Contracts Satisfying Both Growers & Wineries More Info
Chris Lake, Director, Southern Oregon Wine Institute, Umpqua Community College
Wineries need grapes for the production of wine and vineyard owners need a buyer for their crop. This is the basis for a relationship between wineries and grape growers. The resolution of these two needs appears to be simply a matter of arranging a meeting between each grape grower and a corresponding winery representative where a transaction is arranged to provide for mutually beneficial outcomes. These outcomes happen when a sale and delivery of grapes to a winery occurs.
Contracts
To begin with, any transaction involving the sale and delivery of grapes to a winery is essentially a contract. Although this contract can be conveyed by any means, from a simple phone conversation to a multiple page legal document, the basic nature of the agreement is the same; the grower will receive compensation for the delivery of a satisfactory product to the winery. A contract is: 1) a: a binding agreement between two or more persons or parties; especially: one legally enforceable or b: a business arrangement for the supply of goods or services at a fixed price; 2) a document describing the terms of an agreement.
The nuts and bolts of the contract should be as explicit as necessary to ensure that both parties have a fundamental understanding of the principle elements of grape purchase contract. Some examples of the principle elements include:
- Identity of the grapes subject to the contract. This includes cultivar and location on the grower’s farm.
- Term of the contract – one season or multiple years.
- Price and payment – 100 percent in 30 days or sometimes as long as six months.
- Delivery and acceptance – when, where, and who makes the decisions.
- Grape quality, to include mutually agreeable standards like Brix (sugar), acid, pH, MOG or material other than grape fruit (leaves, stems, insects), defects (disease, bird peck), color, flavor, or any other parameters agreed upon.
- Remedies and dispute resolution. This may include choice of law and venue, force majeure (events beyond the control of either party), security interests for grower (grower’s lien), litigation, arbitration or other means of settling the dispute. Attractive incentives to reward superior quality (i.e. bonus for grapes within narrow range of Brix and pH specifications) and penalties for substandard fruit can be included to mediate minor problems (Goodhue et al., 2002). There are some examples of grape contracts available from knowledgeable sources (for example Dr. Bruce Zoecklein at Virginia Tech has a very thorough sample contract at http://www.apps.fst.vt.edu/extension/enology/extonline/harvest.html).
This list of principle elements may be much more detailed than needed for many grower/winery relationships. Many successful grape purchases are produced by a handshake and a willingness to trust one another. Often, the contract between a grower and winery can be contained within a few pages. All of this discussion can be boiled down to two qualities that are present in all successful contracts: trust and respect. If wineries were to trust the grower to produce and deliver grapes of sufficient quality and growers were to trust wineries to compensate them fairly for the effort, a handshake would be all that is required.
The topic of compensation includes the discussion of price to be paid for the crop. Just how much are grapes worth? Many times, the price paid for the crop is on a per ton basis. The basis for establishing a price is determined by the marketplace. Where there is competition, there will be an easily determined, fair-market value for the crop. For winegrapes, this price will be based on the cultivar and growing region. For some grape growers, an additional consideration is the cost of importing fruit from other states versus purchasing locally grown grapes. As an example, grape growers in Texas must essentially compete with grape growers in California for a share of the market to Texas wineries (Marshall, 2008). The limit to the price paid on a per ton basis to Texas growers is the minimum price that a California grower would charge to the Texas winery (includes transportation). The most effective goal is to achieve a price that will remain fairly stable for many years. This ensures that there will be continued demand from the winery and a reasonable ability to make a profit for the grape grower.
In legal terms, contracts are considered a part of the general law of obligations and the performance of a contract is a duty. The law recognizes breach of the contract, and so does a lawyer. The lawyer may charge a substantial fee to litigate a claim and may also receive a large portion of the award if the case goes in her favor. This scenario is a gloomy picture of what is normally a successful business arrangement. It is presented because it serves to illustrate the point that when misunderstandings occur with grape contracts, the remedies are usually insufficient and expensive. It is likely that the more knowledgeable wineries and growers are in the area of winery/grower contract negotiation (typically called Winery Relations or Grower Relations), the better the outcomes for wineries and growers. To that end, we will revisit the basis of the winery/grower relationship and examine the individual needs of each of the parties.
What Growers Want, What Wineries Want
For growers, grape production is a long-term endeavor requiring significant investment of capital with money flowing in the wrong direction for many years. Eventually, vineyards become self-sufficient and hopefully will become profitable. Growers who have been around long enough to know something about vineyard ownership say that profit is made in vineyards “on the back end” of the productive life of a vineyard. Lenders or owners who supply capital to vineyard operations should also know this, and will seek to encourage long-term contracts for the fruit to match the long-term investments.
But wineries are less enthusiastic about long-term agreements. They seek short-term commitments to find the lowest cost per unit of production until the demand for wine exceeds the supply of grapes coming to the winery. At this point, wineries will seek to lock in supply at whatever terms are available. It is a classic case of the law of supply and demand. When supply is low and demand high, the price of a good rises. For wineries with an established brand of wine, there is some motivation to stabilize the cost of raw product needed for the production (Dillon et al., 1993). However, some wineries do not use price as the primary guide in their vineyard relationships; rather, quality is the driving force, and wineries are seeking long term relationships based on the ability of a wine grower to provide consistently high quality fruit, for which wineries are willing to pay a premium. In either circumstance, it is in the best interest of the winery to secure medium- to long-term contracts at prices that will be sustainable over the life of the contract.
Several other observations on the needs of the two parties should be taken into consideration during contract negotiations. Growers have the following objectives:
- highest return per acre,
- production of fruit at the minimum quality standards needed to satisfy the winery,
- a financially secure winery,
- quick payment terms, and
- a sense of pride in their farming abilities (Walker, 2005).
Typical winery objectives are:
- low cost per unit,
- receipt of fruit of maximum quality to produce wines that surpass the consumer’s expectations,
- payment terms to growers that will not drain the winery’s operating budget during critical periods, and
- cooperative growers who are willing to accommodate winemaker’s requests concerning viticultural practices used to produce the fruit.
When these objectives are compared, it may seem they form opposing positions that would hinder cooperation. Normally, the needs of growers to sell their crops and wineries to buy grapes are greater than the differences between the two parties, thus allowing grape purchase contracts to produce profit and security for both parties (Goodhue et al., 2002).
References:
Dillon, C.R., J.R. Morris, and C. Price. 1993. Effect of grape and other raw material prices on winery profitability. In: Proceedings of the Arkansas State Horticulture Association Annual Meeting.
Goodhue, R.E., D.M. Heien, H. Lee, and D.A. Sumner. 2002. Contract use widespread in wine grape industry. California Agriculture 56(3):97-102.
Marshall, W. 2008. Grape supply dilemma: Should Texas wineries pay higher local prices or buy from California? Wines and Vines June:34-38.
Walker, L. 2005. Grape prices: higher, but high enough? Wines and Vines October:51-55.
Recommended Resources
Sample Harvest Contract, Virginia Tech
Reviewed by Eric Stafne, Mississippi State University and Mark Chien, Pennsylvania State University