December 13, 2012
COST OF ESTABLISHMENT AND PRODUCTION OF VINIFERA GRAPES IN THE FINGER LAKES REGION OF NEW YORK, 2010
- by Gerald B. White
In recent years there has been increased interest in the Finger Lakes, as well as in other parts of New Your State and the eastern United States, in planting Vitis vinifera grapes for premium wine production. Acreage of red varieties suck as Pinot Noir, Cabernet Sauvignon, Merlot, and Cabernet Franc all increased in the most recent orchard and vineyard survey complied by the New York Agricultural Statistics in 2006. Acreage of Riesling increased by 60 percent from the 2001 survey, while Chardonnay decreased by 16 percent. Overall, vinifera acreage increased by 38 percent (to 1596 acres) in the Finger Lakes in the five year period, led by Riesling, with a total acreage report of 543. Vinifera accounted for 18 percent of grape acreage in the Finger Lakes. The acreage report by variety will not be conducted again until next year. However, it is likely to show strong growth, as indicated by the total production of vinifera grapes in New York state which has increased from 4,670 tons in 2000 to 9,790 tons in 2010, an annual growth rate of over seven per cent for the decade.
There has been an increase in consumer demand for quality wines (interspecific French American hybrid and V. vinifera cultivars, or designated appellations). Wine consumption in the United States has increased by about 3.3 percent during the last 10 years driven by good news regarding the health benefits of moderate wine consumption. New York is gaining stature as a producer of high quality wines that command premium prices, and the Finger Lakes has benefited from a surge of sales and interest nationally in Riesling varietal wines over the past three years. However, the price received by Finger Lakes growers for vinifera grapes did decline for all major varieties in 2008 and 2009, probably due both to the recession in the US economy, and increased planting of vinifera in New York in recent years. Prices for the major vinifera varieties rebounded slightly in 2010.
Growers who are considering planting additional V. vinifera vineyards need to carefully weigh the cost of planting and establishing a vineyard and the annual cost of production of a mature vineyard against the expected yield and prices to determine whether the investment of $18,000 per acre or more required to bring a V. vinifera vineyard into production. Varieties to plant have to be considered relative to cold hardiness, as the Finger Lakes has experienced severe winter injury to vinifera about every decade, with the last major freeze event occurring in 2004.
Professor Emeritus, Department of Applied Economics and Management, Cornell University, Ithaca New York, 14853.
This question is complicated by the long-run nature of the investment (payback periods are in excess of ten years and can be even much longer), as well as the risk from a worldwide over supply of wine grapes from significant plantings in “new world” competitors such as Australia, New Zealand, and Chile.
Although the New York industry is somewhat insulated by the small scale of its market structure in the premium wine sector, with most wineries selling over 50 percent of their wine (volume) through direct sales in the tasting room, wineries cannot expect to be completely unaffected if global supply outstrips demand in the future. Given the limited area planted, a small increase in planted acreage can have a relatively large impact on supply when the new acreage begins bearing, as Cabernet Franc grapes. This emphasizes the importance of selection of varieties, which is driven both by the marker\ting plan, and to a certain extent by the relative cold hardiness of vinifera varieties. Production of vinifera in NY reached 9,790 tons in 2010, as increases of 22.5 percent over the production in 2007.
The objective of this study was to determine the cost of production V. vinifera grapes in the Finger Lakes region in a commercial size operation. Estimates of the total investment in land, machinery, vineyard establishment and development cost, and annual operating cost were developed.
These estimates may be used by growers and potential investors to compute and analyze the cost and profit potential for their own situation. The estimates are not necessarily representative of average costs for grape production in the Finger Lakes, but rather are typical cost for well-managed vineyards using recommended practice. The yield estimates used for estimation of typical returns assume better sites (well-drained, productive soil with appropriate slope for air drainage). We also assumed that vineyard practices were used which would result in premium quality grapes. Practice such as leaf pulling and cluster thinning of certain varieties, limit yield and contribute to higher quality wine. Poorer sites and/or failure to follow optimal management practices can have a significant negative impact on the earning estimated presented in this publication. Operations such as special negative practices (hilling up and take way) once again had their value demonstrated with the winter injury that was widespread in 2004.
