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56 WINES&VINES October 2017 BARRELS PRACTICAL WINERY & VINEYARD E very winery's goal is to maximize profit, which often comes in the form of minimizing cost. In some indus- tries, it is straightforward to trim expenditures with a strong understanding of the product you are producing and its accom- panying inputs and technologies. However, in the wine industry, these deci- sions are increasingly complex given the choice between American oak and French oak, volatility in the exchange rate, limited resources of small wineries and the rising costs of oak barrels. This article focuses on French oak barrels and their complex pur- chasing options by utilizing data and system- atically analyzing the choice of delivery and timing of payment for French oak barrels denominated in euros. Though some coopers do offer invoicing in U.S. dollars at the time of commitment, euros remain the most popular method of payment. Wineries have the option to make barrel orders in advance of the industry norm with a discount from some suppliers (often called an "early delivery discount") or at a later time at full price. This purchasing choice depends not only on the early delivery discount, but since French oak barrels are purchased in euros, the timing of the pur- chase and exchange rate fluctuations over time also impact the real final cost. Utilizing 15 years of price data for a specific custom-made barrel, this research analyzes purchase costs for the exact same style of bar- rel every year. Since 2001, winemaker Tim Mondavi of Continuum Estate in Napa, Calif., has purchased the custom Taransaud Ref 102 barrel. This barrel is specifically made for Mondavi and provides a reliable starting point for a long-term analysis to understand the cost of barrel purchasing. Using the exact same barrel style allows control of that variable and to focus only on exchange rate variation and timing of payment. Many wineries face this decision, only with a bookkeeper In order to consider the impact of exchange rates and early delivery discounts on costs, our analysis focuses on wineries within the United States, which produce approximately 10% of the world's wine. There are 7,496 bonded wineries in the United States and 3,062 in California, according to Wines Vines Analytics, with nearly 700 bonded wineries in Washing- ton and 439 in Oregon. A significant number of these wineries produce fine wines and use French oak barrels in the production process. French oak barrels represent 63% of all new barrel purchases, according to Wine Business Monthly, and the Fédération des Tonneliers de France reports that 170,000 barrels are exported annually to the United States. One almost universally agreed-upon component of fine wine is French oak barrels, which are expensive. For example, one Taransaud T5 barrel cost €1,500 in 2016. Much of the complexity of purchasing bar- rels comes from staffing at a small winery. The professional staff of a 10,000-case winery typically includes a winemaker, viticulturist, salesperson and accountant. Large wineries that purchase French oak barrels could em- ploy accountants or controllers to develop a working knowledge of euro exchange rates and hedging strategies to be used in this an- nual transaction. However, given the resource constraints regarding finance decisions for a typical win- ery, this level of staffing is impractical. Barrel decisions are a small part of an annual proce- dure where one employee or owner/wine- maker is responsible for many financial decisions. A simple and consistent tactic can be utilized by wineries without the resources to make an independent annual decision re- garding when to pay for the barrels. Such a rule could be used annually to minimize costs. Each year the Wine Spectator publishes an influential "Top 100 Wines of the Year" list. In 2016 the top five wines from around the world were, first: 2013 Lewis Napa Valley Cabernet (1,600 cases), second: 2014 Domaine Serene Oregon Chardonnay (2,000 cases), third: 2014 Beaux Freres Oregon Pinot Noir (2,405 cases), fourth: 2013 Chateau Climens Barsac France (1,417 cases), and fifth: Producttori de Bar- baresco Asili Italy (1,110 cases). These are all very small wineries, and we use these produc- tion sizes to inform our calculations below. High-quality wines being produced at small production levels is not uncommon. A 228-liter (60 gallon) wine barrel holds 25 cases of wine. A high-end luxury cuvee of 1,000 cases of wine could require 40 new barrels per year, assum- ing 100% new oak. At €929 per Taransaud Ref 102 barrel (the price in 2016), 40 new barrels would cost the winery €37,160. Similarly, a larger winery producing 2,500 cases of wine could require 100 new barrels per year. We assume a 2,500-case example for sim- plicity, which assures a certain level of limited financial resources but can also easily be scaled in size as appropriate. This assumption allows us to estimate the costs of 100 new French oak barrels in seeking a simple, repeatable tactic. Wineries have a few options for how to pur- chase barrels. Tonnelleries (coopers) send out order forms in January and February for standard barrel delivery in August (and September pay- ment). All prices are denominated in euros, generally with a discount for early delivery and payment. For example, Artisan Barrels & Tanks Purchasing French Oak Barrels Fluctuating exchange rates and dynamic discounting drive ordering decisions By Sarah Quintanar and Eric N. Sims ERIC SIMS