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INTRODUCTION - Grape and Wine Research and Development Corporation

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INTRODUCTION - Grape and Wine Research and Development Corporation Powered By Docstoc
					 Capacity Building for Australian Wine Grape Growers Project




            VineBiz
MANUAL FOR THE VINEYARD BUSINESS DEVELOPMENT
    PROGRAM & FINANCIAL ‘READY RECKONER’




                            Version 1.0 (2008)


                                  Prepared By
         Mary Retallack, Garth Swinburn, Charles Drew, Peter Scholefield
ACKNOWLEDGEMENTS
The VineBiz Business Development Program and Financial „Ready Reckoner‟ was prepared by Scholefield Robinson
Horticultural Services as part of the ‘Capacity Building for Australian Wine Grape Growers’ project for Wine Grape Growers‟
Australia (WGGA), funded by the Australian Government Department of Agriculture, Fisheries and Forestry (DAFF).
Scholefield Robinson acknowledges and thanks the following organisations and people who have contributed to the
development of the VineBiz Financial „Ready Reckoner‟ and VineBiz Program.

Project Steering Committee
        Alan Newton (WGGA)
        Mark McKenzie (WGGA)
        Stephen Strachan (WFA)
        Vic Patrick (WGGA)
        Chris Byrne (RWGA)
        Mike Ryan (DAFF)
        Alisha Green (DAFF)
        Robert Stafford (DAFF)

Regional Grape Grower Organisations
        Adelaide Hills Wine Region
        Barossa Wine and Tourism
        Clare Grape Growers Association
        King Valley Vignerons
        Langhorne Creek Wine Industry Council
        Limestone Coast Wine Industry Council
        McLaren Vale Grape, Wine and Tourism
        Murray Valley Winegrowers
        Riverina Wine Grapes Marketing Board
        Riverland Winegrape Growers‟ Association

Scholefield Robinson Team Members
        Peter Scholefield
        Mary Retallack
        Charles Drew
        Garth Swinburn
        Alison MacGregor
        Anne-Marie Broughton

Data Providers
A total of 96 sets of vineyard financial data was provided by grapegrowers or consultants in regions across Australia. The main
data sets analysed were for Sunraysia, Riverland, Riverina and Barossa. Because numbers in other regions were small the
analysis of data from them is less reliable.
We thank all those who provided data, as without willing co-operators, benchmarking is not possible.

Case Study Examples
Scholefield Robinson acknowledges the use of the Case Study examples from the report “Australian Irrigated Horticulture:
Opportunities for Gaining Economies of Scale Through Collaboration” prepared in 2007 by Street Ryan & Associates Pty Ltd for
Mildura Rural City Council/Wentworth Shire Council, funded by DAFF.




DISCLAIMER
While a great deal of care has been invested in the development of this Excel model, Wine Grape Growers’ Australia and
Scholefield Robinson Horticultural Services cannot accept any responsibility for losses arising from the use of it or the
information it contains.
Before using the results of calculations from this model to make important decisions, we recommend that you get your
calculations checked by a professional financial analyst, such as your accountant or farm business consultant.




Page 2                                                                                                  VineBiz Manual, 2008
                                              TABLE OF CONTENTS
INTRODUCTION ................................................................................................................ 7
         Wine Grape Business Analysis ..................................................................................................................... 7
         Vineyard Performance Benchmarking ........................................................................................................... 8
         Relating Wine Price Points to Grape Prices .................................................................................................. 8
         New Vineyard Business Models .................................................................................................................... 8


VINEYARD PERFORMANCE BENCHMARKING ................................................................... 10
         Comparative Analysis (Benchmarking) ....................................................................................................... 14
         Aggregation of Costs ................................................................................................................................... 15
         Assumptions ................................................................................................................................................ 16


WINE GRAPE BUSINESS ANALYSIS (VINEBIZ FINANCIAL ‘READY RECKONER’) .................... 17
         Background ................................................................................................................................................. 17
         Introduction.................................................................................................................................................. 18
         Managing the Vineyard Business ................................................................................................................ 18
         Information Checklist (Basic Analysis)......................................................................................................... 19
         Information Checklist (Advanced Analysis) ................................................................................................. 19
         Entering Data .............................................................................................................................................. 19
         Setting Up.................................................................................................................................................... 20
         Getting Started ............................................................................................................................................ 20
         Printing ........................................................................................................................................................ 20
         Title Page .................................................................................................................................................... 21
         Main Menu................................................................................................................................................... 21
         Report Menu................................................................................................................................................ 22
         Data Entry ................................................................................................................................................... 22


