Growing Chardonnay grapes, the number one vinifera variety grown in North Carolina, can be a profitable venture in certain areas of the state. The profitability analysis in this chapter, based on 2005 costs, shows that it will take an estimated $12,876 per acre to bring a vineyard up to full production in the fourth year. The vineyard would begin to yield $1,097 per acre in the eighth year, and the producer may be able to break even by the eighth year.

If you are considering planting Chardonnay, use the estimated production and harvesting figures along with the investment analysis in this chapter as a starting point. The monthly production sequence; the equipment, material, and labor input requirements needed to complete each operation; and the estimated costs per acre are based on a representative 10-acre vineyard. With some modifications for vine cost, crop value, and certain cultural practices, you could also apply this budget to other types of wine grapes and table grapes. You will also want to consult an expanded version of this chapter at ncwine.org, along with other publications and resources on the cost of investment and operation of a winery.

Vineyard Layout, Training, and Trellis System

In this hypothetical 10-acre vineyard, vines are spaced 7 feet apart in the rows and the row width is 10 feet for a total of 622 grapevines per acre on relatively flat terrain. Vines are trained in a bilateral cordon system with vertically shoot-positioned (VSP) canopies to optimize fruit and foliage exposure. The system modeled in this budget was assumed to have three sets of 13-gauge catch wires, a 9-gauge wire to secure the cordon, and a fixed 12.5-gauge wire at the top of the post (Figure 2.1).

An internal end-post brace assembly was employed, as shown in chapter 5, Vineyard Establishment. A listing of the materials and the estimated costs of each component needed to construct the 10-acre trellis system are listed in Table 2-1. Not surprising, posts and bracing timbers were the major expenses accounting for slightly over 58 percent ($12,816) of the total materials costs, while the wire was the second most costly item comprising over 35 percent ($7,756) of the total. In addition, the equipment and labor requirements cost $1,400 and $5,197, respectively.

Production Practices

It was assumed that the vineyard management would be near optimal and that all currently recommended pest management practices in chapter 8 would be followed. Of course, the actual production practices are site specific, and you will need to adapt your actual practices in coming up with your own costs.

The comprehensive summary of the cost of materials used is found in Table 2-2 is based on 2005 prices from local dealers who regularly supply North Carolina grape growers. Tables 2-3 through 2-7 show the detailed production and pest control programs that were modeled in this budget.

The task that should be accomplished and the estimated amount of labor needed to complete each activity are also listed by production year and month in these tables.

^a Actual application rates should be based on actual soil tests. ↲

Wildlife and Frost Control

Losses due to bird feeding, browsing by deer, and frosts vary from year to year, between locations, and by grape varieties. Control options are also diverse. Assess the economic costs and benefits of the different alternatives before selecting a specific control method for these problems.

Bird Control.

Bird netting was incorporated into the budget for bird control. Bird netting is probably the best choice where total, environmentally friendly control is desired. Researchers at the University of Oregon have estimated that the investment costs for bird netting is $800 per acre (Seavert and Castagnoli, 2004). This cost estimate was used in the budget and it was assumed that 45 hours of labor would be required annually to install and remove the nets.

Deer Control.

Browsing by deer can be a serious problem, especially in the establishment years when it can delay fruit production by a year or more. The most effective way to eliminate browsing by deer is to enclose the area with a fence that is at least 7.6 feet high (Roberson, 1985). Lower fences, such as 4-foot-high chain-link, and decorative, wood or metal fences will reduce, but not eliminate deer problems. Repellents like systemic insecticides, human hair, soap, other chemicals, outdoor lighting, and artificial noise, are unreliable. While perimeter fencing can be installed to control deer, this expense was not included in the budget.

Frost Control.

Frost is a problem in many areas, especially in the piedmont where vineyards are highly prone to damage by spring frosts. Chardonnay’s early budbreak is a major weakness, making it susceptible to frost damage crop, especially in areas of lower elevation with poor cold air drainage. Wind machines, or fans, can provide active frost protection for many vinifera vineyards (see chapter 11). Although a wind machine was not used in this budget in 2005, some producers in North Carolina spent approximately $2,800 per acre to install a gasoline-fueled fan system. It is also estimated that this wind machine would be used 50 hours per year for frost control (approximately 5 to 6 nights of protection per season).

