With the recent publication of Pennsylvania’s Orchard And Vineyard Statistics 2002, we have recent grower and acreage numbers for the entire Lake Erie Grape Belt. Are there general trends for Niagara County, Chautauqua-Erie, and Erie County, PA?

Niagara County grape farms declined 29% from 1996 to 2001. Acreage declined by 13% during the same period. Taking a longer-term view of Niagara County’s grape industry:

I believe that Niagara County declines are flattening out and acreage will stabilize by 2006 (the time for the next New York Fruit Tree and Vineyard Survey). One interesting fact is that ‘Niagara’ in Niagara County is the leading variety.

The industry looks a lot more stable in the Chautauqua-Erie Belt. Farm numbers declined by only 5% and acreage went up over 12% from 1996 to 2001. Farm numbers slipped a lot more from 1990 to 1996 as shown in the following chart:

While over 75% of grape farms are less than 50 acres, the 11% of farms over 100 acres control a majority of acreage! By 2006, I think we will see increases in the three 50+ acre farm size categories. Overall farm numbers will likely slip under 500 from 529 in 2001. Most of the acreage involved will likely stay in production.

Erie County, PA grape statistics occupy the middle ground between the relatively rosy view of the Chautauqua-Erie Belt and the attrition in Niagara County. Grape farms declined by 40 to 179 (down 18%) from 1997 to 2002. Acreage declined by 479 or more than 4%. Erie County still dominates Pennsylvania’s grape acreage and production. In 2002, over 94% of Pennsylvania’s grape acreage still resided in Erie County.

Nearly 20% of the Erie County, PA grape farms are over 100 acres in size compared to the 11% in the Chautauqua-Erie Belt in New York. Those largest 35 farms control over 57% of the grape acreage in the county. All farm sizes less than 100 acres declined from 1997 to 2002 as shown below:

Our Erie Co., Pennsylvania grape farms are larger esp. when you factor in the Chautauqua County grape acreage owned and/or operated by them. The individual states statistics don’t pick up the cross border operations and treats one operation as two (one in each state).

What is in store for the Erie County, Pennsylvania grape industry? I think we will see, by 2007, acreage slightly under 10,000 and farm numbers around 150.

These snapshots give us an idea about the health of the industry. Trends can be powerful, yet the Chautauqua-Erie Grape Belt bucked the trend and took advantage of some market opportunities, esp. in regards to increased ‘Niagara’ production.

Over the past 30 years, growers of juice grapes have experienced periods of several consecutive years of declining prices. (See the figure below for the US production of juice grapes and New York juice grape prices from 1975 through 2003.) The figure illustrates graphically that the price cycle is a highly relevant topic. The first NASS estimate of NY juice grape price in 2003 was $198. If this estimate stands up after all cooperative earnings for crop year 2003 are known, this will be the first year since 1994 that prices were below $200 per ton on average.

In New York, following a peak in 1977 at $223 per ton, there followed a period of generally declining prices until 1984, a time of severe financial crisis in the industry when the price bottomed out at $136 per ton. The market was affected by an over-supply of grapes and a strong US dollar which led to increasing supplies of imported concentrate and wine, as well as a reduced incentive to export processed grape products.

A declining US dollar, the development of the export market in Japan, and new product development and promotion helped to fuel recovery of prices in the mid-to late 1980’s. After peaking in 1990 at $294 (a record for NY juice grapes), prices declined for four consecutive years, reaching a low of $198 in 1994. A series of large national crops and the slow growth in consumer disposable income resulting from the recession in the early 1990’s had a negative impact on prices during this period.

The peak in the most recent cycle occurred in 2001 with the average price at $287. (This was preceded by a small dip in prices in 1999 due to the largest juice grape crop on record following a short crop in ‘98.)

Counting cycles in terms of years of declining prices, in the first cycle during this 29-year period, prices generally declined for the next seven years. (There was a slight up tick in 1981.) In the next down cycle beginning in1991, prices declined for the next four years. We are now in just the second year of decreased prices, albeit the decline this past year of $74 per ton was the steepest decline in the past 29 years.

The NASS price data (including estimated cooperative payments) shows prices differently compared to just a list of area cash market prices. If you use announced cash market prices, they last bottomed out in 1995 and peaked in 1998 a mere three years later. Using these numbers, 2003 was the fifth year of price declines from the 1998 peak.

Profitability for grape growers is definitely influenced by price and crop size. Using results from the Lake Erie Grape Farm Cost Study (LEGFCS), we observed the worst profitability in 1995 with low prices and average yields. Average income per acre dropped under $1,200. Costs were down but Schedule F profit per acre was only $51 and once operator labor was taken into account the average grower had an $88 loss per acre. Contrast this with 1999 results of high price and high yields with good growing conditions. The average income per acre broke the $2,000 barrier for the first time with profits being roughly $400 higher per acre than 1995!

