Economic analysis of wine grape production in the Texas High Plains

In an effort to stabilize or increase net farm income, agricultural producers in the Texas High Plains have been seeking alternatives to the traditional field crops of cotton and grains. Net returns for cotton and grains have diminished over the years as input costs have increased. Wine grape production may provide producers a viable alternative to these traditional field crops.

Before an agricultural producer can make the decision to switch to an alternative crop like wine grapes, cost-return budgets must be developed and evaluated. The producer should not begin establishing a wine grape vineyard unless the net present value or internal rate of return of the projected income stream exceeds that of alternative investments.

Objectives of this study were twofold. The first objective was to estimate the 1993 costs of establishing a wine grape vineyard in the Texas High Plains. The second objective was to identify and compare current input costs of commonly used grape production practices and estimate returns from these practices. An analysis has been made for each of the five major wine grape varieties grown in the Texas High Plains.

The wine grape varieties used in this study were Cabernet Sauvignon, Chardonnay, Chenin Blanc, Riesling, and Sauvignon Blanc. These varieties were selected because they represent the largest acreage of producing wine grapes in the Texas High Plains. Input costs of commonly used production practices were identified and cost estimates for establishing a wine grape vineyard in the Texas High Plans, utilizing these five varieties, have been developed. Performing the analysis for each variety allowed the comparison of expected profitability between the varieties.

A Quattro Pro For Windows® spreadsheet was used in preparing economic budgets for a wine grape vineyard. This spreadsheet was used in developing two models which analyzed the budgets and provided financial analysis. Model I varied the owner equity ratio in comparing the costs, receipts, net income, and breakeven prices for the five wine grape varieties and a vineyard planted equally to each of the five varieties. Model I was used to calculate the internal rate of return (IRR), net present value (NPV), profitability index (PI), and payback period for each variety, with varying levels of owner equity. IRRs and NPVs were also compared when interest/discount rates and owner equity levels were varied.

The simulation model used the budgets developed in Model I to generate probability analysis for achieving specific IRR and NPV levels. Projected annual crop yields for the 30-year planning horizon were randomly selected from historical data by the simulation model, utilizing average yearly yields for the variety being simulated.

Probabilities were obtained by repeating the experiment, utilizing fifty iterations of each 30-year planning horizon, to estimate probabilities for the occurrence of a specific event. Standardizing the probabilities obtained involved calculating a "z" score. Various levels of owner equity were utilized in these analyses.

Costs of establishing a vineyard are high and the producer/investor must have substantial capital if the vineyard is to be successful. Budgets developed in this study indicate that total investment in a 55-acre vineyard could reach approximately $450,000 ($8,180 per acre) before annual production income exceeds production expense.

This study verified that it could be economically feasible to establish and operate a wine grape vineyard in the High Plains of Texas. The level of owner equity and interest/discount rate utilized in the analysis greatly impact the investment decision to be raade, when NPV is used as the decision criterion.