In early March I was interviewed by Jordan Mackay for an article in the New York Times called "Local Versions of Europe's Everyday Wines". In it, Jordan explored why so few California winemakers were attempting to make inexpensive but artisanal wines that can compete with the basic regional wines of France. This seems to be a topic of broader interest among wine writers; Jon Bonné wrote a similar article (“California’s Côtes du Rhone”) in the San Francisco Chronicle last year. I caught up with Jon at this past weekend’s Rhone Rangers tasting, and our conversation wandered to this topic. He suggested that smaller California wineries are only now focusing their attention on making wines in this $10 to $20 category, but that with the market hungry for these sorts of wines, the category will grow. I think he's right, and that as long as winemakers can find older vineyards of less-fashionable varietals, we'll see growth. Still, there are structural issues with the economics of grape growing in California that will inhibit the production of these wines – even if the market rewards those that are produced.
We recently considered whether our own cost structure could support adding a vineyard that would either allow greater production of our Cotes de Tablas wines (our least expensive wines, around $25 retail) or produce grapes to sell at the going rate for top vineyards in our area. This prospective vineyard was beautiful – 20 acres on a mountaintop near the summit of Peachy Canyon Road, five miles south-east of Tablas Creek – and it was clear to us that it will make a great vineyard. But, as we did the math, we couldn't make it come out to break-even either in selling the grapes or in making more Cotes de Tablas.
Here's how the math works, using Tablas Creek's costs and production from 2008 (a fairly average year for us). Our 2008 vineyard expenses (between labor and benefits, depreciation, taxes, materials, fuel & maintenance, utilities, licenses and fees) were $612,313, and we harvested 262 tons of grapes off our 95 producing acres. So, our cost of producing each ton was $2,337 and our yield 2.75 tons per acre. Our cost of grape production, not counting interest on our land or improvements, was $6,427 per acre.
The owner of the 20-acre property was asking around $1 million for those 20 plantable acres. A 30-year mortgage on $1 million at 5.75% would require about $70,000 in payments per year. Planting costs in an irrigated, trellised vineyard are typically about $30,000 per acre. Head-pruned, dry-farmed vineyards are notably less expensive (around $4,500 per acre) but yields are typically lower and the vineyard may take an extra year or two to come into production. Assuming that we financed the planting costs, we'd add another $42,000 in finance payments each year ($6,300 if we chose to head-prune and dry farm). Total financing costs of $112,000 per year, divided by 20 acres, comes to $5,600 per acre, though planting head-pruned, dry-farmed could reduce that to about $3,800 per acre.
So, our total costs (in financing and expenses) per acre per year would be something like $12,000 ($10,200 if we chose to dry farm). Could we expect to recoup our farming costs? If we sold grapes, probably not. The top vineyards in our area charge between $3,000 and $4,500 per ton for grapes. At our yields (2.75 tons per acre in 2008) we could expect between and $8,250 and $12,375 in grape revenue per year. If instead we chose to dry-farm, we felt it was unreasonable to expect more than 2 tons per acre, so even at $4,500 per ton, we wouldn't cover our $10,200 annual farming cost.
Would the financial picture look better if we used the extra production to make more of our Cotes de Tablas? Not really. We'd typically sell the wine for $150/case into the wholesale market, allowing for the distributor's and the retailer's markup. Our vineyard costs come to about $73/case ($4,363 cost per ton calculated at 60 cases per ton). The crush and winemaking costs (based on our 2008 Cotes de Tablas) add another $44/case, and the bottling costs (bottles, labels, capsules and labor) $20/case. That totals $137/case in cost of production, not counting costs of overhead or to sell the wine.
It's worth noting that the assumptions above are for a vineyard that is financed 100%. But any money that is paid up front rather than financed incurs opportunity costs roughly equivalent to financing costs. These opportunity costs represent the lost profits from not having invested this money elsewhere.
Our net decision was an easy one. We didn't buy the additional property.
So, for what sort of proprietor would such a property make sense? It would work for a producer who built a winery and tasting room and sold much or all of the production direct. They would have to be willing to put $3 million or more into the project (between land, planting, vineyard improvement and winery), but the higher margins in direct sales make it a viable proposition after that. Or a savvy investor in land might take a chance, given that the price of prime vineyard land here is almost certain to appreciate. Someone who bought it and covered most of their annual costs through selling grapes could come out ahead given that in a dozen years it might sell for double what it's worth now.
In the calculations above, you can see how large a portion of the annual expenses the initial investments in land and planting represent. And I think that these costs are the real reason why most wine reviewers think that Europe enjoys a competitive advantage in the $10-$20 price category. There is so much old vineyard planted in all the traditional wine-producing countries that a winemaker can find inexpensive grapes from older vines on vineyards long since bought and paid for.
Will that ever be possible in California, where most vineyards have to be planted from scratch, on land that is often in demand for development and therefore more expensive? We'll see some growth, I'm sure, as long a it's still possible to find overlooked older vineyards. But the numbers above shed some light on why small California producers, working with similar economies of scale and similar restrictions on mechanization, tend not to aim their wines at the under-$20 portion of the market.