2nd of 4 part series on the Wine Industry Supply Chain
Passion to Profit: Understanding the business of grapes
By Tim Hanni, MW
co-authored & edited by NVWA staff
In 2020, the range in cost for one ton of Napa Valley Cabernet ranged from $200 per ton up to almost $67,000 per ton. This wild fluctuation means that if you want to be successful in wine, you better understand the key factors affecting grape prices and demand. Additionally it is imperative to secure your grape source but have the flexibility to adapt to changing climate and economic conditions.
Smoke taint, pests, diseases and drought are just a few of the risks associated with growing grapes. There is also mounting opposition from communities surrounding vineyards, who view them as a source for unwanted pesticides, tourism congestion and competition for water resources.
“You can be profitable in growing and selling grapes, but you must understand the business fundamentals and key decisions needed to create a financially viable vineyard,” explains Master of Wine Tim Hanni, creator of Napa Valley Wine Academy’s Business of Wine course.
In his course, he helps students understand the grape market, covering everything from basic supply and demand to international wine market variables. Hanni also covers the risks and rewards of growing, buying and/or selling the essential raw material for any wine.
His first task is to dispel the common myth that planting a vineyard is the most economical way to source grapes for a winery. In reality, you are tying up a lot of capital to purchase the land, buying or leasing the equipment, and adding several years to your timeline for having a product ready to sell.
Relying on your own vineyard can also reduce the number of options available to the winery in vintages that are compromised in quality, low in annual yield, or may not be able to supply enough quantity to keep up with sales success and demand for a product.
You must also consider the time it will take to manage and farm the vineyard. At the end of all of this, some wineries discover that the grapes they labored over are not as good as what they could purchase from local growers.
However, buying grapes wholesale comes with its own challenges. Hanni walks students through the risks and rewards of procuring grapes through long-term contracts or speculative buying in the “spot market.”
And it’s more than just theoretical concepts. Students also have access to key resources such as the California Grape Crush report – the most comprehensive resource in the world with over 140 pages of grape transaction prices and harvest data.
Grape producers are facing their own challenges as more wineries are demanding lower yield for a higher concentration of flavors. Practices such as dropping fruit and dehydration during extended “hang time” can easily reduce the yield by 10 to even 50%. Yet the fixed costs for farming the grapes remains relatively the same, and it can be even more expensive to grow fewer grapes.
In response to these demands many growers have instituted a new grape pricing model. A grower might know they can get a yield of 5 tons of quality fruit and sell it for $3,000 per ton, giving a gross profit of $15,000 per acre. To compensate and remain profitable, many growers will charge the winery $15,000 per acre of harvested fruit, and if the winery wants to reduce the yield the buyer assumes the additional costs.
It’s important to understand the vast differences in grape costs and crop quality from the perspective of a grape grower, graper buyer or broker, and a winemaker. The Business of Wine course helps people think critically to negotiate terms that are fair for all parties involved.
Hanni also walks students through the key elements of a grape contract in a document written by a law firm. It covers critical information such as:
- Negotiating the price per ton including harvest costs and transportation to the winery
- Stipulations for maintaining long-term supply while also ensuring the grapes meet specific quality standards required by the buyer.
- Protections for both the grower and the buyer: mitigating risks and unforeseen circumstances such as poor weather and smoke taint that can reduce quality.
- Allowances for the inevitable swings in supply and demand for maintaining fair market values.
- Terms for renewal of contract and considerations for short- and long-term price adjustments.
Even if you never touch a grape in your wine journey, you can still benefit from understanding how decisions at the vineyard affect everything in the supply and value chain. The business of grapes affects everything from product ideation, pricing, marketing and forecasting for the future of a brand.
<<< See the first article in our Passion to Profits series here.