Cost of Establishment August 5,

Carlos Carpio, Ag Econ, Clemson Charles Safley, ARE, NCSU Barclay Poling, HS, NCSU 2

 Estimate the cost of producing & harvesting muscadine grapes (wine grapes)  Enterprise Budget  Evaluate the profitability of establishing a Muscadine grape vineyard  Cash Flow Analysis  Net Present Value  Internal Rate of Return 3

 Cost estimates were based on a 10 Acre vineyard  Production practices were based on management practices recommended by Extension Specialists and Farmers  Equipment costs were based on 2005 purchase prices  Input prices were collected from farmers and dealers who supply NC grape growers 4

 Bilateral cordon system  Vertically shoot-positioned canopies  Internal-end-post brace assembly  622 grapevines/acre  Row width 10’  Vines spaced 7’ apart 5

QtyCost Materials - Vineyard Posts1,560$7,800 - Brace Posts 6”x6”x8’ 5283,696 - Other materials ,526 Total Materials $22,022 Equipment costs ,400 Labor costs828 hrs5,198 Total$28,620 6

 Bird netting: $800/acre (3 rd year) 45 hours of labor  Deer Control: None Fence ≥ 7.5 feet  Frost Control: None Wind Machine $28, hours/year 7

 Full time employees  Wage rate: $8.25/hour  Required expenses: 2.31/hour  Total cost: $10.56/hour  Trellis construction  Part-time labor: $8.25/hour 8

 Drip Irrigation: $2,274/acre  Machinery & Equipment Costs: Prep Year: $58,585 First Year: $10,572  Harvest in September  Custom harvest rate: $100 per ton  “Base” Price: $1,400 per ton 9

YearYield (Tons/A)

 Most of the machinery and equipment can be used for other farming operations  Equipment cost estimates could reflect only the costs associated with grape production  Based on estimated costs per hour  Exceptions:  Irrigation equipment was used only for grape production 11

Purchase Price Cost per hour* Total Cost per hour Tractor, 60 hp $ 25,000 $ 7.81$ Spot sprayer, 26 g Fertilizer spreader Tine chisel plow, 7’ 2, Disk, 9’ 3, Soil auger Post driver 2, Utility trailer 2, * Cost Estimates do not include depreciation

Fuel Prices Estimated Cost per Hour FuelLubricantsTotal $ $ $ $ $ $

Fuel Prices Estimated Cost per Mile FuelLubricantsTotal $ $ $ $ $ $

1 st Year2 nd Year3 rd Year4 th Year Mar Apr May Jun July Aug Sept Total

1 st Year2 nd Year3 rd Year4 th Year Mar$ 1,344$ 118$ 340$ 397 Apr May Jun July Aug Sept Total$ 3,274$ 1,789$ 3,039$ 3,230 16

Price ($/T) Yields (tons/acre) Break- even yield ,582-1,442-1,302-1,162-1, , , ,0971,3571, ,7001,6571,9772,2972,6172, ,0002,7373,1173,4973,8774,

 Breakeven Price  Price that covers the estimated total cost  Total cost = Fixed cost + Variable costs  Profit = $0.00  Shutdown Price  Price that covers only variable costs 18

Production System YieldNet returns Breakeven price Shutdown price T/acre$/acre $/ton Drip Irrigation 4.00$1,097$ 1,126$

 Important to see when the dollars come in and the returns available in other enterprises  The sooner a dollar comes in, the sooner it can be used to earn more revenue  For any two enterprises of equal risk, the one yielding the higher rate of return is usually preferable 20

YearsDrip Irrigation 0-5, , , ,370 21

22 Accumulated Cash Flow YearsDrip Irrigation 0- 5, , , , , , , , , , ,363

23 $27,351 Chardonnay Grapes Breakeven Year

 The year when enough revenue has been generated to cover start-up expenses.  To secure a loan of shorter duration could leave the farming operation insolvent. 24

 Today’s cash equivalent value of the 20 year vineyard.  Assumes you can invest money at a given interest rate  “Best” interest rate is low risk alternative, e.g. long term certificate of deposit  Essence is the enterprise should be accepted if the NPV > $0 25

$8,807/acre  A new 10A Chardonnay Grape vineyard is worth $8,807/acre today  Someone would have to pay you $8,807/acre to bribe you NOT to establish this vineyard 26

12.67%  Compared to a Treasury Bond that yields 4.98%:  A Chardonnay Grape vineyard with an IRR of 12.67% looks pretty good!  The closer an IRR is to the Treasury Bond of 4.98% the vineyard is not as attractive when you consider the risk and amount of time associated with grape production 27

Price Received Breakeven Year NPVIRR $1,10017-$2,905/A3.30% $1,20013$999/A6.85% $1,30011$4,903/A9.92% $1,4008$8,807/A12.67% $1,5008$12, % 28

 Assumed Yields:  Year 6: 2 tons/a  Year 10: 2 tons/a  Year 13: 0 tons/a Loss of production was known early enough in the production season, so the grower could adjust her/his costs accordingly Maintenance cost of $250/a  Year 17: 1 ton/a 29

Price Received Breakeven Year NPVIRR $1,100n/a-$7,576/A-2.57% $1,20019-$4,223/A1.70% $1,30014-$870/A5.18% $1,4009 & 11$2,482/A8.2% $1,5009$5, % 30

 Purchase Price: $28,000  Estimated Annual Use: 50 hrs/yr  Estimated Annual Cost:  Equipment Costs: $ 150/A  Labor Costs: $ 158/A  Total Costs: $ 308/A 31

Price ($/T) Yields (tons/acre) Break- even yield ,181-2,041-1,901-1,761-1, ,100-1, , , ,7001,0591,3791,6992,0192, ,0002,1392,5192,8993,2793,

 Total Accumulated Cash Flow  $19,055  NPV  $3,533/A  IRR  8.59% 33

 A new 10A commercial Chardonnay Grape Vineyard can be a profitable venture under the assumptions in this analysis  Price  Cost  Market  Critical Success Factors: 1. You have a stable market with a reputable winery, marketing association, wholesaler, etc. 2. You can meet the buyer’s requirements. 34

 70 Wineries in 30 Counties  350 Vineyards 35

 Implement the Production Plan w/o developing a Marketing Plan and/or a Financial Plan  An unrealistic Financial Plan (e.g. estimated costs are too low while returns are too high, costs are overlooked, etc.).  The Marketing Plan is an afterthought  The Marketing Plan is inadequate &/or lacks key components that could help the business succeed  What happens if the primary market falls apart? 36

 Budgets are only guides – not substitutes for a grower’s own cost estimates  Yield patterns assumed no adverse weather, production setbacks or marketing difficulties  It was assumed that growers had a market for the grapes  Recommended that each grower estimate their production and harvest costs & conduct a profitability analysis based on their own production techniques and price expectations. 37

 Charles D. Safley  