Switching of Wine Juice Production Methods: An Application to the Indiana Wine Market Whitney Oliver Peake Purdue University Brian C. Briggeman Oklahoma State University SAEA Annual Meetings 2006 Orlando, FL

Motivation Reduction of Tobacco Quotas in Southern Indiana Reduction of Tobacco Quotas in Southern Indiana Farmers need viable alternative crops Farmers need viable alternative crops Grape and wine production, Bordelon (1999) Grape and wine production, Bordelon (1999)

Indiana Wine Policy Indiana Small Winery Act Indiana Small Winery Act Passed in 1972 Passed in ,000 gallons to 500,000 gallons 100,000 gallons to 500,000 gallons IC IC Can import grapes, grapes juice, other fruits or fruit juice, and honey Can import grapes, grapes juice, other fruits or fruit juice, and honey Adequate supply not available in Indiana Adequate supply not available in Indiana Can still label as Indiana product (i.e. Indiana Wine) Can still label as Indiana product (i.e. Indiana Wine)

Objective Is grape/wine production a viable alternative crop Is grape/wine production a viable alternative crop Quantify the implications of Indiana policy for wine producers Quantify the implications of Indiana policy for wine producers

Methodology Investment Analysis Investment Analysis NPV NPV Simulation Simulation Real options thinking, McGrath and MacMillan (2000) Real options thinking, McGrath and MacMillan (2000)

Actual Data and Estimates Import Grapes if MC > Import Price Capacity! Simulate NPV Vineyard and Winery Use own grapes Simulate NPV Vineyard and Winery Simulation Model

D.R. = 15% N = 11 years VW Cost = $142,404 Residual Value = $0 Import Price = $575/ton Grape Price=$550/ton Wine Price = $38.40/gallon Simulation Model Assumptions

Data Indiana Wine Producer (2001 – 2004) Indiana Wine Producer (2001 – 2004) Production Production Costs Costs Michigan Agricultural Statistics Service (1970 – 2003) Michigan Agricultural Statistics Service (1970 – 2003) Grape production Grape production Indiana Wine Council (1997 – 2003) Indiana Wine Council (1997 – 2003) Wine sales for Indiana Wine sales for Indiana

NPV Model Results (CDF Graph)

NPV Model Results (CDF Graph) Sensitivity 75% Market Share

NPV Model Results (CDF Graph) Sensitivity Import Price $650/ton

NPV Model Results (CDF Graph) Sensitivity Wine Price $30/gallon

Conclusions A vineyard is a viable alternative crop for southern Indiana farmers A vineyard is a viable alternative crop for southern Indiana farmers Implications for surrounding areas (e.g. Kentucky) Implications for surrounding areas (e.g. Kentucky) Incorporating real options thinking is critical for appropriate analysis Incorporating real options thinking is critical for appropriate analysis

Conclusions Vineyard is viable but must import grapes Vineyard is viable but must import grapes Operate winery at capacity Operate winery at capacity Use of fixed asset Use of fixed asset Important to properly care for vineyard Important to properly care for vineyard Indiana policy is beneficial for farmers Indiana policy is beneficial for farmers Vineyard is economically viable Vineyard is economically viable Value of policy $207,267 Value of policy $207,267 More conservative estimate is $96,461 More conservative estimate is $96,461

Questions