Economic evaluation of winegrape contracts, risk sharing, and implications for the future of the industry

Abstract

Sales contracts for wine grapes are fundamental to both the winery and the grower. While several surveys have been completed to determine the extent of contract use, specific contract provisions, and aspects of implementation, no studies using the lens of principal-agency theory have been published regarding winegrape contracts. This study explores current contracting methods by evaluating winegrape pricing methods, production risk transfer, and incentive/disincentive stipulations in agricultural contracts between vineyards and wineries. The results show that contracts offering a fixed payment will result in lower quality fruit on average compared to quality incentive compensation. Furthermore, in the event any particular grape quality parameter is an informative signal and worth measuring, it is worth explicitly incorporating into the contract by means of a bonus/penalty for that particular attribute or by profit sharing linked to the retail wine price. In markets where contracting per-ton pervades, the focus on quantity predominates. This suggests that in the face of the grape quantity-quality tradeoff paradox, it may be possible to infer the relative end-product outcome balance in this context.