BASIC ANALYSIS .............................................................................................................. 25
         Sheet 1a Basic Data Input – Vineyard Details (Current Year) ....................................................................... 25
         Sheet 1b Basic Data Input – Operating & Overhead Costs (Current Year) ............................................................ 27
         Sheet 2a Basic Data Input – Comparative Analysis (Benchmarks) ............................................................. 28
         Sheet 2b Report – Operating & Overhead Costs ($/ha) (Current Year) ...................................................... 29
         Sheet 3a Report – Gross Margin per Management Unit (Current Year) ...................................................... 30
         Sheet 3b Report – Gross Margin Summary................................................................................................. 31


ADVANCED ANALYSIS ..................................................................................................... 34
         Sheet 4a Advanced Data Input & Report – Management Unit Income & Cost Summary (Current Year) .... 34
         Sheet 4b Advanced Data Input & Report – Detailed Management Unit Gross Margins .............................. 37
         Sheet 4c Entering Details - Detailed Management Unit Gross Margins ........................................................... 39
         Sheet 4d Advanced Data Input & Report – Management Unit Income (Historical Summary) ..................... 40


Page 3                                                                                                                                        VineBiz Manual, 2008
         Sheet 5 Advanced Data Input & Report –Vineyard Data (Historical) ........................................................... 41
         Sheet 6 Advanced Data Input & Report – Cash Flow .................................................................................. 44
         Sheet 7a Advanced Data Input & Report – Statement of Position............................................................... 46
         Sheet 7b Advanced Data Input & Report – Statement of Position (Business & Personal) .......................... 49
         Sheet 7c Advanced Data Input and Report – Statement of Position (Historical) ......................................... 51
         Sheet 8 Advanced Data Input & Report – Financial Summary .................................................................... 52
         Sheet 9 Analytical Tools - Gross Margin & Profitability Sensitivity Analysis ................................................ 55


FURTHER ANALYSIS (ADVANCED) .................................................................................... 58
         Water Decision Chart .................................................................................................................................. 58
         Sheet 10a Water Purchase Calculator (Current Situation) .......................................................................... 59
         Sheet 10b Water Purchase Calculator (With Additional Water Purchase) .................................................. 61
         Sheet 10c Water Purchase Sensitivity Analysis (Wine Grapes) .................................................................. 64
         Sheet 11a Restructuring Cost Calculator (Data Input) ................................................................................ 65
         Sheet 11b Restructuring Cost Calculator (Report) ...................................................................................... 67
         Units of Competency ................................................................................................................................... 69


RELATING WINE PRICE POINTS TO GRAPE PRICES ............................................................ 71
         Introduction.................................................................................................................................................. 71
         Sheet 12a Relating Wine Price Points to Grape Prices ............................................................................... 72
         Sheet 12b Relating Wine Price Points to Grape Prices – Sensitivity Analysis............................................. 75
         Capable and Competent Producers ............................................................................................................ 77


NEW VINEYARD BUSINESS MODELS ................................................................................ 79
         Introduction.................................................................................................................................................. 79
         Current Situation ......................................................................................................................................... 79
         Alternative Approaches ............................................................................................................................... 80
         Case Studies ............................................................................................................................................... 81
         Relation of Wine Grape Transactions to the Value Chain ........................................................................... 82
         Financial Performance of Different Size Vineyards ..................................................................................... 84
         Information Required by Grape Growers to Assess Medium to Long term Viability .................................... 84
         Examples of Case Studies .......................................................................................................................... 87




Page 4                                                                                                                                      VineBiz Manual, 2008
List of Tables
Table 1: Operating (Variable) Costs ...................................................................................................................... 16

Table 2: Overhead (Fixed) Costs........................................................................................................................... 16

Table 3: Financial Analysis Structure .................................................................................................................... 36

Table 4: Ratio Formula & Description .................................................................................................................... 54

Table 5: Competency Standards ........................................................................................................................... 69

Table 6: Australian Wine Grape Production and Price Point Categories ............................................................... 73

Table 7: Differences Between Dialogue and Debate ............................................................................................. 77

Table 8 : Examples of Alternative Ways of Doing Business .................................................................................. 80

Table 9: Examples of Case Studies from Street Ryan Report ............................................................................... 81

Table 10: Value Chain Stage and Alternative Business Structures ....................................................................... 83