The methods used to construct cost estimates were a combination of 1) interviews with a panel comprised of grower representatives, and 2) economic engineering using recommended practice. In June of 2010, we met with a panel of four growers and vineyard managers. The growers reviewed the data prepared for the most recent estimates of the cost establishing and growing V. vinifera grapes in 2007, the last time this study was conducted. Consensus estimates were developed for land prices, labor machinery complement for a full time commercial vineyard. The panel reviewed the machinery and labor time estimates for the/07 study, and made recommendations for changes.
The panel also provided estimates, based on their own experience in the vineyard, of the time required to perform various vineyard operations, such as tillage, spaying, mowing, etc., and hand operations such as pruning, tying & removal, suckering, and cluster & shoot thinning,
Land. The study assumes land was purchased at $5,000 per acre. The size of the vineyard was decided in consolation with the grower panel. The specified size was 54 acres, with 50 acres planted to grapes. The other four acres are occupied by roads, headlands, and a shop. The 50- acre vineyard is large enough to use vineyard machinery and equipment efficiently, but small enough to be operated by one working manager with one other full-time worker. Some hand labor operations would be done by hiring part-time labor or by migrant labor crews.
Vineyard layout. The vineyard was assumed to be planted on a 6’ X 9’ spacing (vines by row) resulting in a planting density of 807 vines per acre. There were 11 rows to an acre and rows were 440 feet long. Vine cost was estimated to average $3.25 each for the initial planting (assuming orders of vines in quantities over 1000). Each year it was assumed that two percent of the vines had to be replanted. At two percent, 807 vines would be used annually fro replanting. For quantities of vines under 1000, the vines cost was assumed to be $3.50 per vine. Vines were planted using contracted laser planting. The fee for laser planting was $45 per row and $.50 per vine.
Varieties. The 50-acre vineyard was planted to the following four V.vinifera varieties: Pinot Noir, Cabernet Franc, Chardonnay, and Riesling. These four varieties were selected because they are well suited for the cool climate of the Finger Lakes region and exhibit excellent potential for premium wine production.
Tile Drainage. It was assumed that tile drainage was installed in the middle of every second row of 18 feet apart. The tile drainage system consisted of 4” lateral pipes running down the middle of every second row, and these lateral pipes were connected to a 6” mainline pipe that ran along the width of the vineyard.
Trellis System. It was assumed that the vines were trained using the vertically shoot positioned (VSP) training system. The trellis system was made up of two pairs of catch wires and two cordon wires (for a total of six wires), a 3” X 8” wooden line posts at every thirst vine, four catch wire clips per line post, and a 5” X8’ wooden end post and anchor support post at the end of each row.
Herbicides and Fertilizer/Soil Program. The sample herbicide program was developed in consultation with the advisory panel of four growers. The herbicide program relies upon the use of an Environmist sprayer (purchase price of $4,500). The program is based on the use of glyphosate in three applications under the trellis per season and one spot application applied by hand held equipment. The sample program is probably not sustainable for the 22 year useful life of the vineyard because of the potential development of weed resistance due to the long- term reliance on a single herbicide; however, new materials are being tested which should be available in the near future that can be used in combination with glyphosate. For details of the sample herbicide program, see Appendix, Table 1. The fertilizer/soil program was developed by Hans Walter-Peterson, Extension Educator, Finer Lakes Grape Program. See Appendix, Table 2 for details.
Wage Rates. Wage rates used represented the consensus of the grower panel. The rates assumed were $19.00 per hour for skilled labor (i.e. $14.50 per hour (plus fringe benefits). Fringe benefits consist of workers compensation, social security, medical insurance, and other benefits, For unskilled labor the rate was $12.00 per hour (including fringe benefits). Piece rate wage rates were used for pruning the vines in the third and fourth year. The rate was $.40 per vine. The piece rates for tying were specified at $.20 per vine.
Harvesting & Hauling. Grapes were custom machine harvested in the fourth year and beyond. The machine-harvesting rate is $60 per ton or a minimum of $240 per acre. Since all varieties were assumed to yield less than four tons per ache, the effective rate was $240 per acre for all four varieties. Hauling costs are included in this rate and represent the additional expense of transporting the grapes to the winery.
