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An Economic Analysis of Grape Production for Wine Making in Connecticut

 

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Abstract

The general thrust of this project is to examine how production of specialty crops can contribute to the profitability and sustainability of Connecticut agriculture and thus to preserving farm land. To this end, this initial study will develop a methodological framework that can be used to analyze the economics of a variety of specialty crops. Using the case study of grape production for wine making and the potential "win-win" strategy of locating vineyards in dairy lands, as well as in other types of farms, the specific objectives of this project are to: (1) develop a budget generator suitable to analyze the expected profitability of multiyear specialty crops; (2) estimate cost and profitability of grape production for wine making for representative farms under alternative technological assumptions; (3) examine the potential market for locally produced grapes as an input to Connecticut wine producers; and (4) implement outreach programs to disseminate information concerning the expected profitability and prospects of expanded grape production. Potential beneficiaries include existing grape producers, and dairy and non-dairy farmers interested in the production of grapes for wine making as well as state wineries that will also benefit from increases in locally produced grapes.

Objectives

The Connecticut wine making industry relies heavily on imported juice for its operation and it is under pressure to increase the use of local grapes in order to reap the benefits of labeling their wines 'local.' Grapes for wine making can grow very well on hilly land, which can be found throughout Connecticut. Thus, there appears to be synergy between expanding grape production by using currently idle land and by diversifying away from land currently used to produce feed inputs (i.e., hay and corn silage) in dairy farms. Moreover, entry into specialty crop production could be an important new undertaking for dairy farmers currently facing very difficult times as well for other farmers searching for novel and potentially profitable uses for their resources.

In Connecticut, dairy farming is the backbone of an industry that makes a significant contribution to the State's economy ($1 billion in statewide sales generating 4,000 jobs in 2007). It is also a major land steward for open space (83,000 acres in 2007), a key sector for food security and ensuring the quality of life (DECD, 2008). Yet, this sector continues to decline. A brief period of stability occurred in the late 1990s when the Northeast Dairy Compact was in effect, ensuring adequate returns to dairy farmers. The world-wide economic recession has had a major negative effect on milk prices and farm profitability, a situation that is expected to remain critical over the foreseeable future (Thraen, 2008). Given mounting losses and negative returns for dairy farmers from a low price-high cost trap, Connecticut passed the Public Act 09-229 on July 1, 2009 to try to mitigate a further decline in the dairy sector over the next two years. In this challenging economic period, dairy producers are looking for alternative sources of income that could be derived from their land, labor and other farm resources. At the same time, there is growing interest, from various types of producers, in specialty crops generally and grapes and wine in particular, as revealed by the most recent U.S. Farm Bill (Nelson, 2008). Vineyards add value to the land, lead to more jobs and increase the appeal of rural areas.

The foregoing suggests that there are good prospects to diversify and increase grape production for wine making in Connecticut while also providing new opportunities for dairy farmers and other land holders to become specialty growers. However, there is no economic and market analysis to support the expansion of grape production as a specialty crop in our State. For these reasons, efforts to develop economic analyses concerning alternative ways to utilize available resources, both to inform managerial decisions and guide policy making, are fully warranted.

The general objective of this study is to examine how specialty crop production can contribute to the profitability and sustainability of farming in Connecticut. The information generated will be useful to different types of land holders interested in exploring alternative farming activities. In this initial study, the intention is to concentrate on developing a methodological framework that can be used for a variety of specialty and more conventional crops, but the actual analysis will focus on grape production for wine making.

Early work done at the Department of Agricultural Economics (Bravo-Ureta and Whitham, 1984) showed that, given the technology and prices prevailing in the early 1980s, grape production for wine making could be a profitable alternative in Connecticut. Clearly, the farming and market conditions have changed markedly over the last 25 years, which requires a new look at this situation.

The specific objectives of the study are:

  1. To adapt or develop a budget generator platform suitable to analyze the expected profitability of multiyear specialty crops for a set of representative farms.
  2. To analyze the expected cost structure and profitability of grape production for wine making in Connecticut for the representative farms under alternative technological assumptions.
  3. To examine the potential market for locally produced grapes as an input to Connecticut wine producers.
  4. To develop and implement outreach programs targeted to growers, farm groups and policy makers to deliver information concerning the expected profitability of grape production.

Potential Impact

The principal beneficiaries of this project are Connecticut farmers who currently grow specialty crops, particularly grape growers and farmers considering such undertaking. These producers will benefit from production cost estimates as well as market potential analysis to identify profit opportunities. Farmers who might be interested in diversifying into grape production include the 151 dairy farmers who hold land particularly suitable for growing this crop. In addition, wine making operations will also benefit from the potential increase in local supply of grapes through reduced transportation costs and likely better quality of raw materials which would command higher prices from consumers who prefer local wines. Other beneficiaries include workers to be employed by the subsector and businesses that supply grape production and wine making.

Expected Measurable Outcomes

A major goal of this project is to develop a budget simulator, which is needed to undertake analysis of expected profitability of specialty crops. This analysis will make it possible to prepare economic information to orient farmers, extension personnel and policy makers, concerning the expected profitability of grape production for wine. The results of the model will be shared with the population of CT farmers, both via written documents and in meetings and presentations.

After a review of available statistics it appears that data on Connecticut grape and wine production and marketing is very scarce, so a second goal is to collect the data necessary to establish a baseline for this project. For this purpose, it will be necessary early on to gather information from producers and experts around the state on the following key indicators: Acreage under grape production; Number of grape producers; Average yields for key varieties; Volume of wine produced; Quantity of juice/grapes imported into the state by wine makers, and prices paid and received for grapes and other inputs.

Given the gestation period for an investment in grape production it will not be possible to get meaningful quantitative indicators on changes in acreage, yields or production for both grapes and wine, and number of producers. Nevertheless, data will be collected from farmers participating in extension meetings, at the beginning and end of the project to get an idea of any changes regarding their views on grape production, interest in becoming involved in the industry, and information needs.

A broader and longer term outcome, which again cannot be measured within the life of the project, is increased production of specialty crops and higher farm profitability.

 


 

This summary of An Economic Analysis of Grape Production for Wine Making in Connecticut was written by Boris E. Bravo-Ureta