Cost of Establishment
August 5, 2008
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Carlos Carpio, Ag Econ, Clemson
Charles Safley, ARE, NCSU
Barclay Poling, HS, NCSU
2
Estimate the cost of producing & harvesting
muscadine grapes (wine grapes)
Enterprise Budget
Evaluate the profitability of establishing a
Muscadine grape vineyard
Cash Flow Analysis
Net Present Value
Internal Rate of Return
3
Cost estimates were based on a 10 Acre
vineyard
Production practices were based on
management practices recommended by
Extension Specialists and Farmers
Equipment costs were based on 2005
purchase prices
Input prices were collected from farmers and
dealers who supply NC grape growers
4
 Bilateral cordon system
 Vertically shoot-positioned
canopies
 Internal-end-post brace
assembly
 622 grapevines/acre
 Row width 10’
 Vines spaced 7’ apart
5
Qty
Cost
Materials
- Vineyard Posts
- Brace Posts 6”x6”x8’
- Other materials
Total Materials
Equipment costs
Labor costs
Total
1,560
528
$7,800
3,696
------------------828 hrs
10,526
$22,022
1,400
5,198
$28,620
6
Bird netting: $800/acre (3rd year)
45 hours of labor
Deer Control: None
Fence ≥ 7.5 feet
Frost Control: None
Wind Machine
$28,000
50 hours/year
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Full time employees
Wage rate:
$8.25/hour
Required expenses:
2.31/hour
Total cost:
$10.56/hour
Trellis construction
Part-time labor:
$8.25/hour
8
Drip Irrigation: $2,274/acre
Machinery & Equipment Costs:
Prep Year: $58,585
First Year: $10,572
Harvest in September
Custom harvest rate: $100 per
ton
“Base” Price: $1,400 per ton
9
Year
Yield
(Tons/A)
1
0.0
2
1.5
3
3.0
4 -20
4.0
10
Most of the machinery and equipment can be
used for other farming operations
Equipment cost estimates could reflect only
the costs associated with grape production
Based on estimated costs per hour
Exceptions:
Irrigation equipment was used only for grape
production
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Purchase
Price
Tractor, 60 hp
Cost per
hour*
Total Cost
per hour
$ 25,000
$ 7.81
$ 11.91
Spot sprayer, 26 g
190
0.22
0.56
Fertilizer spreader
395
0.56
0.94
Tine chisel plow, 7’
2,500
1.54
3.57
Disk, 9’
3,500
1.85
4.69
Soil auger
498
0.46
1.30
Post driver
2,374
2.20
6.21
Utility trailer
2,000
0.70
2.39
* Cost Estimates do not include depreciation
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Fuel Prices
Estimated Cost per Hour
Fuel
Lubricants
Total
$2.39
5.98
0.90
6.87
$2.50
6.25
0.94
7.19
$3.00
7.50
1.13
8.63
$3.50
8.75
1.31
10.06
$4.00
10.00
1.50
11.50
$4.50
11.25
1.69
12.94
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Fuel Prices
Estimated Cost per Mile
Fuel
Lubricants
Total
$2.00
0.133
0.200
0.153
$2.50
0.167
0.025
0.192
$3.00
0.200
0.030
0.230
$3.50
0.233
0.035
0.268
$4.00
0.267
0.040
0.307
$4.50
0.300
0.045
0.345
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1st Year
2nd Year
3rd Year
4th Year
Mar
63.4
11.2
32.2
32.6
Apr
May
Jun
July
33.7
6.0
5.2
23.3
6.6
3.1
22.4
13.6
12.2
4.0
54.3
53.3
12.2
3.58
44.4
53.7
Aug
2.3
12.4
12.4
12.5
Sept
6.8
5.3
23.2
25.2
Total
147
82.54
193.7
192.2
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1st Year
2nd Year
3rd Year
4th Year
Mar
$ 1,344
$ 118
$ 340
$ 397
Apr
May
Jun
July
754
289
209
347
154
205
373
314
189
263
600
700
199
2116
639
717
Aug
63
182
186
185
Sept
94
247
564
680
Total
$ 3,274
$ 1,789
$ 3,039 $ 3,230
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Yields (tons/acre)
Breakeven
yield
Price
($/T)
3.6
800
-1,582
1,100
-502
-302
-102
97
297
4.10
1,400
577
837
1,097
1,357
1,617
3.16
1,700
1,657
1,977
2,297
2,617
2,937
2.56
2,000
2,737
3,117
3,497
3,877
4,257
2.16
3.8
4.0
4.2
4.4
-1,442 -1,302 -1,162 -1,022
5.86
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Breakeven Price
Price that covers the estimated total
cost
Total cost = Fixed cost + Variable
costs
Profit = $0.00
Shutdown Price
Price that covers only variable costs
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Production
System
Drip
Irrigation
Yield
Net
returns
T/acre
$/acre
4.00
$1,097
Breakeven
price
Shutdown
price
----------$/ton----------
$ 1,126
$ 725
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Important to see when the dollars come in
and the returns available in other
enterprises
The sooner a dollar comes in, the
sooner it can be used to earn more
revenue
For any two enterprises of equal
risk, the one yielding the higher rate
of return is usually preferable
20
Years
0
1
2
3
4
5 - 20
Drip Irrigation
-5,865
-6,120
278
312
2,370
2,370
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Accumulated Cash Flow
Years
Drip Irrigation
0
1
2
- 5,865
- 11,984
- 11,706
3
4
5
6
- 11,395
- 9,024
- 6,654
- 4,284
7
8
9
- 1,913
457
2,827
10
11
3,993
6,363
22
Thousands
30
$27,351
25
Chardonnay
Grapes
20
15
Breakeven Year
10
5
0
-5
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-10
-15
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The year when enough revenue
has been generated to cover
start-up expenses.