Table 11: Financial Viability (Gross Margin and Business Return) for Vineyards of Various Sizes in Riverland
(SA), Sunraysia (Vic), Riverina (NSW), and Barossa (SA) .................................................................................... 84

Table 12: Issues and Implications for Grape growers ............................................................................................ 85




List of Figures
Figure 1: Deciding on Appropriate Water Saving Strategies – Decision Making Chart.......................................... 58

Figure 2: Value Chain Diagram ............................................................................................................................. 83

Figure 3: Some Critical Questions to Ask About Your Vineyard Business ............................................................. 86




Page 5                                                                                                                           VineBiz Manual, 2008
INTRODUCTION
Introduction
The VineBiz Program comprises a range of vineyard business analysis tools that aim to equip wine
grape growers to:

        Analyse their current business methods and models,

        Compare their performance with grape growers from a range of regions,

        Assess opportunities to improve their financial performance, and

        Identify and assess alternative business models and options for the future.

This program is designed to be delivered in a module based format. This allows the content to be split
and staged over a period of time. This will enable regional grape grower associations to present
information sessions or workshops according to demand, using presenters with local knowledge and
regional case studies.
The „VineBiz Program‟ includes the following components:

1.   Vineyard Performance Benchmarking

2.   Wine Grape Business Analysis

3.   Relating Wine Price Points to Grape Prices

4.   New Vineyard Business Models

Components 1-3 are combined into an integrated financial tool for grape growers called the VineBiz
Financial ‘Ready Reckoner’.



WINE GRAPE BUSINESS ANALYSIS
The Wine Grape Business Analysis section of the Financial „Ready Reckoner‟ provides a range of
tools in a standardised template, for growers to analyse their grape growing enterprise in more detail.
The vineyard enterprise is broken down into individual management units (blocks/patches or varieties)
and current data on yield price and costs are entered. The model generates graphical representation
of trends and calculates important financial ratios to guide growers in their decision making.
The Business Analysis component also includes a water purchase calculator tool and a facility to run
vineyard re-development scenarios a part of an upgrading program to improve long term profitability.
Benefits to growers include:
        Analysis of each vineyard management unit, gross margins and profit per variety, per hectare,
         per tonne;
        Simple format to collect and collate vineyard income and operating costs;

        Feedback on gross margins and business surplus/deficit per year;

        Key financial performance ratios calculated

        Advanced analysis of whole enterprise, sensitivity analysis of yield and price; and
        Analysis of water use and purchases and evaluation of re-development scenarios.




Page 7                                                                                  VineBiz Manual, 2008
VINEYARD PERFORMANCE BENCHMARKING
The aim of vineyard performance benchmarking (or comparative analysis) is to identify current income
and operating costs for a range of wine grape enterprises across Australia. A national benchmarking
template and handbook have been developed to assist growers in capturing vineyard income and
operating costs for the past five seasons; this provides a mechanism to observe trends in profitability
within a grape growing business over time.
Where sufficient data is available for different wine growing regions this has been incorporated into the
Benchmarking section of the Financial „Ready Reckoner‟. This allows individual grape growers to
compare their own financial and operating performance with established benchmarks within the same
region.
Benefits to growers include:

        Comparison of vineyard costs of production with regional benchmarks;
        Comparison of key financial performance ratios; and
        A standardised format for comparing data with other growers and regions.



RELATING WINE PRICE POINTS TO GRAPE PRICES
The Ready Reckoner has a component that allows grape growers to relate wine price points to the
price of grapes used to produce wine at a range of price points in the market place. The tool helps
growers understand the wine value chain and assess the degree of profitability of growing grapes for a
specific price point or market, given the current vineyard yields, grape returns and cost of production.
The tool allows growers to analyse specific varieties within the vineyard or to analyse the whole
enterprise using average yields, prices and costs.
Benefits to growers include:
        An understanding of the full costs of producing a bottle of wine and distributing it to the retail
         level;
        The ability to see what range of prices wineries may be prepared to pay for grapes at different
         wine price points;
        The ability to run scenarios on wine price points, grape prices, grape yields and operating costs
         for an individual vineyard or variety.



