Running a vineyard and winery

Many wineries buy some or all of their grapes, and many growers never make wine at all. How they deal with each other shapes both businesses. In California, the official crush reports publish the average prices paid per ton by variety and district every year, and they show huge gaps: famous districts and varieties fetch many times what bulk grapes do.

The simplest deal is a price per ton. The winery pays for what is picked. If the vines give a big crop, the grower earns more; if frost halves the crop, the grower earns less. The grower carries the yield risk.

A price per acre contract works differently. The winery rents the output of a block of vines and pays the same amount however much fruit comes off it. Wineries like this when they want low yields for quality, because the grower loses nothing by cutting the crop. Now the winery carries the yield risk.

Contracts can also run for several years, with bonuses or penalties for ripeness, health of the fruit, or picking on time. Long contracts give the grower a steady income and the winery a steady supply. The alternative is the spot market, buying and selling grapes at whatever the going price is that harvest. That brings flexibility but also risk. When there is too much wine around, as there has been in several regions recently with global wine drinking drifting lower, spot prices fall and some growers struggle to find buyers at all. In a short year, wineries without contracts may not get the fruit they need.

Every contract is really a decision about who carries which risk, and at what price.

Remember A per-ton price leaves yield risk with the grower; a per-acre price moves it to the winery.

A factory can plan next year's output to the last unit. A vineyard cannot. Spring frost can kill young shoots in one night. Hail can shred a crop in minutes. Heatwaves and drought shrink berries, rain at harvest brings rot, and in recent years wildfire smoke has spoiled grapes in parts of California and Australia. Weather is the biggest risk a grower faces, meaning a chance that things turn out worse than expected.

Weather hurts so much because of fixed costs. Here is a made-up vineyard with round numbers: it spends $100,000 a year farming and normally harvests 50 tons, so each ton costs $2,000. A frost cuts the crop to 25 tons. The $100,000 is still spent, so each ton now costs $4,000. The cost per bottle doubles just when there are fewer bottles to sell.

Growers fight back in several ways. Against frost they light fires or candles between the rows, run wind machines to stir warmer air down, or spray water that freezes and protects the buds. Against hail some put up nets. Against the money side of risk they buy crop insurance, own vineyards in different places so one storm cannot hit them all, keep a reserve of wine from earlier vintages to sell in a short year, and hold some cash as a cushion.

All of these protections cost money in good years too. Choosing how much to spend is like deciding how much insurance to buy on a phone: too little and one accident ruins you, too much and you pay for protection you rarely use. A winery that has had three good years in a row can be tempted to cut back, which is exactly when a bad year does the most damage.

Remember A small crop does not shrink the fixed costs, so bad weather sharply raises the cost of each bottle.

Some wines must wait years before they can be sold. Non-vintage Champagne must age at least 15 months before release and vintage Champagne at least three years. A Rioja Gran Reserva red must be aged at least five years, two of them in oak. All that time the grapes, barrels and labour are already paid for, but no money has come back.

Money spent on stock that has not yet been sold is part of a business's working capital. If the winery borrowed it, it pays interest, the price of borrowing money. If it used its own cash, there is an opportunity cost, because the cash could have earned interest elsewhere. Here is a made-up winery with round numbers: it has $500,000 tied up in ageing wine and borrows at 6% a year. That is $30,000 of interest a year, and $90,000 over three years, more if the interest compounds. Long ageing is expensive even when the wine is just sitting quietly in the dark.

Once the wine is ready, how should it be priced? Cost-plus pricing adds a markup to the cost. Value-based pricing asks what buyers will pay, which for a strong brand can be far above cost. A brand is a promise built up over years, and it lets a winery charge more than its costs alone would suggest.

Protecting a brand shapes many decisions. Cutting the price to clear stock can make buyers think the wine is worth less, and the brand may never recover, so many famous estates would rather sell less than sell cheaply. Many Bordeaux châteaux make a second wine from younger vines or lots not chosen for the main wine. That keeps the main label exclusive while still earning money from the rest of the crop. Some estates sell only to a mailing list, allocating a few bottles to each customer, which keeps demand ahead of supply.

Remember Ageing ties up money that costs interest, and a strong brand lets a winery price above its costs.