Kenrett Y' JeffersonMoore, Jarvetta S' Bynum, and

1
Wine Grape Production A Promising Enterprise
for Small Scale Enterprises in North Carolina?
Kenrett Y. Jefferson-Moore, Jarvetta S. Bynum,
and Jannety M. Mosley Annual Meeting of the
Southern Agricultural Economics
Association February 2 6, 2008 Dallas, Texas
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education aUndergraduate
Research Assistant, bAssistant Professor of
Agribusiness
2
Introduction
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
3
Economic Outlook for N.C.

• The state of North Carolina has experienced
  economic devastation in the furniture, textile,
  and tobacco industries triggered by globalization
  and the outsourcing of jobs.

North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
4
Wine Grape Production

• Wineries have become one of the states major
  components for tourism, which have contributed
  800,000 wine-related tourists to the area.
• As of 2005, North Carolina has 55 wineries and
  350 wine grape producers.
• Ranked 10th in the nation for grape production in
  2005.

North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
5
Wine Grape Production (Cont.)

• First winery founded in 1835 in Halifax County
  (Northeastern North Carolina)
• First variety produced commericially
  Scuppernong, a native Muscadine variety.
• Vinifera grapes, introduced in the early 1970s,
  has sparked expansion in NC Vinifera grape
  production.

Source MKR Research LLC, 2007.
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
6
Wine Grape Production (Cont.)
Source MKR Research LLC, 2007 and USDA - NASS
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
7
Wine Grape Production (Cont.)
Source MKR Research LLC, 2007.
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
8
Purpose and Objectives

• Purpose
• To evaluate wine grape production as an
  alternative or supplementary enterprise for
  small-to-medium scale producers in southeastern
  North Carolina.
• Objective
• To evaluate the profitability of small scale wine
  production in southeastern North Carolina using
  Net Present Value (NPV) and the Modified Internal
  Rate of Return (MIRR) method of analysis.

North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
9
Methodology
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
10
Data

• Data
• Resource requirements (initial investment)
• Gross receiptsa
• Total costsa
• Size of operationb
• Economic life (20 year planning horizon)c
• Discount rate
• Marginal tax rated

Sources a North Carolina Wine and Grape
Council, b 2002 Census of Agriculture, c The
Economics of Wine Grape Production in Virginia, d
Internal Revenue Service (Publication 225)
although a tax rate is used, rates may vary
considerably from investor to investor.
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
11
Data (Cont.)
Vineyard Costs and Returns by Year One Acre
Sources Bean, et al. 2007
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
12
Assumptions

• Assumptions
• 50 acre vineyard
• No yield until the 3rd year
• All production sold at market prices
• Full production begins in the 4th year and
  continues until 20th year
• Machinery reinvestment is ignored.
• Depreciation (assumed to be zero)

Due to non-determinable useful life of
machinery.
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
13
Method

• Net Present Value Criterion
• The NPV method calculates the net discounted
  value of investment options.
• NPV S Pn /(1 i)n C
• where
• NPV net present value
• Pi net cash flow in year n
• i discount rate (where i 1, 2,,n)
• C initial cost of the investment
• n the number of time periods

Source Barry et al., 2000.
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
14
Method

• MIRR Criterion
• The MIRR method solves for the reinvestment rate
  that equates present and future values of the
  proposed investment.
• rm FVCI/PVCO1/n 1
• where
• rm modified internal rate of return
• FVCI future value of cash inflows
• PVCO present value of cash outlflows
• n the number of time periods

Source Barry et al., 2000.
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
15
Results
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
16
Summary of NPV and MIRR
Sources a North Carolina Wine and Grape
Council, 2002 Census of Agriculture, The
Economics of Wine Grape Production in Virginia,
Due to non-determinable useful life of machinery
b Discount rate is assumed to be equivalent to
the rate of return to assets for farm operations
with sales of 100,000 and less, USDA-ERS (2005
Farm Financial Management Report) c Internal
Revenue Service (Publication 225)
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
17
Conclusion
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
18
Conclusion

• It appears as an ideal alternative enterprise for
  small scale growers in southeastern North
  Carolina.
• Although the initial investment is estimated to
  be 230,950, small-to-medium scale growers should
  also evaluate the 20-year economic life of the
  investment. Growers will have to wait at least
  15 years to receive a complete return on
  investment.

North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
19
Conclusion (Cont.)

• Growers should conduct a sensitivity analysis
  considering factors, such as, operation size, tax
  rates, machinery usage, insurance, investment
  capital, cost of capital, educational transition,
  other opportunity costs and so on.

North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education
20
Thank You
Any Questions?
North Carolina Agricultural Technical State
University School of Agriculture Environmental
Sciences Department of Agribusiness, Applied
Economics, Agriscience Education