The Economics of Growing Wine in El Dorado
Last month, I presented to the El Dorado Winegrowers’ association. The topic of the presentation was the economics and pricing dynamics of the market for El Dorado wine grapes. Just last year, the UC Davis Extension service put out one of their characteristically detailed and accurate cost studies for the Sierra Nevada Foothills, which illuminated the challenge of planting and operating a profitable vineyard in the region.
I enjoyed giving the presentation for three reasons. First, I stayed in Placerville, which is a lovely wine country town that I hope to return to. Second, I have done only a small amount of work with the El Dorado region, so it was great to get a chance to learn more. Finally, the audience was wonderful. I never had a presentation provoke so many questions and so much conversation, pushback and information-sharing.
You can download the whole report here, in Word doc format. Following are the main takeaways from the presentation and discussion:
Items of Interest:
The 2016 UC Davis Extension Cost Study indicated a difficult economic environment for growers in the Foothills, with the example presented in the report generating $3,214 in losses per acre per year.
Though El Dorado growers obtain higher prices than indicated in the Cost Study, they also obtain lower average yields.
To cover the full range of expenses outlined in the scenario depicted in the cost study, a grower obtaining El Dorado's average 2015 price of $1,502 per ton would need to yield 6 tons per acre. Very few El Dorado growers achieve these yields. If the grower obtained the 2.1 tons per acre indicated as the average in the El Dorado County Wine Grape Survey, he would need to be paid $4,000 per ton, a price that no one in the region receives.
In the long-term, Vineyard Financial Associates estimates that El Dorado wine grape prices are growing faster than expenses, outpacing expense inflation by 1%. Vineyard Financial Associates believes that land prices are increasing at an even faster rate.
Vineyard Financial Associates estimates that El Dorado growers are typically paid 70 times the retail bottle price of a wine for one ton of the grapes that go into that wine.
Though this is lower than the Beckstoffer Rule standard of 100 time bottle price, it is typical of similar appellation that produce quality wine, but lack recognition.
Furthermore, using Wine Spectator scores as a proxy for quality, El Dorado seems to be in line with other similar regions, in terms of its value proposition to the consumer. That is, prices seem to be typical of quality wines from lesser-known regions.
Evidence suggests that where yields could be increased, based on site and weather, quality would not suffer. This would make farming wine grapes in the region more financially sustainable.
Some El Dorado growers should consider exiting the business, due to the challenging economic environment.
Growers should monitor the prices and price movement of wines made from their grapes and aim to capture a price of at least 70 time bottle price.
Growers should push winemakers to experiment with loosening or discarding yield caps or other yield-limiting requests.
Growers should plant, redevelop and manage vineyards with the intent of producing significantly higher yields than is currently typical in the region.