Nothing illustrates the agricultural uncertainties of the wine business better than the recent announcement by

Scheid Vineyards

(SVIN)

warning that its 1998 revenues had been crushed by last year's El Nino. It was the cool, wet weather, said the company, that caused the California vineyard's grape harvest to fall by more than 30% -- to 10,800 tons from 15,610 tons in 1997.

Even so, revenues for the year ending Dec. 31 were $17.5 million, down a mere 12% from 1997, but only thanks to an average 12% increase in the prices received for the grapes, and the company's increased sales of bulk wine.

But as D&D reported in

February the 1998 California harvest totaled 2.5 million tons, a near record. Not only was it the second largest in history, but it represents a level that is the best kind of news for wineries: ensuring they will have more-than-adequate supplies without the immediate specter of a glut.

If that's the case, why is Scheid hurting so badly? Because the macro harvest statistics hide the fact that it was only the lousy weather spawned by El Nino that saved the industry from a 1998 glut -- and pushed the misery down to the individual vineyard level. While harvest yields were hammered by the wet, cold weather and late harvest -- some were down 40%, 50% and more -- thousands of new acres began to produce grapes, making the statewide stats look good while ruining the yields of individual vineyards.

A little digging around in the Scheid IPO prospectus and its recent statement shows just how the pain plays out:

These numbers also give us a glimpse of the glut to come. Here's why: If harvests at individual vineyards statewide were down 30% -- in fact, the statewide harvest was down just 13% from 1997's record 2.9 million tons -- then what would the harvest have been had El Nino not intervened?

Even if you weren't great at those word problems on the SAT, you can figure out that the answer might be around 17% above 1997 -- or something close to 3.4 million tons for California alone. Normal weather this year plus even more new producing acres could push 1999 above even that. Can you say glut? Sure you can.

The cold, damp weather not only pruned vineyard revenues but also increased the direct cost of farming through the extended season -- and required the increased use of fungicides in order to control rot and mildew.

This is a key reason why Scheid's cost of sales in 1998 jumped 27% from 1997. This is also why the real operating pain is to be found in Scheid's gross profit line: $9.56 million in 1998 versus $13.65 million in 1997. To give Scheid officials credit, they still managed to eke out a slightly higher net income: $3.6 million for 1998 versus $3.5 million the year before. Earnings per share would have risen a couple of pennies from 1997's 65 cents, but was pruned down to 55 cents thanks to the dilutive effect of a 24% increase in shares outstanding to 6.6 million.

Unfortunately, wine growing is not the glamour business that too many of the nouveau vintners think it is. This is agriculture, and every farmer knows that each growing season is a poker match with Mother Nature -- and she cheats.

Thurmond Shows Rubin Who's Boss

Hell hath no fury like a senator scorned, and

Strom Thurmond

is determined that the wine industry and the

Department of Treasury

never forget that maxim. Ever. Ever.

As this column reported in late

February, Thurmond, R-S.C., was incensed at having his imperial decrees ignored by the

Department of Treasury

when its alcohol enforcement unit, the

Bureau of Alcohol, Tobacco and Firearms

, approved two watered-down wine bottle labels that hinted vaguely of the beneficial health effects of moderate consumption.

At the time, Thurmond issued a blistering press release that said that if anyone in government or industry "thought that I would not react to this decision, they made a losing bet."

Thurmond not only raised the ante by introducing legislation that would wipe out winery profits on most wine but also lambasted Treasury Secretary

Robert Rubin

for the decision. A printed statement from Thurmond's office said that a chastened "Rubin assured

Thurmond that he would work with him to develop legislation to rectify this problem."

To make sure Rubin remembers who's stacked the deck, Thurmond has blocked confirmation of three top Treasury officials. New Senate disclosure rules show that Thurmond has placed a hold on confirmations of Gary Gensler whom

President Clinton

has nominated to be under secretary for domestic finance and Timothy Geithner and Edwin Truman to the respective posts of under secretary and assistant secretary for international affairs.

Not only is this trio being held hostage, but Thurmond spokesman John DeCrosta said that "anything coming out of Treasury is going to be a target. We're looking for others."

In addition, Thurmond has played another ace by demanding an investigation by the inspectors general of

Health and Human Services

and the

Department of Agriculture

into whether the wine industry improperly influenced the decision to change the U.S. Dietary Guidelines in 1995. The guidelines were changed to include a statement that "alcoholic beverages have been used to enhance the enjoyment of meals by many societies throughout human history," and to drop the statement that "drinking (alcoholic beverages) has no net health benefit."

The change was based on solid evidence: More than 100 medical and scientific studies published in

Cardiology

, the

New England Journal of Medicine

,

The Lancet

and similar journals have confirmed that people who drink one to three drinks a day live longer, healthier lives than either abstainers or heavy drinkers. But Thurmond just won't have any part of it, scientifically sound or not.

Yet another reminder that in a business like wine, which is so subject to political control, investors ignore the personalities of the politicians at their extreme peril. Thurmond holds most of the cards in this high-stakes game -- making it a big gamble to bet against him.

Lewis Perdue is editor and publisher of

Wine Investment News. While Perdue does not hold any positions in the companies discussed in this column, he is the chief technology officer (on a consulting basis) to the e-tailer Wine Society of the World, which may, from time to time, discuss purchasing or other agreements with wine companies. He can be reached at

lperdue@ideaworx.com.