1. Cost of Establishment August 5, 2008 1

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

3.  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

4.  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

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

6. QtyCost Materials - Vineyard Posts1,560$7,800 - Brace Posts 6”x6”x8’ 5283,696 - Other materials-------10,526 Total Materials-------$22,022 Equipment costs-------1,400 Labor costs828 hrs5,198 Total$28,620 6

7.  Bird netting: $800/acre (3 rd year) 45 hours of labor  Deer Control: None Fence ≥ 7.5 feet  Frost Control: None Wind Machine $28,000 50 hours/year 7

8.  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

9.  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

10. YearYield (Tons/A) 10.0 21.5 33.0 4 -204.0 10

11.  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

12. Purchase Price Cost per hour* Total Cost per hour Tractor, 60 hp $ 25,000 $ 7.81$ 11.91 Spot sprayer, 26 g 1900.220.56 Fertilizer spreader 3950.560.94 Tine chisel plow, 7’ 2,5001.543.57 Disk, 9’ 3,5001.854.69 Soil auger 4980.461.30 Post driver 2,3742.206.21 Utility trailer 2,0000.702.39 12 * Cost Estimates do not include depreciation

13. Fuel Prices Estimated Cost per Hour FuelLubricantsTotal $2.39 5.980.90 6.87 $2.50 6.250.94 7.19 $3.00 7.501.13 8.63 $3.50 8.751.3110.06 $4.0010.001.5011.50 $4.5011.251.6912.94 13

14. Fuel Prices Estimated Cost per Mile FuelLubricantsTotal $2.000.1330.2000.153 $2.500.1670.0250.192 $3.000.2000.0300.230 $3.500.2330.0350.268 $4.000.2670.0400.307 $4.500.3000.0450.345 14

15. 1 st Year2 nd Year3 rd Year4 th Year Mar63.411.232.232.6 Apr33.76.612.2 May6.03.14.03.58 Jun5.222.454.344.4 July23.313.653.353.7 Aug2.312.4 12.5 Sept6.85.323.225.2 Total14782.54193.7192.2 15

16. 1 st Year2 nd Year3 rd Year4 th Year Mar$ 1,344$ 118$ 340$ 397 Apr754154189199 May2892052632116 Jun209373600639 July347314700717 Aug63182186185 Sept94247564680 Total$ 3,274$ 1,789$ 3,039$ 3,230 16

17. Price ($/T) Yields (tons/acre) Break- even yield 3.63.84.04.24.4 800-1,582-1,442-1,302-1,162-1,0225.86 1,100-502-302-102972974.10 1,4005778371,0971,3571,6173.16 1,7001,6571,9772,2972,6172,9372.56 2,0002,7373,1173,4973,8774,2572.16 17

18.  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

19. Production System YieldNet returns Breakeven price Shutdown price T/acre$/acre----------$/ton---------- Drip Irrigation 4.00$1,097$ 1,126$ 725 19

20.  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

21. YearsDrip Irrigation 0-5,865 1-6,120 2278 3312 42,370 5 - 202,370 21

22. 22 Accumulated Cash Flow YearsDrip Irrigation 0- 5,865 1- 11,984 2- 11,706 3- 11,395 4- 9,024 5- 6,654 6- 4,284 7- 1,913 8457 92,827 103,993 116,363

23. 23 $27,351 Chardonnay Grapes Breakeven Year

24.  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

25.  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

26. $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

27. 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

28. 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$12,71215.20% 28

29.  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

30. 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$5,83410.91% 30

31.  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

32. Price ($/T) Yields (tons/acre) Break- even yield 3.63.84.04.24.4 800-2,181-2,041-1,901-1,761-1,6216.72 1,100-1,101-901-701-501-3014.70 1,400-21- 2394997591,0193.62 1,7001,0591,3791,6992,0192,3392.94 2,0002,1392,5192,8993,2793,6592.47 32

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

34.  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

35.  70 Wineries in 30 Counties  350 Vineyards 35

36.  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

37.  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

38.  Charles D. Safley  charles_safley@ncsu.edu charles_safley@ncsu.edu  919-515-4538 38