Drip Irrigation System

Chardonnay wine grapes need 3 gallons of water per vine per week the first year, 6 gallons of water per vine per week the second year, and 9 gallons of water per vine per week the third and subsequent years. It was assumed that the water source would be a pond and that the irrigation system would provide 2.33 gallons of water per vine per hour. It was also assumed that irrigation system must be operated 3 weeks in May, 4 weeks in June, 4 weeks in July, and 1 week in August.

It would cost an estimated $22,743 to purchased and install the equipment required for the 10-acre drip irrigation system (Table 2-8). Annual taxes were estimated to be 1.0 percent of the initial equipment cost; insurance cost was 0.5 percent of the initial cost; and the annual repair cost was 5.0 percent of the initial cost. It was also assumed that the annual labor requirements to operate the irrigation system would total 6 percent of the total irrigation time (Turner and Anderson, 1980). The energy costs were based on $0.08 per kilowatt hour.

Labor Costs

The estimated hours of labor needed for each operation that involved machinery and equipment were increased by a factor of 1.2 to account for the time needed to set up, adjust, or calibrate, and move the equipment to the vineyard (Edwards, 2002). Full-time employees were paid $8.25 an hour, and when required payroll expenses, e.g. workers’ compensation, unemployment, and FICA taxes, and other overhead expenses were included, the hourly cost was $10.56 an hour. It was also assumed that temporary employees would be hired to help construct the trellis and would be paid $8.25 per hour.

Machinery and Equipment Costs

The estimated hourly operating costs of the machinery and equipment required for the production of Chardonnay grapes are shown in Table 2-9. It was assumed that all the machinery and equipment were purchased new at 2005 purchase prices. The machinery and equipment used in this budget reflect machinery components that can be used for other farming enterprises in addition to growing grapes on a typical diversified farm. Therefore, the hours of annual use and the resulting costs per hour reflect the equipment costs for a total farm business and not just for grape production. The exceptions to this are the blast sprayer, wind machine, and the irrigation equipment, which are used solely for winegrape production.

The hourly operating cost includes property taxes (1.0 percent of the purchase price), insurance (0.5 percent of the purchase price), repair costs, and fuel and lubricants costs. Fuel costs per hour were estimated using a price of $2.39 per gallon for diesel fuel and $2.13 per gallon for gasoline, while lubricant costs were assumed to be 15 percent of the fuel costs. The time required for the application of all the pesticides was assumed to be 20 minutes per acre.

Harvesting Costs, Yields, and Prices

The projected yield pattern over the 20-year life of the vineyard assumed that there would be no adverse weather or production setbacks and that there would be no marketing difficulties throughout the life of the vineyard. The initial yield in the second year was expected to be 1.5 tons per acre, and it would increase to 3.0 tons in the third year of production, and peak at 4 tons per acre in the fourth through twentieth years.

The harvest was assumed to be started and completed in early September (in warmer piedmont areas, Chardonnay harvest typically begins in late August). A custom harvest rate of $100 per ton was charged to the vineyard operation for custom hand picking, and the price the growers were assumed to receive for their grapes was $1,400 per ton.

Land, Management, and Overhead Charges

Since every commodity should contribute to the financial success of a farm, a fee was charged to the vineyard for the overall farm overhead expenses and operating capital. Because land values vary throughout the region a land charge was not included in this budget. However, growers should include a land charge that is representative of current land values in their area. Owners should also charge a management fee to the vineyard operation to account for their managerial ability in supervising the overall business.

Figure 2.1 Bilateral cordon-trained vine with vertically shoot-positioned (VSP) canopies.

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Figure 2.1 Bilateral cordon-trained vine with vertically shoot-positioned (VSP) canopies.

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Monthly Labor Estimates

The monthly and annual labor estimates required to produce an acre of Chardonnay wine grapes are presented in Table 2-10. Slightly more than 6 person-hours of labor are needed per acre in the preparation year (year 0), 147 hours per acre in the first year, 83 hours per acre in the second year, 194 hours per acre in the third year, and 192 hours per acre after the vines reach full production in the fourth year.

In the first year, 63.4 hours were spent constructing the trellis and digging vine holes in March, while 33.7 hours were needed to plant vines and install growth tubes in April. In the second year, over 74 hours of the labor was needed from March through September. By the third and fourth year, almost all of the approximately 190 hours are needed from March through September. In fact, the only significant activity that does not occur in these months is trellis repair in November. Keep in mind that labor requirements in September are underestimated because, as was previously discussed, it was assumed that the labor needed to harvest the grapes would be hired at a custom rate of $100 per ton.

