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62 WINES&VINES October 2017 BARRELS In 2016, each barrel utilized by Continuum Estate cost €929. If the winery had followed our purchasing rule to order early and pay in September, based on the previous 15 years of data (assuming purchase of 100 barrels), the winery would have saved about $5,000 in one year alone. This is a savings of approximately 5% in barrel costs. Additional relevance of early payment benefits Demand for high-quality wine barrels far ex- ceeds supply. French oak forests and tree- felling permits are limited, and the three- to five-year seasoning process disconnects current supply and demand. On top of increasing fine wine demand, use of American oak continues to increase. For example, American oak aging is becoming more common in whiskey and bourbon. As demand for American oak in- creases in these industries, it will drive up the price of American oak barrels, also increasing demand for French oak and making this type of analysis even more relevant. In a perfect world, and most likely the case in large wineries, the following occurs: Winemak- ers submit barrel purchase orders to Accounts Payable in March or later. The winery buys a forward contract with their international bank for delivery of euros in September. The contract costs some percentage of the total amount pur- chased forward. Winery personnel then bird-dog the coopers to confirm the invoices all come due about the same time in September, or later. The winery takes delivery of euros in Sep- tember or later to pay the coopers with those forward-purchased funds. In reality, winemak- ers change their orders (a couple of times), and invoices never come due close to the same date. Thus, the payment process becomes very complex at the end. In theory, one would hypothesize the right thing to do is to manage the finances of a small winery in such a way as to imitate larger winer- ies. Knowing financial right from wrong led to this article. What was the hedging cost to a small winery? As it turns out, between 2001 and 2016, not hedging coupled with early payment dis- counts was the financially prudent strategy. It is certainly the easiest tactic to implement. Sarah Quintanar is an assistant professor of economics at University of Arkansas, Little Rock. She earned a Ph.D. in economics from Louisiana State University. Quintanar has begun to transform her enjoyment of wine to economic research related to the wine industry. Eric N. Sims received an undergraduate degree in economics from the University of California and a Ph.D. in econom- ics from the University of Arkansas. He divides his time between teaching at Sonoma State University and consulting at Continuum Estate. SAVES OPEN WINE FROM OXIDATION "KEEPS WINE FRESH " rier Preventing Wine Oxidation 100% PRODUCT GUARANTEE www.VineyardFresh.com Gary@VineyardFresh.com TASTING ROOM MUST HAVE LEARN MORE The references for this article are available at winesandvines.com/features.