receive a farm winery license and sell direct to consumers, 51 percent of a winery’s annual production has to be from Minnesota-grown fruit — a requirement that some farm wineries find unpalatable today.

“I predate the farm winery license,” says Bailly, owner of Alexis Bailly Vineyards in Hastings. She says its strictures are “not economical, not commercially viable, and not how I want to make my wine.” In 2017, Bailly and Next Chapter Winery of New Prague filed a lawsuit to challenge the 51 percent restriction on the grounds that it violates the U.S. Constitution’s commerce clause by discriminating against out-of-state grape growers.

In April, U.S. District Judge Wilhelmina Wright dismissed the case, ruling wineries like Bailly could obtain a wine manufacturer’s license and avoid the Minnesota-grown grape requirement. However, because a manufacturer’s license prevents wineries from selling directly to the consumer and because the plaintiffs believe the state has no right to dictate grape sourcing, they have filed an appeal with the Eighth Circuit Court of Appeals.

“Oral arguments are likely this fall, with a decision sometime in 2019,” says the Institute of Justice’s Anthony Sanders, attorney for the wineries. Its contention is that “whatever the percent restriction is, any percent restriction is unconstitutional.”

Valuing a regional brand

Retaining the 51 percent rule is important to the state’s wine identity, contends Dave Mohn, president of the Minnesota Grape Growers Association and owner of Flower Valley Vineyard and Winery in Red Wing. “If we ship in grapes from somewhere else or ship in shiners [wine bottled in another state, which can be up to 10 percent of a farm winery’s inventory], what is the point? We want to give this region a chance to become a wine region,” Mohn says. “You can go to the liquor store and buy [cabernets, chardonnays, and other varietals] cheaper, so there is no point of even having a winery if you are going to sell wines made with those grapes. Why would I want to compete with a major winery in California?”

Currently, Minnesota farm wineries can ship in grapes from any state, crush the grapes, ferment the wine, blend it with wines made from Minnesota grapes, and bottle it, as long as their total annual production is made with 51 percent Minnesota fruit. Opponents of the 51 percent rule argue that it hamstrings them from bringing in enough out-of-state grapes with recognizable names such as chardonnay or cabernet sauvignon to market to consumers. Proponents argue that eliminating the rule would undo everything the local industry has accomplished establishing itself as a unique and viable wine region.

Today, more than 70 “farm” wineries are producing Minnesota wines in every corner of the state, using the 51 percent rule. “The industry is moving away from being a novelty business, where people are just enjoying making wine” to businesses with real economic prospects, says Brigid Tuck, a University of Minnesota Mankato extension economist. “The wineries are getting better. They are generating more energy and enthusiasm over what is happening on their [land] than just selling wine.”

Michael Kaiser, vice president of Wine America, says that the 51 percent requirement in Minnesota is “actually quite low.” For example, California law requires vineyards with wineries in California to use 100 percent California-grown grapes, and New York’s law is similar. Under U.S. Alcohol and Tobacco Tax and Trade Bureau regulations, for a wine to be designated with an Appellation of Origin — typically a state or country — 75 percent or more of the grapes used to make the wine must be grown within the geographical boundary, and the wine must be fully finished within that appellation.

If a wine is designated with an American Viticultural Area (AVA) appellation, federal regulations require that at least 85 percent of the grapes in the wine are grown within the boundaries of that AVA, typically a region such as Oregon’s Willamette Valley, New York’s Finger Lakes, or California’s Napa Valley, and the wine must be fully finished within the region. “The use of appellations on wine labels lets the consumer know exactly where the grapes used to make the wine come from, and it allows regions to develop their own viticultural identity,” Kaiser says. As long as they follow state and federal regulations, Minnesota farm wineries can use the Minnesota Appellation of Origin, and wineries located within the state’s two AVAs — the Upper Mississippi Valley and Alexandria Lakes — can tout those pedigrees.

And no law prevents them from making wines from 100 percent California grapes and selling that wine directly to consumers in their tasting rooms, as long as they don’t label it as a Minnesota wine.