Machinery. Machinery depreciation and interest were charged on the basis of prices for new equipment with the minor exception for a small disc and a mechanical hedger, which were assumed to be used. Diesel fuel as $2.64 per gallon was budgeted for machine operations. (Note: the diesel fuel being used is green diesel, which may only be used for agricultural purposes). Gasoline was charged at $3.04 per gallon (for unleaded). These were representative of prices in Central New York as of January 2011. Hourly machinery variable cost (repairs, fuel, and lube) are shown in Table 3 of the appendix. Hourly machinery variable costs were estimated according to American Society of Agricultural Engineers 2000 Standards.
Overhead. Annual insurance expense was estimated at 1 percent of the initial investment in building and machinery. Office supplies, phone, etc. were estimated at $3,000 per year. School and property taxes were $25 per $1,000 of assessed value of the initial land investment.
Management Charge. A management fee of five percent of gross receipts was assessed for the vineyard. This represents the opportunity cost for the vineyard owner to manage the operations. All labor requirements were assessed as cash costs. Therefore, in situations where the owner of manager is performing vineyard tasks and managing the operation, actual cash outlays would be lower than are represented in these cost estimates.
Cost of Capital. A four percent interest charge on capital investments and operating capital was charged. This rate represents a real rate based on a seven percent nominal rate of interest and an expected rate of inflation of three percent.
Yields. Yields were specified as the long-term average attainable on suitable sites (near the lake, sloping, good air drainage, somewhat well-drained with soil depth at least medium). These yields assume better than average management practices that are consistent with the attainment of premium quality V. vinifera wines. These management practices shoot thinning and cluster removal that often decrease yields, but improve wine quality.
Table 1 summarizes the yield assumption.
Pinot Noir, year 1: ton per acre, year 2, 2.6 tons per acre
Cab Franc 1 ton/acre
Grape Prices. Prices for the most recent five-year period (2006-2010) in the Finger Lakes Region were obtained from Martinson and Walter-Peterson, Finger Lakes Vineyard Notes newsletter, Harvest Issues
Prices for the five years ending in 2010 are shown in Table 2. (these averages reflect price lists submitted to the NYS Department of Agriculture and Markers and forwarded to the Finger Lakes Grape Program.) A detailed list of varietal prices is summarized annually in the August issue of the Finger Lakes Vineyard Notes. There average do no take into account quality and/or quantity of grapes purchased by each processor. Since larger processors often pay less, the true average price is often lower than average reported in Table 2. However the prices in Table 2 are reasonable indicator of price trends for the four varieties. The panel of grape growers and vineyard managers took these prices into account when specifying the prices shown in the last row of Table 2, which are the prices used in the profitability analysis reported in this bulletin. The prices specified by the panel reflect special quality practices that are used for premium wine production.
Table 2: Average Price Listing for Selected V. Vinifera Grapes in the Finger Lakes Region. 2006-2010, Dollars per Ton.
insert table 2
Machinery and Building Costs
The investment costs and annual cost for equipment and building are summarized in Table 3. The machinery investment required totals$151,825, an average investment of $3,037 per acre on vineyard. The investment for a shop is estimated at $69,000, or $1m380 per acre. The shop was 1,500 square feet, and the construction cost was estimated at $46.00 per square feet, which includes basic amenities such as water and electricity. The total annual cost for depreciation and interest amount to $20,710 for machinery and $3,988 for building, or $414 and $80 annual cost per acre, respectively. Machinery investment would be much greater if a mechanical grape harvester was necessary.
Pesticide Program Spray Costs
Table 4 indicated the recommended spray program and cost for years one, two, three, and year four through twenty-five. In year three, eight sprays are recommended. Beginning in year four, sprays are assumed to be approximately the same from year to year with the necessity on average from twelve sprays during the growing season. Spray materials cost were $344.07 per acre for Cabernet Franc and $379.97 for Chardonnay, Riesling and more susceptible to Botryis bunch rot. These varieties had extra costs for spray materials due to an extra fungicide material (Vangard 75 WP) necessary with the 6th spray. Of course, spray programs will have to be adjusted slightly from year to year to accommodate variable weather and/or pest pressure. Pesticide applications cost for labor and machinery, as well as herbicides, are developed in Tables 7 and 9 to follow.