The venerable Cornell agricultural economist, the late Max Brunk, used to say, “The best cure for low prices is a low price!” He meant that a low price discourages production, and prices recover. Some older, less efficient, and/or financially stressed producers drop out. Others change to different crops or different varieties of grapes. In some cases this acreage is abandoned, but more often, if on a good site, it can be leased or sold. (Remember the crisis at the low point in 1984? According to the New York Agriculture Statistics Service, between 1985 and 1990, New York lost 28 per cent of the farms growing grapes and 14 percent of grape acreage.) The problem that causes long cycles, which has been recognized with perennial crops, is that high prices signal to producers to ramp up production, but the vineyards planted only come into full production three or four years later. More planting may follow before low prices signal that there is a surplus of production capacity.

This article will now focus on suggestions for growers about how to manage their cash flow and financial resources in such a way as to be able to weather the ups and downs of the grape price cycle. Suggestions are made for three different cases: (1) What growers should do every year; (2) actions to consider in periods of low prices; and (3) actions to consider in periods of high prices.

Every year

Good financial management in periods of low prices really starts with sound financial practices being established and used every year!

• Prepare monthly and annual cash flow projections in December or at least by January. Periodically (monthly or quarterly) record and compare actual expenditures vs. projected expenditures. If you need to borrow operating capital, contact your creditor early to discuss your credit needs. This should have been done already this year!
• Set financial and production goals for next year and five years from now. Goals should be SMART-Specific, Measurable, Attainable (but they should also be set to push you and your employees to higher performance!), Rewarding, and Timed (to indicate the time line for the goal to be accomplished)
• Prepare a prioritized list of capital investments, giving preference to projects that will allow you to increase profits or realize cost savings.

Periods of low prices

• Practice cost control. Look for opportunities to reduce operating expenses while holding yield and brix constant. Cutting cultural costs such as spraying can be counter productive. Some examples of actions that do not affect yield or crop quality:

Ø      Carefully negotiate major purchases, looking for the best deal.

Ø      Take advantages of discounts by timely payment and pay suppliers before interest charges start to accrue.  Don’t pay suppliers with credit cards unless you can pay the balance before interest charges are assessed.

Ø      Try to adjust family living expenses to the extent possible.  Also, can a spouse or another family member find off farm employment?

Ø      Hire less labor and do more of the vineyard work by unpaid family labor.

• Sell non-essential capital assets, e.g. a building lot, machinery, and cooperative certificates.
• Eliminate blocks that are contributing the least to cash flow and liquidate enterprises that are unprofitable. If you are financially able and plan to be in the grape business for the long haul, contract to lease more vineyard acreage in order to make more efficient use of existing machinery and other fixed resources. Remove and replant vineyards whenever possible near the bottom of a down cycle…the lost revenue is not as great when prices are low, and the plantings will come into bearing during the up cycle!
• Cooperative members benefit from receiving payments from past crops in a year of low revenue, which helps to even out their cash flow. Like most risk reduction tools, this has a cost—the opportunity costs of interest on delayed payments.
• Restructure debt: put more debt into longer term and less into short term to lower total payments. (Whether this is a good idea depends partly upon the level and yield curves for interest rates. Since interest rates can be independent of the grape price cycle, you may find longer-term rates to be relatively high. That is definitely not the case now…rates are extremely favorable for restructuring!)

Periods of High Prices

• Pay down principal on debt. This will help to avoid erosion of net worth in periods of low prices.
• Review you tax situation a couple of months prior to the end of your tax year. Make purchases of inputs for next year’s production to the extent permitted by NYS and IRS tax regulations.
• Don’t make investment decisions solely based on avoiding income taxes. Give preference to investments that improve profitability. Don’t get the “New Paint disease”!

Looking ahead

Was 2003 the bottom of a low price cycle? Down cycles usually last more than two years, but history is not a perfect predictor! Some aspects of the current cycle are favorable for higher prices next year. These include a strong economy and consumers’ disposable income is rebounding; a weak US dollar has made exports more favorable and decreased the attractiveness of the US industrial market for imported concentrate; and the glut situation with California juice and concentrate has peaked. We may be looking at a smaller national crop of Concord and Niagara because of vine stress, both east and west, from last year’s large crop.

Some factors, on the other hand, are unfavorable for higher prices. It is noteworthy that there is considerable concern in the industrial Concord market, in which customers were blending larger percentages of surplus California and South American red and white grape concentrates that were being sold at very low prices. The surplus situation in California has abated so that prices are now higher. The weaker dollar makes the offshore concentrate more expensive. The lingering concern is that now that prices of the California and offshore concentrate are higher, will processors return to the stronger flavor of the Concord variety in their product line?

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Recently I was asked about tiling every row in poorly drained Concord vineyards like Ontario growers have done for their wine grapes. I can estimate the yield response needed to make this practice pay for itself.

How much increase in yearly income is needed to pay for this investment? We use a present value table for multiple-year income stream, go down the 9% column down to year 20. The value there is 9.1285 This value means that a steady steam of income for 20 years is not worth 20 times that value but only 9.1285 times (to put it into today's dollars).

To find the breakeven income amount we take the initial cost of $2500 divided by 9.1285 =$273.87 To invest in this project, astute managers would want to get a minimum of $274 in increased income and/or reduced cost yearly. I'm sure that improved water drainage will help allow a wider window of time for equipment. This can prove beneficial for scheduling work and possibly more timely spray programs. At a conservative long term Concord price of $200 per ton we divide $274 by $200/ton = 1.4 t/a increase needed. Higher expected prices would reduce the yield increase needed to be profitable using the NPV method.