A winery might import grapes for any number of reasons, from cost to local harvest difficulties to flavor profile, rooted in the determination that having a predominantly Minnesota-grown wine is of less value to the consumer than price or taste.

The Minnesota Grape Growers Association lists 33 varieties of grapes that can be grown in the state, but the University of Minnesota’s development of six cold-hardy grape varieties (Frontenac, Frontenac Gris, Frontenac Blanc, La Crescent, Marquette, and Itasca) helped increase vine survival in frigid Minnesota winters. At the same time, the Minnesota farm winery law helped jumpstart the state’s wine industry by providing the state’s grape growers with a market niche. In addition to the estimated 70 farm wineries, 120 to 200 independent growers of all sizes grow more than 350 acres of grapes in Minnesota, according to Matthew Clark, leader of the University of Minnesota’s grape breeding and enology efforts.

Minnesota’s farm wineries generated more than $2.9 billion in economic activity in 2017, according to the 2017 Economic Impact Report on American Wine Industry by John Dunham and Associates, an economic research firm based in New York. The report notes that 58 Minnesota farm wineries employed 15,383 people and generated jobs for 3,846 people who supply ancillary goods and services to the industry. Total wages generated by direct, indirect, and induced economic activity were $989 million; those working in the industry made an average of $38,300 in annual wages and benefits. The state’s farm winery industry is estimated to have paid more than $185 million in state and local taxes as well as $60.7 million in state consumption taxes in 2017.

Economic realities

According to sources at several farm wineries TCB interviewed, the cost to produce Minnesota grapes averages about $1,500 to $2,500 per ton. By comparison, California white wine grapes sell for nearly $600 per ton, red wine grapes about $733 per ton, according to the USDA. The shipping cost per ton from California to Minnesota adds another $250 per ton, according to Allied Grape Growers of Fresno, Calif., putting the average cost of California grapes well below those grown in Minnesota, and Bailly says the grapes are often better because they are less acidic.

“I need [to produce and sell] a minimum amount of wine each year to stay in business. When I lose my grapes, I have no choice but to bring in grapes,” says Bailly, whose vineyard grows grapes over 10 acres. “Why should we be mandated to support Minnesota grape growers? If they are growing good grapes, we will buy them.”

In years with poor harvests, Minnesota farm wineries can apply for a waiver that exempts them from the 51 percent requirement. But that’s not really the issue. Winemakers, like Bailly, say the law prevents them from bringing in enough less expensive grapes to control the price to consumers.

“When I lived in France, we drank the local wine, a dry red. Nobody cared what grapes were in it,” Bailly says. “Today I make a Country Red, and I want to keep it as cheap as I can.” The wine sells for about $15 per bottle, about half the price of her best wine. “Some years it contains 25 percent grapes from California and some years 75 percent, depending on my harvest. You have to be able to taste the wine and have the freedom to make the necessary changes. What business is it of the government’s to tell me how to make my wine?”

Twin Cities Business

Flower Valley’s Mohn produces 10,000 bottles of Minnesota wine each year from the grapes he grows on his 10-acre vineyard, combined with grapes from New York, California, and Washington. He says it costs him about $6 to produce a bottle of wine, which he sells for $15 to $30. While the winery makes money every year, the profit picture for grape growing is more tenuous.

“If you take into account the labor, time, and money needed to [maintain] a vineyard, it would be cheaper to buy all of your grapes,” he notes. Mohn estimates that the cost to start a 10-acre vineyard, which is a typical size for many Minnesota farm wineries, is at least $110,000, including land at $6,000 an acre, trellises, grape vines, planting costs, a used 35 hp tractor, a 200-gallon sprayer, and chemicals. And it’s a long-term play. “For the first two to three years, the vines don’t produce, so for the first three to four years you don’t [make] wine.”