Drainage Construction Cost
Table 5 contains an estimate of drainage construction cost. These cost are transferred to the site preparation section of the establishment and development cost. Cost will vary greatly from site to site depending on the soil condition and preferences of the vineyard manager. This study assumed that tile drainage was placed in the middle of every second row or 18 feet apart. Costs were estimated to total $4,110 per acre.
Trellis Construction Cost
Table 6 contains an estimate of trellis construction cost. The total cost for materials is estimated at $3,648 per acre. These cost are transferred to Table 7 in the first year of establishment and development. Labor and machinery costs for trellis establishment are also shown in Table 7. The total of trellis construction for materials, labor, and machinery is $4,523 per acre.
The trellis was designed fro Vertically Shoot Positioned (VSP) vines. It was made up of two pairs of moveable catch wires and two fixed fruiting wires (a total of six wires). Wooden line posts were used for every thirst vine, and four catch wire clips were used on each post to hold the catch wires in place. Wooden anchor posts were used to support each end post. Rows were 440 feet long and there were 11 rows to an acre and 73 vines per row.
Table 3: Machinery, Equipment, and Building Capital Recovery and Interest Cost, 50 acre
insert table 3,4,5,& 6
Establishment and Development Costs
The cost for labor machinery and materials for site preparation and years one through three constitute the establishment and development (E&D) cost (table 7). First year cost including site preparation, trellis construction, and planting, are substantial, amounting to $12,660 per acre. A planting density of 807 vines (6’ x 9’) (vine by row) was assumed. The largest cost in the first year is for trellis construction for a total of $4,523. In year two, costs are a relatively modest $876 per acre with lower spray costs and less labor required than for mature vines. In the thirds year, a spray program of eight sprays is recommended, and have harvesting is required to protect the young vines. Total cost for the third year are $1,608 per acre.
The total cost for the entire E&D period are summarized in Table 8. The totals from Table 7 for each of the three years are brought into the row labeled ‘annual variable costs’. Hand harvesting costs are added for the third year only. Fixed costs (capital recovery fro machinery and equipment and buildings, property taxes, office supplies, land charge, insurance, and management) are added. Interest, at a real rate of four per cent, is added to the cumulative cost. Credit is given for the revenue from the estimated one ton of grapes harvested in year three. The price of grapes in year three is the average of the four varieties produced. The total cumulative.
Table 7: V.vinifera Grapes Establishment and Development Costs
insert table 7 & 8
Cost for the E&D period is $18,792 per acre. Amortized at a four percent real rate of interest for the estimated years of life from year four through 25 (or 22 years), the annual cost for capital recovery (interest and deprecation) is $1,300 per acre. This amount was charged as a fixed cost in Table 11, which summarizes the cost and returns for a mature vineyard. Cash cost for establishment, including labor, are $15,144 for site preparation and the first three years.
Cost and Returns for Mature Vineyard
Annual growing cost for years four through 25 are developed in Table 9. Total growing cost for a typical year in the mature vineyard are estimated to be $2,453 per acre. The most costly operations are canopy management ($602 per acre), spraying (12 times, for a total of $577 per acre, including labor, machinery and materials costs) and pruning and brush removal ($323 per acre). By year four, the well managed vineyard will nearly have reached its full yield potential and will require approximately the same management each year for the duration of its life.
Table 9: Growing Costs, Year Four through Twenty-Five, V.vinifera Grapes, Finger Lakes Region, 2010
insert table 9
Table 10 summarizes the growing, establishment, and development cost fro a V.vinifera vineyard. Growing cost are largest in the first year when a significant amount must be spent preparing the site, planting the vines, and constructing the trellis. Growing costs are $2,453 per acre in years four through 25, and this number is transported to Table 11 to use in the computation of the costs and returns for the mature vineyard. The cost of crop insurance was added in the 2010 study at an average cost of $109 per acre. Costs for crop insurance will actually vary a few dollars per acre depending upon the grape variety planted.
