1 Estimated Costs of Producing Muscadine Grapes in North Carolina Muscadine Grape Workshop for Cooperative Extension Service Agents September 13, 2006

2 Departments of Agriculture & Resource Economic and Horticulture, CALS, NCSU Carlos Carpio Charles Safley Barclay Poling

3 Procedures  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 Objectives  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

5 Production Systems  Single-Wire Trellis (SWT) 1.Without irrigation 2.With irrigation  Geneva Double Curtain (GDC) 1.Without irrigation 2.With irrigation

6 Yield Assumptions (tons/acre) SWTGDC Year Without irrigation Irrigation Without irrigation Irrigation

7 Harvest Assumptions  Harvest in September  Grapes were sold for $500 per Ton  Custom harvest rate: $100 per Ton  Farmer provided a 60hp Tractor

8 Labor Costs  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

9 Machinery Costs/Equipment Investment  Most of the machinery and equipment can be used for other farming operations  Equipment cost estimates only reflect the costs associated with grape production  Based on estimated costs per hour  Exceptions:  Irrigation equipment was used only for grapes  Grape hedger was assumed to be rented at $85/hour

10 Equipment Requirements 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

11 Equipment Requirements, cont. Purchase Price Cost per hour* Total Cost per hour Boom sprayer, 60G Blast sprayer, 110G4, Rotary mower, 7’2, Pruning equipment1, Grape hedger Pickup truck, ½ ton25, Drip Irrigation (SWT)23, Drip Irrigation (GDC)22, * Cost Estimates do not include depreciation

12 Grape Vines SWTNumberCost - Vines per acre218$600 - Growth tubes per acre218$140 - Replant: vines per acre 10 $28 GDC - Vines per acre182$500 - Growth tubes per acre182$116 - Replant: vines per acre 10 $28

13 Estimated Trellis Costs: SWT QtyCost Materials - 4'' x 8' Posts Treated2,128$10, '' x 8' Posts Treated5283, '' x 4"x 6' Timbers2641,320 - Wire & Staples ,260 Equipment costs ,795 Labor costs536 hrs4,422 Total$24,393

14 Estimated Trellis Costs: GDC QtyCost Materials - Posts2,260$12, ''x 4"x 6' Timbers 2201,100 - Other materials ,117 Total Materials $30,924 Equipment costs ,500 Labor costs828 hrs6,831 Total$39,256

15 Estimated Annual Costs, Years 0 – 20 th YearSWTGDC No Irrigation IrrigationNo IrrigationIrrigation $/acre ,747 3,923 12,2612,3422,8322,910 21,3821,5501,8682,032 31,7292,0052,0542, ,2632,6392,7203,097

16 Breakeven & Shutdown Prices  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

17 Breakeven & Shutdown Prices Production System YieldNet returns Breakeven price Shutdown price T/acre$/acre $/ton SWT w/o Irrigation SWT w/ Irrigation GDC w/o Irrigation GDC w/ Irrigation

18 Estimated Returns: SWT w/o Irrigation Price ($/T) Yields (tons/acre) Break- even yield ,361-1,297-1,123-1,169-1, ,

19 Estimated Returns: SWT with Irrigation Price ($/T) Yields (tons/acre) Break- even yield ,550-1,470-1,390-1,310-1, ,0101,2101,

20 Estimated Returns: GDC w/o Irrigation Price ($/T) Yields (tons/acre) Break- even yield ,509-1,427-1,343-1,259-1, , ,1531,3631,

21 Estimated Returns: GDC with Irrigation Price ($/T) Yields (tons/acre) Break- even yield ,664-1,564-1,464-1,364-1, ,0361,2611, ,0361,3861,5361,7862,

22 Profitability  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

23 Net Cash Flow – SWT YearsNo IrrigationIrrigation 0-3, ,833-5, , , ,361

24 Accumulated Cash Flow – SWT YearsNo IrrigationIrrigation 0-3, ,672-9, ,654-10, ,183-10, ,246-9, ,309-7, ,372-6, ,435-5, ,498-3, ,560-2, ,028-1, , ,231

25 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.

26 Accumulated Cash Flows –SWT $12,181 $7,409 Irrigation No Irrigation Breakeven Year

27 Net Cash Flow – GDC YearsNo IrrigationIrrigation 0-5, ,403-5, ,348-1, ,4401,903 51,4401,903

28 Accumulated Cash Flow – GDC YearsNo IrrigationIrrigation 0-5, ,418-10, ,766-12, ,260-12, ,820-10, ,380-8, ,940-6, ,499-4, ,059-3, ,619-1, , ,9423, ,3815,702

29 Accumulated Cash Flows – GDC Irrigation No Irrigation $19,446 $13,886 Breakeven Year

30 Net Present Value  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

31 Net Present Value Production SystemNPV Single-wire trellis - Without Irrigation$ With Irrigation$1,567 Geneva Double Curtain - Without Irrigation$2,551 - With Irrigation$4,443

32 Today’s Cash Equivalent  A new 10A muscadine grape vineyard on GDC trellis system with irrigation is worth $4,443 today  Someone would have to pay a farmer $ 4,443 to bribe him to forget his plans of establishing a 10A muscadine grape vineyard  One could pay up to $444 per acre for good muscadine grape soil and still do as well as in other investments

33 Internal Rate of Return Production SystemIRR Single-wire trellis - Without Irrigation6.18% - With Irrigation7.58% Geneva Double Curtain - Without Irrigation8.54% - With Irrigation9.54%

34 Internal Rate of Return  Compared to a Treasury bond that yields 4.98%:  A muscadine grape vineyard on a GDC trellis system with an IRR of 9.54% looks pretty good.  A planting on SWT system w/ irrigation that has an IRR of 6.18% % is not as attractive when you consider the risk and amount of time associated with grape production

35 “Limited” Sensitivity Analysis  Assumed:  No yield in the 13 th year of production  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

36 Net Present Value System Previous NPV “New” NPV %% SWT: - No Irrigation$ 135- $ Irrigation$1,567$ % GDC: - No Irrigation$2,551$1, % - Irrigation$4,443$3, %

37 Internal Rate of Return System Previous IRR “New” IRR SWT: - No Irrigation6.18%5.41% - Irrigation7.58%6.85% GDC: - No Irrigation8.54%7.82% - Irrigation9.54%8.85%

38 Conclusions  A new 10A muscadine grape vineyard can be a profitable venture under these assumptions  Price  Cost  Rank of production systems: 1. GDC with Irrigation 2. GDC without irrigation 3. SWT with irrigation 4. SWT without irrigation

39 System’s Rank Based on: SystemBkn YrNPVIRR GDC - Irrigation10 th $ 4, % - No Irrigation11 th $ 2, % SWT - Irrigation12 th $ 1, % - No Irrigation13 th $ %

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

41 Contacts Charles D. Safley  