Mistake Monday: The Vineyard Death Spiral

What does it mean when you have revenues per acre of $6,893 and farming costs per acre of $7,147?  It means you lost a little money.  What does it mean when your leasing cost per acre is $2,514 on TOP of your $7,147 farming costs?  It means you lost a sh*# load of money.  Let’s also say this vineyard has, oh for example, 72.3 Acres.  That would mean that you lost, at least, $200,126.40.  Sh*#. 

What about if you had revenues per acre of $10,041 and farming costs per acre of $6,882?  And that same leasing cost per acre of $2,514?  Well, HAPPY DAYS!!! You made $46,633.50!!! 

Bad news though.  This vineyard we were leasing?  It had a horrible, terrible, no good case of… Vineyard Death Spiral.  In the worst-case year, we were down $200k.  In the best-case year, we were up $46k.  THAT is about as clear and cut as it gets for a case of Vineyard Death Spiral.  Vineyard Death Spiral means that we would literally never get ahead, financially.  We define Vineyard Death Spiral as the downward pointing production value of a vineyard, regardless of the money you spend to turn it around.

making money

There is really only one absolute imperative for making money on vineyard, and I don’t care if you are in Texas or California or New York.  This imperative is as follows: The life of a particular block needs to last at least 15 years.  Around year 10 of a block’s life, it may break even; debts paid back, machinery paid for, etc.  You may have made a few dollars, maybe you lost a few dollars. 

That being said, it is possible to turn a profit in 10 years, but you have to run an ultra-lean farming model.  And that farming model is generally not associated with vineyards, so it has its challenges.  This is why one of our key missions at Apical Texas is to ensure that Texas vineyards last 15-20 years or more.  The current general lifespan in Texas is 10 to 12 years.  If Texas vineyards are not making money, then this industry will either plateau at a certain size or it will deflate.  Neither of those are options for us.

Vineyards have a “life cycle”.  It’s really easy to say how long a vineyard life was 20 years after you planted it.  20/20 vision and all… But projecting the future vineyard life, at year 5?  Well, that requires some skill and good guessing.  Luckily, you don’t have to be an expert or have a PhD for this.  You just have to avoid the “duds”.  See, everybody walks around life looking to pick the winners.  In Silicon Valley, they are looking to pick winners.  In Napa, they are looking to pick winners.  But you literally cannot pick winners without a good deal of luck.  BUT you can avoid picking the losers.  Indeed, a very simple way to improve your success is avoiding the zeros.  Zeros really bring down an average REALLY fast.

For the vineyard, you need to avoid what I call the Vineyard Death Spiral.  Napa and Sonoma are peppered with these types of vineyards.  In Napa, I learned how to avoid picking the duds and at E&J Gallo I learned how get over the emotion of dropping the duds.  I have been part of the Vineyard Death Spiral from several angles.  How you handle it before and during are what will set you apart from the pack.

Vineyard Death Spiral Details

The example that I lead with was a real example with real dollars from a real vineyard and a real lease.  It’s very easy to tell when a vineyard is in tip-top shape.  It’s very easy to tell when it is on death’s doorstep.  But… the in between stages?  That’s not so easy.  But if you haven’t made any money, 4 years into a 5-year lease?  Well, guess what year 5 will be…  This applies just as cleanly to a vineyard that was planted and owned by one person from the start.  Let’s say you planted 20 acres of only Aglianico in 2014, and by 2020, it hasn’t really made any money.  You can’t quite tell if you should keep it or replant it.  Some days you like it, but some days you hate it.  That is the front side of Vineyard Death Spiral.  The backside of Vineyard Death Spiral happens in 2024 you’re trying to lease or sell because you still can’t make any money off of it.  The difference between 2020 and 2024 is only the amount of money you have placed into the Vineyard Death Spiral.

What does the Vineyard Death Spiral look like from the outside?  They tend to be young vineyards where owners are looking to exit.  It seems like it should be working for the owners but it’s not.  Often, these vineyards have some virus, crown gall or something really difficult to battle.  These vineyards can also be middle-aged or older, though they usually show visible signs of decline pretty clearly when they are older.  Commonly, the buyer/lessor (i.e., you or me) repeats the words, “just think of what it could turn into with some love.”  Repeat those words and insert a movie scene from Money Pit with Tom Hanks and Shelley Long.

What’s often misunderstood is that most vineyards begin the Vineyard Death Spiral due to poor management, not the vines nor the site.  And not even the weather.  Sure, you could have problems with those, but honestly, if you have Vineyard Death Spiral, it’s mostly your fault.  It may also be the fault of people before you, but make no mistake, it’s at least partially your fault.  OH SNAP… :-/

A vineyard can be very difficult at times.  The feedback loop between an action taken in the field and the corresponding result is at best, within a few weeks or a season, and at worst, within two to three seasons.  I may apply a specific fertilizer and not see the result until following seasons.  I may adjust my irrigation, only to have a very wet season that completely eviscerates those adjustments.

great, so…

What to do about it?  Well, it may not sound comforting, but you need to focus on the details and the process.  You need to look at the vineyard as a machine.  When you are dealing with situations that have high variability and low certainty, that’s what you need to do.  In technical jargon, this is called operating with incomplete information or information asymmetry.  You literally have no choice but to make decisions, absent good information.  But let’s be honest, this is common in life, not just vineyards.  

You need to look at the vineyard as a machine.