Table 10: Summary of Growing Cost for V. vinifera.Vineyard, Trained to a Vertically Shoot Positioned System, Finger Lakes Region, NY 2010
insert table 10
Table 11 summarizes the cost and return expected from a mature vineyard. The estimated revenue per acre varies from $3,960 to $4,420 depending upon variety. Total costs vary from $5,200 to $5,330 per acre by variety. The break-even price and yields are shown in Table 11. A yield of 4.5 to break even with Chardonnay. Yields at the higher levels may be inconsistent with quality requirements.
tons per acre is the break-even yield for Cabernet Franc. A yield of 4.4 tons per acre would be necessary
Cabernet Franc shows a large loss (-$1,324) given the assumed yield and price. To put this in perspective, it should be remembered that we assumed recommended practices throughout the model. Some growers will be able to reduce some of these costs considerable. All labor, including the owners labor, is charges a cash wage. There is an imputed charge on all capital used. The vineyard at the end of 25 years has a value that may be as much, or ever more, than it was worth in the early years of the planting, assuming the vine replacement and trellis maintenance are done annually. At the assumed yield and price, all varieties exhibited negative net returns
Table 11: Costs and Returns for a mature V. vinifera Vineyard, Trained to a Vertically Shoot Positioned System, Finger Lakes Region, NY, 2010
insert table 11
Table 12 indicates the capital investment per acre necessary to get into grape production in the Finger Lakes region, assuming a vineyard of 50 total planted acres with an additional four acres for roads, headlands, and a building: and reliance on either custom hand or machine harvesting of grapes. The table uses the value of new machinery and equipment and buildings. If a harvester is purchased, investment per acre for machinery would be considerable higher. Lane costs assume a prime site close to the lake. Table 12 indicates that it would require $28,6098 per planted acre to get a vineyard into maturity in the Finger Lakes under the assumption indicated above. Established growers, with depreciated vineyards, machinery and equipment, and building would have lower capital investment (book value) depending upon the age of their depreciable assets. Growers with smaller acreage will typically have higher investment costs per acre. This is due to less efficient use of the machinery complement unless these smaller growers hire some vineyard operations to be done by custom operators and/or vineyard management companies, this giving them the possibility of buying fewer items or machinery and equipments.
Table 12: Investment Per Acre of V. vinifera Grapes,
Finger Lakes Region of New York, for a 50-Acre Vineyard, 2010
insert table 12
DISCUSSION AND SENSITIVITY ANALYSIS
Costs per ton of grapes and profits for Finger Lakes vineyards will vary widely due to factors such as land costs site factor, farm size, managerial ability and labor efficiency. The cost and return estimates developed in the publication represent typical costs for well-managed vineyards producing premium quality grapes on prime sites.
The grower panel did not believe there was sufficient data to adjust cost for varietal differences. In reality, vigorous cultivars such as Cabernet Franc may require a greater labor input for pruning, brush removal, tying and other hand labor tasks. Differences in fungicide applications may be necessary due to the differences in disease resistance among the various varieties. For example, Pinot Noir, Chardonnay, and Riesling are more susceptible to Botrytis bunch rot, so additional spray materials at $36 per acre were allocated to these varieties for Botrytis control.
The total cost per ton, or breakeven price, is quite sensitive to yield as shown in Table 13. If yields are two tons per acre or less and/or with low yielding cultivars, a price of about $2,600
Table 13: Total Cost Per Ton (Breakeven Price) At Varying Yields,
V.vinifera Grapes, Finger Lakes Region of New York, 2010
insert table 13
*Cost at different yield levels adjusted for machine harvesting and hauling. Assumes a 4% real interest rate and a $5,000 per acre land value.
Per ton would be required to break even. Even the highest price paid in the most recent seasons would result in unprofitable production with such a low yield scenario.
Yields of more than four tons per acre for Cabernet Franc or more than 2,6 tons per acre for Pinot Noir, or more than five tons per acre for white vinifera varieties are probably incompatible with the quality requirements of the market for premium wines, but this is a question that needs more definitive research.
The cost and returns estimates derived in the publication indicate results for V. vinifera in the Linger Lakes under the assumption of prime sites, the use of recommended practices, good management 2010 price for inputs, and price for grapes that reflect several quality enhancing practices such as leaf pulling, cluster removal for two varieties, and limited yields.
