Napa Vineyard Economics

Tom Wark’s Fermentation The Daily Wine Blog, just released a post telling 30-year-olds to buy Napa Valley or other premium wine grape land to secure their financial future. The point he makes is that no matter what the current cost of getting into this coveted land is, it will be viewed as a bargain within 30 years. I agree with Tom’s overall notion, but what does it actually take? Through this post, I hope to shed some light on the real costs of owning and farming land in the Napa Valley. I think you might see that while it certainly will be worth a lot of money in 30 years, it’s a bit like telling a 30 year old to purchase Berkshire Hathaway stock right now, because it will do well.

For the purposes of this post, I am sticking to rough vineyard economics in the Napa Valley. A lot of the numbers scale to other wine regions (land is often cheaper and fruit prices are incrementally lower), but this post leaves out winemaking, winery, and cost of sales and marketing which dramatically increase the cost of entering the wine business…with no guarantee of a solid return on investment (I’ll post in the future, about the winemaking economics, but simple math in the wine industry is 10 years to paying off your vineyard investment and starting to see a return if you sell out annually of all the wine you personally make off your vineyard- this is way easier said than done).

First and foremost, there just aren’t very many 3-4 acre parcels of either planted or unplanted raw land available in Napa. On top of that it is important to understand that the Napa Valley is one of the most highly regulated and restricted areas of the country to develop land (i.e. it’s costly and risky to take on a project that may not be approved by the County without ample: engineering, erosion, and environmental studies, or support from your neighbors). The Napa County Planning Department has outlined Agricultural Areas in Napa that have different requirements for vineyard and winery development, and as an aside, I know people that have spent more than $500,000 on the: experts, studies, and plans needed just for the permit to plant their hillside vineyard. However, again for the sake of simplification and hypotheticals, let’s assume the parcel exists and look at what it might take to purchase, plant, or farm this piece of land. Here are two examples.

Scenario 1: You’re 30 years old, you want to buy your 3-4 acre piece of un-planted vineyard land in the Napa Valley, in order to plant your vineyard and secure your financial future. Your chances of finding a piece are better in the hills and will cost less money initially. Unplanted land ranges from $100,000/acre-$500,000/acre. Let’s assume you find 4 acres for a quarter of a million dollars per acre. You’ve begged, borrowed, or stolen the down payment. Aside from clearing the land, planting costs on hillside vineyards typically average $100,000 an acre between materials and labor. Annual farming costs can average between $10,000-$40,000 an acre. We’ll pretend you only spend 10K/acre on farming costs, because you are young and doing a lot of the work yourself. It will take 3-5 years before you have a crop worthy to sell to a buyer. Current Napa Cabernet Sauvignon average price per ton is just under $8,000. You will probably get around 3 tons per acre of fruit annually. So after 4 years, lets assume you’ve put in $600,000 for planting, permits, and farming (after down payment and mortgage costs) and you are just starting to net around $14,000 per acre annually. After 11 years, you will have paid off your initial investment (apart from the cost of the property—your rich Uncle is covering that). Over the next 20 years you can work for free and just barely pay off the property, because of that 0% loan. You are definitely doing all of this on the side of your day job, and finally after 30 years you are able to retire glad that you purchased yourself 30 years of extra work.

Scenario 2: You’re 30 years old, you want to buy your 3-4 acre piece of planted vineyard land in Napa. At small scale (less than 50 acres), planted vineyard land runs between $100,000/acre in the remote non-AVA areas up to $1,000,000/acre in prized appellations. The real and current average price of Napa Valley planted vineyard land is between $400-$500 thousand dollars an acre. So, to Tom’s point of doing whatever it takes to secure your financial future…if anyone out there wants to give me 30% equity in a planted Napa Valley vineyard purchase, I’ll oversee the farming, you cover all of the costs of purchasing and farming the land for the next 30 years, I’m in! The truth is most people with that kind of money, don’t need a sweat equity partner involved, as they can typically hire help without giving away large amounts of potential profit. But, just in case, my email address is jake@sanswineco.com

These properties in theory will be worth a lot of money in 30 years, but what it actually takes to make work is almost insane. The key to making money in the wine industry is either scale or creativity. One of those models takes a lot of initial capital, the other is the product of necessity. At Sans Wine Co. we love finding unique ways to provide our customers the opportunity to enjoy premium wines without all of the pretention, false romance, and extra costs that are so prevalent in this industry. Our business model works, but it has taken ingenuity and creativity to move over and around the obstacles and barriers of entry, here in the Napa Valley. We lease rather than own land, we minimize unnecessary farming expenses like harsh chemicals, which end up benefitting our environment and lowering costs. Our packaging is less expensive, and therefore we are able to offer all of our wines at lower costs than they would be otherwise. It’s a false notion that any 30 something person, aside from the most privileged, would be able to afford buying land in our community. Although, if someone wants to give us 2-3 million dollars…we would also bet on land values increasing.