It is because of this information asymmetry in the vineyard that focusing on the details and processes are so important.  Nearly everything we do in the vineyard deals with incomplete information, which is why people are prone to make many guesses or one unified, simple plan and hope for the best.  That approach, though, doesn’t increase your information over time.  If you farm to the average, then the average is self-fulfilling.  It’s math, not a belief.  You never actually get above average, which means you’ve built a perpetual guessing machine — cross your fingers and “may the odds be ever in your favor”.

But, if you bear down on the details and the processes to generate better information and then adapt and learn as that information becomes available, you go from a perpetual guessing machine, to a perpetual improvement machine.  And that right there is the entire crux, and how you can easily spot a vineyard in a death spiral.  If the person managing the vineyard has been doing nothing but pure guessing over time, then it means they are fully reliant on luck.  If that vineyard looks great, it means they had great luck.  If that vineyard looks horrible, it means they had bad luck.  If that vineyard looks average, you guessed it, it means they had average luck.

Vineyards as a machine

How do I know this?  Because short-term success can only be repeated if the manager/owner spot the “how” and the “why” necessary to repeat it.  That’s why I say I look at the vineyard as a machine.  If the manager and owner are building a perpetual improvement machine, it will be obvious over time.  Nobody will want out.  Nobody will give up.  It will be financially viable.  Most winery buyers will be pleased with the output.  It will be getting better as it goes.  New plantings will look better than the old plantings, etc.  This is what I’ll call farming above average.  To be above average, you must produce effort that is above average.  Not complicated.

What about the perpetual guessing machine?  It will be hard to tell which blocks are best.  Employee turnover is likely high.  It may or may not make money.  Some owners may be trying to sell or exit.  Wineries will probably be agnostic about the fruit purchased, at best.  You could also call this the “good enough” machine.  And it can work.  I’m not placing judgment; I’m just clarifying what something is and isn’t.

The thing about vineyards that is particularly crucial is their decline accelerates downward.  It rarely improves upward in an accelerating manner.  The farther it has declined, the harder it will be to get it back upwards.  What makes it even more difficult?  The fact that when you try to turn a vineyard around, it will respond and improve.  It’s possible that it will appear to be working on some level, but still declining on other levels.

I understand all the incentives not to give up on a vineyard or a block.  I really do.  It may have your name on it.  It has dollars in it.  It has sweat in it.  It may even have blood in it.  But if I learned one single thing at E&J Gallo, it’s that cutting losses before they become a money pit is absolutely crucial to surviving in the vineyard business.  In Texas, I know we have a lot of vineyards where it is unclear what to do right now.  There are blocks that are being examined for removal.  People are unsure what to plant back behind it; if they should plant back behind it.  And make no mistake, big and small growers alike are facing the same reality.  AND THAT, is how I know we are currently relying more heavily on luck than process and details.  THAT’S why I see a number of blocks that are “money pits”.

10 lessons learned

Many blocks in the Vineyard Death Spiral can be saved.  That’s not the question.  The question is; how many dollar bills do you want to spend to get there?  Nearly all of the time, the person who takes that journey usually says, “I spent more than I ever should have”.  My hope is that nobody takes the journey and says, “I went broke trying to save it”.

I took over a vineyard that was a money pit.  This vineyard was 75 acres and about 20 years old.  It had Chardonnay, Pinot Noir, and Syrah.  Each season, oscillated around losing money, breaking even, and making money, but mostly lost money.  Before this vineyard, I didn’t really know what Vineyard Death Spiral looked like, but boy, did I learn.  Here are 10 takeaways I saw from it:

  1. Roughly 1/3 of the acres were producing 2/3 of the crop.  Meaning 1/3 of the acres were making money and 2/3 of the acres were losing money.  That’s the opposite of how it should work.
  2. Unintended consequences pop up after you make improvements.  We improved pruning and canopy management practices, boosted fertilizer, and gained the canopy height we needed to carry increased yields.  On the flip side, we broke A LOT of stakes and trellis wire as we increased the canopy mass.  We literally had segments of rows buckle and fall over from the weight because the trellis was the next weak link in the chain.
  3. This vineyard had viruses like Leafroll 2, Leafroll 3, Corky Bark Virus, Stem Pitting Virus, Fanleaf Virus, Fleck Virus, Eutypa, PD, high-ish nematodes, phylloxera, and sodium toxicity.  How’s that for a list?  This long list says one single thing: replanting is the only way to shorten that list of problems.
  4. It takes multiple years to turn a problematic ranch around.  It took me 3 years on this ranch.  You can make changes in 2020, and maybe see some results in 2021, but more likely it will be 2022.
  5. There were several previous managers who clearly spent as little money as possible on the property, which is technically, OK.  It was just an acute problem for me since we controlled the ranch now and had to make up for all that lack of inputs for many years.
  6. You cannot pay more money on the lease than the gal before you, particularly if she was spending as little money as possible on vineyard inputs.  I mean, you can pay more for the lease, you will just lose more money operating it than the previous tenant.
  7. At some point in a vineyard’s life, it becomes a declining asset.  It hits middle age.  If you built it from the start and own it, then you will have a fair idea of when this occurs.  If you take over a 10- or 20-year-old vineyard, you must guess when it hits middle age (or has hit or will hit).  Guessing correctly is very important.  If you guess wrong, then the casino never pays out.
  8. DO NOT, I repeat, DO NOT EVER, let your emotions determine the decisions.  It’s a business play.  It will either work or it won’t.  And if you can’t tell if it isn’t working, assume it isn’t until proven otherwise.
  9. Heavily discount the future possibilities, from the start.  Then discount them some more just to be safe.
  10. Never forget that the “repair” or “renovation” of a vineyard can only be sped up so much.  There’s still a natural process that takes multiple years, no matter what.