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We
put this information sheet together to assist buyers in understanding
producing vineyards and potential viticultural acreage. Viticulture
is a business impacted by forces that include weather, plant disease,
consumption, grape prices and financing. You can’t put agriculture
in a neat little box. What we are presenting is a general overview
of the business as it relates to your real estate investment.
Paso
Robles is an emerging force in the international wine industry.
California, France and Italy are the top three wine regions in the
world. Paso Robles, along with Napa, Sonoma, Monterey and Santa
Barbara counties, is one of the top five wine regions in California.
Some of the greatest international wine producers in the world have
taken a position in the Paso Robles appellation. Companies such
as Southcorp, Chateau Beaucastle, Caymus, Gallo, Stimson Lane, Contellation,
and Wine World have secured vineyard property to primarily source
premium red wine varietals. Our climate, soil water and location
are ideally suited to the creation of high quality premium fruit.
A very exciting area with our best years well ahead of us.
Our
vintners and growers have joined together to create the Paso
Robles Wine Country Alliance.  This
organization is responsible for promoting the appellation and providing
it’s members with value added services in regards to our industry.
The PRWCA has created a number of high caliber annual events to
showcase our wine community and our products. Vintners and grape
growers often times are strange bedfellows. We work together. We
have a tight wine community committed to promoting the appellation.
A great benefit for our wine community.
Vineyards
produce crops on an annual basis. Harvest time is between August
and November. A big spread. Grapes are harvested by either hand
or machine picked. The grapes are sold to wineries all over California.
Many of our local wineries have vineyards that they utilize for
estate wines. Most wineries purchase fruit from the outside for
a portion of their wines.
Vineyards
usually take three years, from the initial planting, to produce
the first crop. Newer planting techniques and plant material have
been showing a very small crop in the second year. By the fourth
year the vineyard should be in full production. Farming costs are
incurred throughout the first three years even though there is little
or no crop. There are no harvest expenses, which are significant,
if there are no crops.
There
are a number of different planting scenarios. It seems as if every
vineyard is slightly different. The number of vines per acre can
range form 500 vines to 2000 vines. Trellis, wire support, systems
are also varied. Farmers are always looking for the optimum balance
between crop production and crop quality. Too much fruit can hurt
the vine and water down quality. Too little fruit and you can’t
pay the bank. It’s always something.
Most
modern plantings are gearing for tonnage in the 4-7 tons an acre
yield. This means in a normal year, and there is no such animal,
the optimum crop of fruit should be 5+ tons on a per acre basis.
Certain varietals will have higher or lower yields. Production swings
can be wide. I have seen vineyards with 2 tons an acre and 10 tons
an acre. It’s agriculture. So a hundred acre vineyard in full
production in a normal year should yield 500 tons of wine grapes.
 Planting
cost has a direct correlation to the site and vineyard layout. Again
costs can be variable. In getting a vineyard to full production
you will have to plant the vineyard and farm the property for three
years. Vine costs are a good example of cost variations. New plants
can cost $1.50 - $4.00 per item. At 900 plants an acre the numbers
add up. A good number to use for a three-year total cost, including
planting, is between $12,000 and $20,000 an acre. That’s a
total number and does not include financing. Hard out of pocket
expense. No land included.
Once
a vineyard is in production the farming costs again are variable.
Crop size, weather and vineyard design all play into your annual
farming expense. I suggest you consider a figure of $3000 an acre
in annual farming costs. So in a normal year our mythical 100-acre
vineyard would cost $300,000 to farm.
Revenue
is a function of yield and grape pricing. Yield is a function of
weather, viticulture practices and the unknown. Grape prices are
a function of supply and demand. Currently high quality red fruit,
like cabernet is priced in the $1200a ton range in Paso Robles.
I’ve seen numbers significantly higher and lower. Different
varietals have different pricing structures. So our mythical 100-acre
vineyard, yielding 500 tons of cabernet at $1200 a ton, would give
us gross revenues of $600,000. Our expenses would be $300,000. Net
income for the year, no debt service, would be $300,000. There are
also depreciation benefits.
Financing
a vineyard development project requires substantial equity. As a
general rule banks like to see an owner have 40 % or more equity
in the project. Our 100-acre vineyard would cost $2,000,000 to develop.
Throw in $1,200,000 dollars for land costs. The total expense to
create that producing 100-acre vineyard, in year three, would be
$3,200,000. An owner would probably need $1,500,000 in equity in
the project and the bank may provide the rest of the capital. It
is no slam-dunk getting vineyards financed.
Selling
quality Paso Robles red varietals is challenging today. There have
been times when it is easy to sell fruit. In planting a vineyard
a grower should have some marketing ideas for the fruit. Sometimes
wineries will contract with a grower to take the growers crop three
years from planting. Wineries do sign up growers on contacts to
provide fruit to the wineries. Contacts provide some certainty.
Some growers like to play the open or spot market. It’s a risk
reward thing.
Vineyards
can last for a long time. Typically most vineyards don’t die
out. Changing farming technology and consumer preference often times
drive replanting.  Sometimes
pests or disease can mandate a replant situation. It’s agriculture.
Things happen. Generally grape vines are hearty animals. They will
grow anywhere it seems. The key is quality and production.
Recapping
the economics. We have 100 acres at $1,200,000 dollars. We have
vineyard production cost at $2,000,000 dollars. Our total investment
is $3,200,000. We have revenue, in full production, of $600,000
dollars. We have annual farming expenses of $300,000. Our net income,
prior to depreciation and taxes, is $300,000.
I
hope this demonstration will give you a feel for this wonderful
business. Nothing can truly capture the energy and excitement of
the wine industry. Economics are important but the joy and passion
associated with the industry is immense. The people are the best
part of the business. Where else can you make money and enjoy the
country lifestyle? There is something truly magical about vineyards.
We look forward to seeing you in Paso Robles!
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