Anyone who wants to run a successful
wine business has to have a number of ducks in a row, including: professional input, deep pockets, long-range vision, a thick skin and an unwavering belief in the end result. Planting picturesque grapevines on your farm is a romantic notion.
Established vines strategically placed along a residence can add a rustic beauty to the landscape, as well as provide fruit for eating, juicing and winemaking.
Although the temperate regions of the West Coast are known for their vineyards, it’s possible to grow grapes on hobby farms across the country, though some climates may need a bit more effort than others.
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Establishing A Vineyard
Establishing a vineyard and bringing it to full production requires a large investment in money, time, and labor. Estimates vary widely and depend on circumstances specific to the site and the individual choices that are made, but development costs for the first three years can be from $15,000 to more than $20,000 per acre, not including land costs.
Significant negative cash flow will occur for at least the first 3 to 5 years until the vines are established enough to produce a marketable crop. This is why vineyard loans are often a good way to get enough capital to help you through the first few years.
Vineyards are expensive and grapevines require frequent and intensive management, much of which is done manually, not with equipment. Therefore, careful consideration should be taken of the financial and labor requirements before proceeding with plans for a vineyard.
Significant crop losses, and sometimes vine damage or death, can occur due to freezes, frost, hail, diseases and other pests. Pierce’s Disease is a serious threat to the lifespan of a vineyard in most parts of the country. Market risks should also be considered; wine grape supply and demand fluctuate and prices move along with them.
A market outlet for the grapes should be confirmed with one or more wineries, or if your development plans include a winery, a wine market analysis and business plan should be prepared before committing to the venture.
The Wine Industry
Familiarize yourself with the wine industry and investigate marketing opportunities and obstacles. Visit existing vineyards and wineries and meet the owners and managers; they often are quite willing to share their knowledge and experience.
Before getting any vineyard loans, develop a vineyard business plan to help you understand the economics of your operation and guide your decision-making.
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There are numerous viticulture texts that offer methods and guidelines for growing grapes, but none can offer a recipe to be followed for success.
Commercial grape production requires an integration of knowledge of climate, site characteristics, grape varieties, production practices, personnel management, economics, and marketing.
Those are just the main categories of expertise required; numerous skills and abilities are also necessary. Volunteer to work in a neighbor’s vineyard to learn production practices such as training and pruning.
Finally, if you lack experience in grape growing, it is strongly advised that you start conservatively with only an acre or two. After a few years experience with a small vineyard you should be able to assess the feasibility and desirability of expanding the vineyard.
Developing A Vineyard
Once a commitment has been made to develop a vineyard, many decisions must be made in developing the vineyard plan. These decisions include: selection of a suitable site for your vineyard (and winery, if applicable); choice of grape varieties, clones, and possibly rootstocks; selection of a training and trellis system, and vineyard size and design (row and vine spacing).
Finding vineyard loans, the capital, for expansion can be tough for smaller wineries, vineyards and wine-related businesses. Despite the wine industry’s recovery back to pre-recession profitability, many banks shy away from complex, cyclical, commodity-driven businesses like wine.
From a banker’s perspective, vineyard loans can generally be categorized as high risk or low risk, with risk depending on whether the grapes are owned or contracted with the state’s largest wine companies. For vineyard financing, risks are all relatively high and loan terms generally reflect the high risk.
Vineyards that fall in this low-risk category are pretty homogenous. Wineries operating on large land parcels, with consistent production costs and generally high quality grapes are considered sound investments for banks.
But the financing attributes of “everybody else” are anything but homogenous. These vineyards are mostly small parcels dedicated to estate or family wineries, with only a few larger than 150 acres.
Financing estate vineyards and small wineries can be challenging because they are a very diverse group, often with a different focus than more traditional farmers.
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Vineyard financing is dependent on the owner, vineyard management ability, parcel size, site, variety, financial position, earnings history of the owner, and balance sheets of other entities owned.
Vineyard loans regarding operation are generally for 12-month terms, and usually no more than 65 percent of the growing cost will be loaned. Also, equipment loans are available at most dealers, with terms generally from three to seven years, requiring 15 to 20 percent down.
Vineyard loans involving real estate are generally for 10 to 20 years and require 35 percent down. New vineyards can be high-risk investments because of the capital needed for establishment.
Those new to the wine industry often forget about costs that are needed for years two and three before the vines really start producing, he said. Loan rates can be adjustable or fixed, with annual payments and there is usually a penalty for prepayment.
Winery loans are similar to vineyard loans. Operating loans also are set for a 12-month term, but for real estate and construction loans, banks generally require 40 percent down but could be much more depending on customization.
Also, Construction loans for wineries can be brutally painful for both parties. Cost overruns are often a problem, and wineries are expensive to build.
Before looking a vineyard loans for starting your wine business there are a few guidelines to remember when putting together your business plan. Partnerships are only as strong as the weakest link. Avoid them unless the other partner brings something unique to the table.
If you want to buy on future appreciation (high-value vineyard real estate), you will need an equity owner or partner. A poor site is always too expensive and rarely profitable. Vineyard development needs an experienced project leader for two to three years, not just the first year.
Estate wineries need a balance of capital, proven production ability in the vineyard and winery, and strong marketing skills. The wine industry attracts individuals who have been very successful, but perhaps not in running a business.
Lifestyle and family living expectations often can be an issue. Don’t get caught up in the hype of the industry. Value wine inventory at cost, not through accrual adjustments, which can make any winery look profitable on paper. Be cautious about growth expectations.
Rule of thumb: Winery operating loans should be no more than 50 percent of the annual sales. Proven experience in the industry almost always trumps a great business plan. Capital investment for an expensive winery always has a low rate of return. Wineries are like sheep. They are better off in a flock and need traffic from each other.
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