Wines & Vines

March 2017 Vineyard Equipment & Technology Issue

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36 WINES&VINES March 2017 Viewpoint M uch attention has been paid recently to wine producers acquiring vineyards to secure affordable, quality supply as grape prices rise. Less discussion has focused on growers who see this rise in profits as a way to invest in themselves by diversifying into wine production. This perennial ques- tion, "To crush or not to crush?" and its sister question, "Bulk or branded?" are often answered with an intuitive decision. This article will use data to examine the decision to sell bulk wine, while an upcoming issue of Wines & Vines will include a column focusing on wine brands. Profiting from bulk wine sales Easier than starting a brand, many growers choose to crush their grapes into bulk wine for sale on the spot market or as part of a contract with a buyer. Back-of-the-envelope calculations generally indicate that this will significantly increase profits. For instance, the two scenarios on page 37 show a basic calculation for 1 acre of Sonoma County Chardonnay grape sales compared to bulk wine sales for the same site. They are based upon anecdotal evidence, data gathered from winebusiness.com postings, USDA data and UC Davis Extension studies. This simple calculation indicates an increase in profits (before capital recovery costs) of a healthy 17%! Of course, the best-laid plans often shatter upon contact with reality, as anyone who has been in the wine industry long enough can confirm. Make sure to investigate your own situation thoroughly, as while these assumptions are realistic for some growers, they are meant as an example. For one, these simple calculations ignore the effect on cash flow. If a grower is able to collect on grape sales at 60 days from harvest, this implies that he must incur 14 months of expenses prior to receiving income. Conversely, posting dates for bulk wine sales ads on winebusiness.com indicate an average period of roughly three years between harvest and sale of bulk Sonoma County Chardonnay, on top of the year of growing expenses! Even if you manage to avoid such a long sale period—and the storage fees that entails—you can expect a significant increase in the gap between revenue realization and accrual of expenditures. Brokers have indicated to me that, in the broader market for larger transactions, the sale period is much shorter but the prices are also lower. Furthermore, without the regular demands of meeting with and complying with the requests of a winemaker, growers can often reduce their viticultural expenses. One implication of not growing to the tailored needs of a winemaker is that the grapes should be grown and vinified in a way that "casts a wider net," according to Glenn Proctor, a partner at Ciatti Co., a grape brokerage located in San Rafael, Calif. In any case, crushing grapes keeps you from putting money to work for you in other ways, whether through financial instruments or investments in your existing or new vineyards. It also in- creases your risk of falling into ar- r e a r s o n y o u r b i l l s . T h e s e downsides are generally mag- nified for red varieties, as are the storage and mainte- nance fees that can signifi- cantly reduce profitability. Of course, sometimes things go wrong on top of these risk factors. Most obvi- ously, either winemaking or the market may cause your wine to sell for less than ex- pected or cost more to produce. According to Ellison Wofford, a lender with Silicon Valley Bank, while some growers can capture more profit through bulk wine sales, in her expe- rience, "It's not com- mon for folks to receive n GABRIEL FROYMOVICH Wine production can increase or decrease profits. Similarly, it may be an effective hedge against prices, but it also has the potential to make revenues more erratic. Should Growers Make Bulk Wine?

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