Potential investors should be forewarned that the current economic climate for grape growing in the Finger Lakes can change. In some years, given the thing market for certain varieties, a surplus situation can develop when a few growers plant additional acre. The total acreage of some varieties in the Finger Lakes is quite limited. For example, in 2006 (from the most recent vineyard survey available), the New York National Agricultural Statistics Service (NASS) estimated acreage of certain varieties in the Finger Lakes as follows: Cabernet Franc, 199 acres; Chardonnay, 350 acres; Pinot Noir, 149 acres; and Riesling, 543 acres. Total Vinifera acreage in the Finger Lakes was only 1,647 acres, or about 17 percent of total grape acreage in the Finger Lakes. With such limited acreage, a few small plantings or one large planting of these varieties can lead to a large percentage increase in grapes produced, temporarily depressing the cash market. This happened with Chardonnay in the Finger Lakes in the early 1990s and Cabernet Franc in recent years. Vinifera price in the Finger Lakes had been on a downward trend in 2008 and 2009, but recovered slightly in 2012. Lower grape prices in 2008 and 2009 were probably due to some combination of the recent recession and expansion of acreage of major vinifera varieties.
Other concerns include the current macroeconomic conditions with high fuel prices, the potential for inflation of other inputs (especially pesticides and fertilizers), and the decreasing value of the US dollar. Over three-fourths of the wine marketed by New York farms wineries is sold direct to consumers. High price for gasoline, especially during a recession, might limit visitors from the surrounding states from making trips to NY wine country, The weak dollar has some positive and some negative effects. To the extent producers buy special machinery or winery equipment from Europe, it raised those costs. However, on the other side, European and Australian wines cost more now, giving NY producers some new market opportunities.
Labor, especially with more reliance on Hispanic labor for pruning and tying, is a concern. More growers need to consider using H-2A labor to prevent the possibility of labor shortages. (Growers should be reminded that there is a long lead-time involved in securing this labor). Since nearly all grapes in the Finger Lakes are harvested mechanically, the industry is not as vulnerable as the tree fruit and vegetable industries. Immigration reform would help ease growers’ minds considerable, but meaningful reform is unsure at the time of writing this publication.
Nerveless, given the growing consumption of table wine in the United States, the developing tourist trade in the Finger Lakes, and the growing reputation of Finger Lakes wine quality, the long run potential appears favorable for investors who can weather the inevitable ups and downs associated with an agricultural enterprise subject to the usual vagaries of weather and market forces.
Appreciation is expressed to Matt Doyle, Dave Stamp, Mark Wagner, and Chris Verrill who served as the growers panel for helping to establish the costs reported in this bulletin. Hans Walter-Peterson, Extension Educator, Finger Lakes Grape Program and Miguel Gomez of the Department of Applied Economics and Management at Cornell, provided helpful reviews of the manuscript.
Special recognition is extended to Mark Pisoni (M.S., Department of Agricultural, Resource, and Managerial Economics, Cornell University, 2001). While at Cornell, working on a grant funded by the New York State Department of Agriculture and Marker’ “Grow New York” Program, Mark developed an Excel program which was used to develop the 2001, 2004, 2007 and 2010 Cost of Establishment and Production of Vinifera Grapes in the Finger Lakes publication. Mark is now viticulturist of the Pisoni Vineyards and Winery, Gonzales, California.
Appendix Table 1: Sample Herbicide Program for V. vinifera Grapes,
Finger Lakes Region, NY, 2010
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Appendix Table 2: Sample Fertilizers/ Soil Program for V. vinifera Grapes,
Finger Lakes Region, NY, 2010
insert appendix table 2
Appendix Table 3: Hourly Machinery and Equipment Variable Costs, V. vinifera Grapes
Finger Lakes Region, NY, 2010
insert appendix table 3
American Society of Agricultural Engineers. ASAE Standards 2000. St.. Joseph, MI, American Society of Agricultural Engineers, 2000
Hans Walter-Peterson. Finger Lakes Vineyard Notes (harvest Issues), Cornell Cooperative Extension, Penn Yan, NY, 2006-2010
New York Agricultural Statistics Service, 2006. New York Fruit Tree and Vineyard Survey, 2006. Albany NY