Costs of Establishing the Chardonnay Vineyard

If a grower has to purchase all of the machinery and equipment as the vineyard is established, the capital investment was estimated to total $58,585 in the preparatory year, $10,572 during the first production year and $8,000 in the third production year. Of course, as was previously discussed, most of this equipment can also be used for other farming operations in a diversified farm.

The estimated cost per acre was $2,862 for the trellis system and $2,275 for the drip irrigation system. Annual operating costs to run the machinery and equipment, purchase the materials, and hire the labor that was needed to prepare the site, plant and maintain the vineyard until the vines reached full production in the fourth year totaled $12,876 per acre.

Monthly Expenses

Monthly operating costs are summarized in Table 2-11. Over 95 percent of the total estimated cost in the preparation year was spent in August and December to pay for the Chardonnay grape vines and the trellis supplies. In the first year, March accounted for 42 percent of the total cost per acre, primarily due to trellis construction, and the expenses in April comprised 21 percent of the total cost, mainly as a result of planting the vines and installing the growth tubes. A large portion of the expenses was incurred in June and July during the second year primarily because the flower clusters must be removed and the shoots should be thinned during these months. Starting in the third year, over 93 percent of the total costs per acre were incurred from March through September.

You will need to estimate your monthly cash flow requirements before planting the wine grapes to ensure that you will know how much money you will need to meet financial obligations. If you will be borrowing money, a lending agency may require detailed information to determine the appropriate repayment schedule.

Annual Production Costs for Mature Vines and Returns to Land and Management

For mature vines the total cost of producing and harvesting Chardonnay grapes was estimated to be $3,230 per acre. This estimate includes $249 for operating the equipment and machinery, $593 for materials, $1,987 for hired labor, and $400 for the custom harvest. In addition, the cost of establishing the vineyard should be included in this estimate. Therefore, the establishment costs of the vineyard were allocated over the productive years of the enterprise (years four through twenty) using the cost recovery (annuity) method as suggested by the American Agricultural Economics Association (2000). These calculations assumed a 20-year amortization period and a 7 percent nominal interest rate. In this situation the cost recovery for the establishment costs was $1,273 per year.

Net returns depend on marketable yield and the price growers receive for their grapes. Including the cost recovery for the establishment costs, the annual variable costs associated with producing and harvesting Chardonnay wine grapes was $3,075 per acre and the annual fixed costs were $1,428. Assuming a yield of 4 tons per acre and a market price of $1,400 per ton, the net returns to land and management from producing these grapes was $1,097 per acre.

Given the same yield, the breakeven price, i.e. the price that just covers the total production costs, for this vineyard operation was $1,125.64. Moreover the shutdown price, i.e. the price that only covers the variable production costs but not the annual fixed costs, was $725.05. If the market price ever reaches the shutdown price, it would be better to cease production rather than continue growing grapes. However, both the breakeven and shutdown prices are below the assumed market price of $1,400 per ton.

As in most farming operations, you will have a tremendous influence on your crop yield. The more you know about your crop and the better job you do in caring for your crop, the more likely you will be to have a good yield of top quality fruit. On the other hand, local markets will determine the maximum price for which you can sell your grapes. To analyze the sensitivity of different yield assumptions, revenues and breakeven yields were calculated assuming different prices (Table 2-12).

Market prices were varied from a low of $800 per ton to a high of $2,000 per ton, while the yield estimates were 5 percent and 10 percent above and below the average yield of 4 tons per acre for mature vines. Total expenses per acre were adjusted to account for the varying yields. At the average assumed price of $1,400 per ton, growers would receive a positive return only if their yields are above 3.16 tons per acre. With prices equal to or below $1,100 per ton and a yield of 4 tons per acre or less, growers will always receive negative returns. In fact, growers would have to sell 4.1 tons per acre to breakeven if the market price was $1,100 per ton and 5.86 tons per acre if the market price was $800 per ton.

Chardonnay Vineyard Profitability

When judging the profitability of an enterprise, it is important not only to see how many dollars the enterprise yields but also when the dollars come in and the returns available in other enterprises. There are two principles to consider. First, the sooner a dollar of revenue comes in, the sooner it can be used to earn more revenue. Second, for any two enterprises of equal risk, the one yielding the higher rate of return is usually preferable. We will look at the flow of funds for the Chardonnay vineyard to show both profitability and cash position (solvency).