As the Minnesota wine industry has grown, its products have been growing in popularity. According to the University of Minnesota Extension’s Vineyards and Wineries of Minnesota summary, Minnesota wineries reported annual average wine sales of $580,000 in 2015, up from $311,000 in 2011. On average, each tasting room attracted 13,600 visitors, up from 6,800 in 2011, and more than 80 percent of revenue came from tasting room sales. Minnesota Wine Country, a consortium of local wineries, began selling Minnesota wine in the horticulture building at the Minnesota State Fair in 2007. By 2012, business was so good that it purchased the building that formerly housed Epiphany Diner. Since its inception, the group reports that wine sales at the Fair have increased tenfold.

Linda and Marvin Seppanen of Garvin Heights Vineyard in Winona have been growing wine grapes for 25 years and making Minnesota wines since 2007. “Our model has always been to buy from local growers, but how much varies from year to year,” Linda says. Their operation uses the Upper Mississippi River AVA on its labels as a way to market the wine’s terroir, a term that captures an area’s environmental conditions — soil and climate — which is said to impart unique characteristics to its wine.

“We sit on a big hunk of limestone,” Seppanen says. “I can taste it in the reds. The wine made from grapes grown farther west in Minnesota in dark soils has a different taste.” Bailly dismisses the notion: “What is terroir? No one understands it. It is very subjective.”

New York passed a farm winery measure in 1976, but its law allows wineries to have both a commercial and a farm winery license simultaneously, so commercial wineries with farm winery licenses can sell directly to the consumer, says Tim Martinson, senior extension associate at Cornell University. “It is a constraint to try to use local grapes from your state,” he says, “but it is an advantage in the long run because you are developing a unique product niche for your wine.”

This is Bailly’s point, in the end. “It’s important to me that people understand why I am pursuing the lawsuit,” she says. “I have a huge commitment to my 13-acre vineyard and Minnesota grapes. But it’s about recognizing how difficult this business is and how unfair our state laws are.”

Wine America’s Kaiser says New York’s approach is better. “In Minnesota, there are privileges farm wineries have [selling directly to consumers] that the wine manufacturers don’t,” he says. “A Minnesota winery can’t grow to the size it needs to be to distribute its wines if it is just using in-state grapes because there are not enough grapes in the ground.” At the same time, he says that eliminating the 51 percent requirement removes incentive for Minnesota growers to plant the grapes Minnesotans are just beginning to love.

This article is reprinted in partnership with Twin Cities Business.

Comments (3)

  1. Submitted by Colin Brownlow on 08/22/2018 - 09:37 am.

    Bit of hypocricy here

    I found it interesting that Next Chapter Winery was party to this suite. My wife and I spent a very enjoyable and informative afternoon at the winery a couple of years ago. We were given an extensive tour by the owner who constantly stressed how they used his own grapes in their wine. He went to great lengths to show the measures they used to protect their vines from weather, predation and overspray of neighbors herbicides. He was very clear that they only used a limited amount of “imported grape” in some of their cheaper blends. This same vintner spent a lot of time talking about “terroir” and how you could detect it in his wines. The same notion that Nan Bailly dismisses.

    On one hand they want to use they use Minnesota grown and produced as a key part of their marketing strategy, but on the other they don’t want to abide by rules that ensure the bulk of the wine is actually from local grapes.

  2. Submitted by Lyn Crosby on 08/22/2018 - 12:07 pm.

    Hypocricy?

    I read the whole article, twice. I don’t see hypocricy but a difference of approach and opinion.

    I don’t come down on either side strongly, but I do see the point made in the last paragraph.

    Thanks to the author for a lot of info of which I was not aware.

    From an avid wine drinker.

  3. Submitted by James Hamilton on 08/22/2018 - 05:36 pm.

    Apples and oranges don’t make for good wine.

    Based on this piece only, it seems that the state overreached when it refused to issue a wine license based on the origin of the grapes. A sounder approach would have been to declare that one could not advertise a product as a Minnesota wine unless it contained more than 50% Minnesota-grown grapes. Maybe they’ll figure that out before the 8th Circuit rules.

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