French Colombard
In an article by University of California Office of the Presidents (UCOP), French Colombard crushed wine are priced among the lowest in the country. After the 1980s, the French Colombard yield began to fall steadily (Figure 1). This decrease in yield and the decreasing demand for white wines is a good sign for our vineyard to shift production to a more popular white grape variety. We can consider growing more Chardonnay grapes (white) which made up to 75% of the total white grape production in the Central Valley and their yield has been rising steadily until the 2000s.
Zinfandel
In the same article by UCOP, Zinfandel has the lowest average returns among the major red wine grapes. Cabernet Sauvignon and Merlot has picked up its growth in yield (figure 2) since the 2000s and is continuing. Cabernet has also yielded the highest average return by a significant margin among all red wine grapes. Given this information about Cabernet Sauvignon and Merlot grapes, it seems like a no-brainer for us to shift gradually to producing them.
Cost
The 2017 average price for Zinfandel was $589.82, down 2.4 percent from 2016, while the French Colombard average price was up 2.5 percent from 2016 at $267.39 per ton. (USDA)
So the price for Zinfandel in 2016 is $603.98/ton and the price for French Colombard in 2016 is $260.71/per ton. French Colombard yields around 17 tons per acre and Zinfandel yields around 5 tons per acre.
The data in the SAMPLE COSTS FOR WINEGRAPES is collected from a farm that has 60 acres on Cabernet Sauvignon. Our farm has 1000 acres of wine grapes: 500 acres of Zinfandel and 500 French Colombard. Below is just a general idea of the costs of running this vineyard and excludes trivial costs.
Assessment Fee (cost study)
Lodi Winegrape Commission. Assesses growers $0.0045 ($4.50 per 1,000 acre) on the gross crop returns (yield x returns).
California Air Resources Board Mitigation Plan Fee. Each grower with 100 contiguous acres is required to submit an annual plan to the California Air Resources Board (CARB), as to practices or operations to reduce particulate matter from roadways and agricultural operations. This fee is $100 per site.
Irrigated Lands Regulatory Program (ILRP). Each grower is required to join a Water Coalition or provide their own monitoring and data collected to the Regional Water Quality Control Board (RWQCB). The fee is $5.00 per acre.
County Agricultural Commissioner (CAC) Pesticide Storage Fee. The fee is $100 per site.
3rd Party Inspection Fee. The Winegrape Inspection Program provides an impartial service that makes determinations and certification of soluble solids, materials other than grapes (MOG) and defects. The fee is $0.415 per ton.
Glassy Winged Sharpshooter (GWSS). A program to control the GWSS. The fee is $1.25 per $1000 of gross crop returns.
Labor (cost study)
Hourly wages for workers are $14.00 for machine operators and $11.00 per hour non-machine labor. Adding 39 percent for the employers’ share of federal and state payroll taxes, insurance, and other possible benefits gives the labor rates shown of $19.46 and $15.29 per hour for machine labor and non-machine labor, respectively.
Labor for operations involving machinery are 20 percent higher than the operation time.
Equipment Operating Cost (cost study)
Interest on operating capital is based on cash operating costs and is calculated monthly until harvest at a nominal rate of 4.25 percent per year.
Vine management (cost study)
Pruning
Hand pruning at 33 man-hours per acre is done during the winter months (February). Also in March, winter tying at 6.0 man-hours per acre is completed.
Subsequently, trunk suckering (3.5 man-hours) is done in April; shoot removal (18 man-hours) in May.
Harvest
The crop is machine harvested by a custom operator and costs $350 per acre.
For this vineyard, the cost is $350,000/year.
Transportation (cost study)
Hauling to the winery/crusher is contracted and the grower pays $18 per ton for local hauls.
For this vineyard, the cost is $350,000/year.
Fertilization (cost study)
The total amount of fertilizer applied per year is 600 pounds per acre
Irrigation (cost study)
Irrigation costs in the tables include pumped water and irrigation labor. The water is calculated to cost $100.00 per acre-foot ($8.33/acre-inch) based on pumping costs as provided by the growers.
Fifteen acre-inches are applied during the growing season beginning in April and three acre-inches are applied post-harvest.
For this vineyard, the cost is $2499/year.
Pest Management (cost study)
Weeds, Insects, Diseases
According to the cost study file, total cost for pest management is $466/acre. For this vineyard the cost is $466,000/year.