After subtracting expenses from revenues in each year, the flow-of-funds, or net cash flow, pattern emerges as it appears in Table 2-13. Growers establishing a new Chardonnay wine grape vineyard will experience net cash outflows in the preparatory year, and the first and third years of production. The income stream is positive in the fourth through twentieth year.

The net accumulated cash flow is also shown in Table 2-13. The breakeven year, or payback year, is the year in which growers finally get their investment back in terms of cash flow. The breakeven year for the Chardonnay vineyard modeled in this study was 8 years. The breakeven year is important when arranging financing because you must secure loans that cover the period in which the enterprise operates in a deficit cash position. Only during the breakeven year will you have generated enough revenues to cover start-up expenses.

The next step is to compare the net revenue stream with other opportunities. There are two ways to do this. The first way is to assume that farmers could invest their money elsewhere at a given interest rate, such as 6 percent, and compare the Chardonnay vineyard with this other investment. The interest rate selected for this analysis should represent the best low risk alternative, such as a long-term certificate of deposit, available for off-farm investments. For a single enterprise, the essence of the net present value (NPV) approach is that the project should be accepted if its NPV is greater than zero. This procedure uses the discounting procedure to compare the value of a dollar at the time of the planting decision with a dollar received for grapes at some future time. Discounting is based on the concept that a dollar received in the future is worth less than a dollar received today. For example, $1,000 received 10 years from now is worth $558 received today at a 6 percent interest rate.

Today’s cash equivalent value of applying land and management to Chardonnay grapes for a 6 percent interest rate is $8,807 per acre. This figure is interpreted in just one way, but the interpretation can be phrased in several ways. At an interest rate of 6 percent, for example: a) a new, 1-acre Chardonnay vineyard as described in this analysis is worth $8,807 per acre today, or b) if a farmer was just about to establish a Chardonnay wine grape vineyard, someone would have to pay $8,807 per acre to bribe him or her to forget the plans. Under these assumptions, establishing the vineyard looks profitable.

The second method for financial comparison of the vineyard with other opportunities is to calculate the internal rate of return (IRR) on the total investment of the Chardonnay wine grape operation and then compare this rate of return with the interest yields on other investments. In this analysis the Chardonnay vineyard was compared to Treasury bonds, which are typically a 20-year low risk investment. The IRR to an investment in the Chardonnay vineyard was 12.67 percent. With dividends on Treasury bonds currently yielding around 4.25 percent, the vineyard operation returns look relatively good. Of course, the revenues from grapes are more risky due to price fluctuations and weather conditions.

Net Present Value: 8,807.64

IRR: 12.67%

¹ Since the machinery and equipment can be used for other farming enterprises, the capital investment reflects only the percentage of the machinery and equipment purchase prices that were charged to the vineyard and not the complete costs of each item with the exception of the blast sprayer and the irrigation system. These percentages were calculated based on the amount of time each item was projected to be used for grape production relative to the estimated total hours of usage. ↲

Profitability analysis revealed that Chardonnay grape production under the assumed costs and conditions could be a profitable venture in North Carolina. The annual operating costs to run the machinery and equipment, purchase the materials and hire the labor that is needed to prepare the site, plant, and maintain the vineyard until the vines reached full production in the fourth year added up to an estimated $12,876 per acre.

Under the assumed yield and market price the estimated return to land and management starting in the fourth year was $1,097 per acre. Cash flow analysis also demonstrated that the breakeven year can be achieved in the eighth year, while the net present value of the investment was estimated to be $8,807 per acre and the internal rate of return was 12.67 percent.

This budget is only a guide and is not a substitute for calculating your own costs. Costs can vary from one producer to another because of market conditions, labor supply, age and condition of the machinery and equipment, education, managerial skills, and many other factors. It should also be noted that the profitability analysis did not incorporate any effects of lower yields, higher production costs, or fluctuating market prices, which could have a negative impact on the results. The analysis also did not take into account any negative effects that may be associated with increased supplies of wingrapes or increased competition in the wine industry. Since every grower’s situation is different, it is highly recommended that you estimate your individual production, marketing, and harvest costs, and conduct a profitability analysis based on your own production techniques, price expectations, and local market situation.

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