Looking at an newsletter article from The Tender Fruit Grape Vine March/April 1997 from Helen Fisher and Hugh Fraser we see an increase in yields in wet vineyard blocks every year but only one year out of five did the yield increase reach or exceed 1.4 t/a. Based on this I would proceed cautiously and look at options for improved drainage at a lower cost per acre.

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Many times discussions about estate planning revolve around the mechanics of transferring assets. Sometimes transfer of the management responsibilities get overlooked. The reason for transferring the assets is for continuation of a viable farm enterprise. Here are some tips to consider while planning any management transfer:

• COMMUNICATE! Don't assume that everyone involved will have the same goals and aspirations as you do. Have business discussions separate from family discussion.
• Sometimes the best person to run the farm is not the obvious person. Not everybody interested in farming will make a good farm manager. Maybe a daughter or nephew would be a better choice.
• Groom your candidate! Allow him increasing responsibilities from year to year. I think a gradual transfer (3-5 years) is best. This allows him to make mistakes on a smaller scale and to learn from them. This approach also allows you to gradually disengage from the day-to-day management of the farm. A sudden turnover of all responsibility could easily overwhelm the candidate and threaten the survival of the farm.
• Continue to be a source of advice when asked.
• Your candidate should have working knowledge of all facets of the business before full transition occurs. I've seen operations suffer rough patches when a son takes over and he hasn't had experience in one critical operation. Everybody has their favorite parts of the business, but don't exclude others from learning that part from you.
• Plan for this day! A mark of a truly successful manager is to prepare for succession and done better slowly than overnight.
• Remember to communicate! Don't let any disagreements get in the way of communication... the business goes on.

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We have production and financial numbers for commercial juice grape growers in the Lake Erie Grape Farm Cost Study (LEGFCS) since 1991. I've recently seen two of the labor efficiency benchmarks continue to set records.

Acre per worker eq. has moved up from the earliest years:

I think 2003's results are partly due to a lot of not harvested acres reducing harvest expenses. Granted harvest was slow and expensive for most of the acres that were harvested. The upward trend is there because most of the same farms are represented from year to year.

When we look at tons per worker eq. we usually see more variation because this ties in yields. However the last few years show high averages despite mediocre yields since 1999:

Notice that tons per worker eq. stayed buoyant since 1999, which was our last large crop.

Labor costs have stayed pretty level for the last four or five years. Many farms seem to average around $500 per acre in labor (both paid and operator). The LEGFCS averages the last couple of years split out around 75% in paid labor and 25% worth of operator labor.

I see room for continued improvement with the average commercial juice grape grower although I expect a few years in the 50+ acres per worker eq. range. Improvements will likely come from more mechanization.

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Laborers being paid piece rates do most of the hand-pruned vineyards around here. In the April 2004 issue of Wine Business Monthly Melinda Warner wrote a good article about "Establishing Fair and Attractive Piece Rate Pay for Vineyard Pruning".

One interesting observation is that managers may want to set different piece rates for different blocks depending on trellis systems and other vineyard conditions. I've considered that growers have probably underpaid for GDC vineyard pruning compared to single curtain vineyards over the years. Maybe growers should look at paying a little less per vine for low-vigor vineyards compared to high-vigor blocks that would take more pruning cuts.

Agricultural labor expect Gregory Billikopf from the University of California, pointed out the best worker in any given crew is 4-8X faster than the slowest worker! That shouldn't be a problem with managers as long as they are doing a quality job. One way to see if your piece rate pay is accurate is to time an experienced worker, or maybe yourself, at pruning three vines from a specific block.

One great resource is the latest edition of Billikopf's book, Labor Management in Agriculture: Cultivating Personnel Productivity. To download a free electronic copy, go to www.cnr.bereley.edu/ucce50/ag-labor/7labor/001.htm

Paid labor is usually the biggest single expense for grape farms. Add in operator labor and unpaid family labor boosts labor cost to 30-40% of total cost for many grape farms.

Any improvements to a large cost factor will help the bottom line. Improvements can mean not only cost reductions but also improved productivity. Spending time and money on renewals and filling in skips will pay off over time.

I've developed "traffic signal" style benchmarks with red meaning weak to poor, yellow meaning OK, and green meaning good to excellent. Out of the current seven benchmarks, labor is directly measured by three of the parameters.

These numbers do allow for hand pruning and still be in the green range. LEGFCS average paid labor has always been in the yellow range.

The Lake Erie Grape Farm Cost Study (LEGFCS) average acres per worker eq. have been over 40 acres since 1994 and up over 49 acres in 2001!

LEGFCS tons per worker eq. averages from 1991 to 2001 have ranged from 208 to 343 primarily depending on average yields.

These calculations should be done yearly and as a 3-5 year average. Growers should try to ascertain trends (favorable or unfavorable) and strive for improvements. Remember a 10% improvement in labor may mean more to the bottom line than a 50% cost reduction in a smaller cost category.

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