Return on investment
This data is from a vineyard in central valley that grows Cabernet Sauvignon. The price for Zinfandel in 2016 is $603.98/ton, the price for French Colombard in 2016 is $260.71/per ton while Cabernet Sauvignon sells for $600.98/ton in the cost study. Zinfandel yields around 5 tons per acre, French Colombard yield around 17 tons per acre and Cabernet Sauvignon yields around 10 tons per acre. Assuming wine grape variety does not affect total cost.
Net Profit
French Colombard 500 acre * 17 tons/acre * $260.71/ton =$2,216,035
Zinfandel 500 acre * 5 tons/acre * $603.98/ton =$1,509,950
Cabernet Sauvignon 1000 acre * 10 tons/acre * $600.98/ton =$6,009,800
This calculation combined with the table above (Net return above total cost for Cabernet Sauvignon is $-102,000/year) indicates that the vineyard is losing much more money than $-102,000/year.
The vineyard is likely to lose more money each following year since the supply for Zinfandel is larger than demand. A vineyard that’s been operating for 20 years is not likely to succeed financially when it is losing more than $102,000/ year. Luckily, the trend for the price of most of California’s wine grapes is on the rise due to the global rise of demand for wine. Making a few major changes, such as changing varieties and becoming an organic vineyard, could very likely turn the financial state of the vineyard around.
Demand shift to premium wine
Madera county is known for producing cheap jug wine usually selling less than $10 (Northcutt). Our vineyard grows Zinfandel and French Colombard and these varieties are unfortunately not the ones crushed to make premium wines (Northcutt). These varieties of wine are used to produce what is called jug wine, which are around $3 per bottle. Their popularity and sales volume has continue to go down (Racheal).
Ongoing consumer preference for premium wine is trending according to figure 3. We can see that in the ten years from 1995 ~ 2005, premium wine sales increased from 40% of total sales to 70%. Given that jug wine production and sales volume are going down, switching to grow Cabernet Sauvignon, Merlot or Pinot Noir is a good idea, since these variety of wine grapes are suitable for producing premium priced wine (Rachael).
Predicting the Future and Handling Variability
Changing Varieties
Sauvignon Blanc, Pinot Grigio and Pinot Noir from Lodi are also doing well price wise. The only challenge Bitter sees is in the Zinfandel market is supply appears to be ahead of demand. (Fitchette)
To achieve financial feasibility in the long term, the vineyard would need to make a decision and change the varieties of grapes from French Colombard to varieties like Sauvignon Blanc, Pinot noir and Pinot Grigio. Assuming the legislation approves, the vineyard will grow 4 different varieties of wine grapes: Cabernet Sauvignon, Sauvignon Blanc, Merlot and Chardonnay. These four varieties will be offer more financial upside than French Colombard and Zinfandel since their prices have escalated dramatically over the past 5 years and they are projected to rise in the future due to high demand. Different varieties of wine grapes will offer financial insurance for the vineyard since when the price of one certain variety falls drastically, it wouldn’t have a devastating impact on the vineyard’s profit that year.
Running a vineyard requires patience and investment. Although the replanting costs of new wine grape varieties of 1000-acre will be humongous, the vineyard will benefit from this decision in the long run.
Going Organic
The demand for organic certified food is becoming larger each year: organic food is undisputedly popular and arguably mainstream. Since running a vineyard focused on the long term, growing organic grapes and make organic certified wines would make sense financially. Premium organic wine is scarce in market but has a popular demand especially among the younger generation.
While U.S. production of certified organic wine has declined, U.S. consumption of these products has increased, growing at rates between 10% and 20% per year in volume between 2013 and 2016, according to Nielsen, far above the industry average. (Strayer) The vineyard will be making a smart decision going organic, assuming there are no restrictions and difficulties to do so, because the supply for organic wine is much lower than demand.
The vineyard would collaborate with a reliable winery that produces organic certified wine and become more profitable due to the gap between demand and supply for organic wine grapes.
Conclusion
Focusing on the long run, our vineyard will replace French Colombard and Zinfandel with Cabernet Sauvignon, Sauvignon Blanc, Merlot and Chardonnay. Although this move will require loans and investments, changing the varieties will prevent our vineyard to become bankrupt in the future. Our vineyard will also grow organic wine grapes for wineries that produce organic certified wine. We see the opportunities that premium and organic wine presents and we want to seize these opportunities. Focusing on growing grapes that are used for making organic certified wines and premium wines.