To secure a loan of shorter
duration could leave the farming
operation insolvent.
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Today’s cash equivalent value of the 20 year
vineyard.
Assumes you can invest money at a given
interest rate
“Best” interest rate is low risk alternative, e.g.
long term certificate of deposit
Essence is the enterprise should be accepted if
the NPV > $0
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$8,807/acre
A new 10A Chardonnay Grape
vineyard is worth $8,807/acre
today
Someone would have to pay you
$8,807/acre to bribe you NOT to
establish this vineyard
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12.67%
Compared to a Treasury Bond that yields
4.98%:
A Chardonnay Grape vineyard with an IRR
of 12.67% looks pretty good!
The closer an IRR is to the Treasury Bond
of 4.98% the vineyard is not as attractive
when you consider the risk and amount of
time associated with grape production
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Price
Received
Breakeven
Year
NPV
IRR
$1,100
17
-$2,905/A
3.30%
$1,200
13
$999/A
6.85%
$1,300
11
$4,903/A
9.92%
$1,400
8
$8,807/A
12.67%
$1,500
8
$12,712
15.20%
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Assumed Yields:
Year 6: 2 tons/a
Year 10: 2 tons/a
Year 13: 0 tons/a
Loss of production was known early
enough in the production season, so the
grower could adjust her/his costs
accordingly
Maintenance cost of $250/a
Year 17: 1 ton/a
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Price
Received
Breakeven
Year
NPV
IRR
$1,100
n/a
-$7,576/A
-2.57%
$1,200
19
-$4,223/A
1.70%
$1,300
14
-$870/A
5.18%
$1,400
9 & 11
$2,482/A
8.2%
$1,500
9
$5,834
10.91%
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Purchase Price:
$28,000
Estimated Annual Use:
50 hrs/yr
Estimated Annual Cost:
Equipment Costs:
$ 150/A
Labor Costs:
$ 158/A
Total Costs:
$ 308/A
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Yields (tons/acre)
Breakeven
yield
Price
($/T)
3.6
800
-2,181
1,100
-1,101
-901
-701
-501
-301
4.70
1,400
-21
- 239
499
759
1,019
3.62
1,700
1,059
1,379
1,699
2,019
2,339
2.94
2,000
2,139
2,519
2,899
3,279
3,659
2.47
3.8
4.0
4.2
4.4
-2,041 -1,901 -1,761 -1,621
6.72
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Total Accumulated Cash
Flow
$19,055
NPV
$3,533/A
IRR
8.59%
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 A new 10A commercial Chardonnay Grape
Vineyard can be a profitable venture under
the assumptions in this analysis
 Price
 Cost
 Market
 Critical Success Factors:
1. You have a stable market with a reputable
winery, marketing association, wholesaler,
etc.
2. You can meet the buyer’s requirements.
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70 Wineries in 30 Counties
350 Vineyards
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Implement the Production Plan w/o
developing a Marketing Plan and/or a
Financial Plan
An unrealistic Financial Plan (e.g. estimated
costs are too low while returns are too high,
costs are overlooked, etc.).
The Marketing Plan is an afterthought
The Marketing Plan is inadequate &/or
lacks key components that could help the
business succeed
 What happens if the primary market falls apart?
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Budgets are only guides – not substitutes
for a grower’s own cost estimates
Yield patterns assumed no adverse
weather, production setbacks or marketing
difficulties
It was assumed that growers had a market
for the grapes

Recommended that each grower
estimate their production and harvest
costs & conduct a profitability analysis
based on their own production techniques
and price expectations.
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 Charles D. Safley
charles_safley@ncsu.edu
919-515-4538
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