NEW VINEYARD BUSINESS MODELS
Many vineyards will have to leverage greater economies of scale, increase revenue and maximize
cost efficiencies to become and remain viable in the future.
This component of the VineBiz program allows growers to analyse existing or new business models to
help growers understand how to improve the productivity, profitability and sustainability of their own
enterprise.
Benefits to growers include:
        Provides an understanding of the options available to change the existing business model to
         improve:
         −     productivity and profitability of the vineyard enterprise
         −     flexibility and responsiveness to changing market demands
         −     strength and security during down turns in the industry




Page 8                                                                                  VineBiz Manual, 2008
VINEYARD PERFORMANCE
        BENCHMARKING
Vineyard Performance Benchmarking
Benchmarking allows for a comparative analysis of vineyard performance with some other measure,
for example regional averages or top 25% of growers. Growers are not only comparing their own
performance from year to year but they are comparing their performance with other grape producers.
This Benchmarking Section of the Manual has been divided into two parts;
Part 1.    Collection of financial data using a standardised template to enable analysis of vineyard
           business performance and estimation of productivity and financial performance ratios.
Part 2.    Comparison of productivity and financial performance ratios with others.
In recent years, changing seasonal conditions (drought, water restrictions) and a wine industry down
turn caused by increased supply and reduced demand, have adversely affected the grape growers‟
capacity to generate income and manage their operating costs, particularly the cost of water. The
result of these changes is that past benchmarking data has limited use for future projections.
Recent feedback from growers indicates that operating costs have been reduced almost to the limit
while still growing fruit to specification. Some operating costs, such as annual water purchase, are
hard to estimate as the price of water fluctuates throughout the season. Consequently, the most
important influence on vineyard profit is the ability of growers to generate increased income to cover
costs and to generate sufficient return to the business or family. Consequently, it is important for
growers to have a mechanism to assess their capacity to generate a suitable margin to cover all
enterprise costs (operating, overhead and debt servicing) and to know which management units are
generating sufficient income. This level of detail is covered in the „VineBiz Financial Ready Reckoner‟.
This VineBiz Financial „Ready Reckoner‟ provides a standardised approach to collecting grower‟s
financials and has the capacity to become a powerful tool in the future, allowing growers to measure
their financial performance in a standardised way.
A ‘Regional Vineyard Cost Indicator’ template has been developed to measure Vineyard Gross
Margin (VGM), which will assist grape growers to compare the performance of their vineyard with
other crop production within their business and how their vineyard cost of production compares with
other vineyard operators in the same region.

             Gross Income less Operating (Variable) Costs = Vineyard Gross Margin


Once the Vineyard Gross Margin is known, the capacity of these funds to cover Overhead (Fixed)
Costs can be calculated.


    Vineyard Gross Margin less Overhead (Fixed) Costs = Business Return (Surplus/Deficit)


By presenting data in this way, the grower can determine if the margin produced by the crop is
sufficient to cover both the operating costs and overhead costs (including debt servicing – finance and
interest costs). It is important to maintain this „step by step‟ process so the grower can understand
their financial position clearly.
NB: This calculation excludes depreciation, purchase of capital items and income tax, as these are not
relevant to the vineyard and vineyard business cash situation.
The excel template has been designed to be used in conjunction with these notes, and has been
simplified to collect the raw data needed to carry out these calculations. An example of the full
template used for reporting back to growers can be found in Table 1 below.
In addition to filling out the benchmarking template, each vineyard manager is asked the following
questions about management structure and water use source.




Page 10                                                                               VineBiz Manual, 2008
Vineyard Business Types
                                             Owner/operator who does not employ any outside permanent labour but does
 1. Owner/ Manager, Small Vineyard
                                             use contractors/casuals for some tasks ie harvesting
                                             Owner/operator who has one or two permanent workers (for example vineyard
 2. Owner/ Manager Medium Vineyard
                                             hand or tractor driver) and uses casuals and contractors.
                                             The owner manages the business but employs a full time vineyard manager for
 3. Owner/ Manager, Large Vineyard
                                             operating work, monitoring, planning etc.
 4. Corporate/Investor Owner, Large
                                             Contractors and casuals are also used.
     Vineyard


Water User source
                                             Water is sourced directly from a river or bore. Annual water access fees are
 Private Water Diverter
                                             usually low but pumping costs (power) are high.
                                             Water is sourced from an irrigation water provider who supplies water to the
 Irrigator within pumped districts           farm gate. Annual water fees are usually high but pumping costs (for the
                                             grower) are low


 Table 1: ‘Regional Vineyard Cost Indicator’ Reporting Template – Example with fictional data
                      (Including a ‘step by step’ break down of costs and financial ratio indicators)




Page 11                                                                                                VineBiz Manual, 2008
Page 12   VineBiz Manual, 2008
Page 13   VineBiz Manual, 2008
COMPARATIVE ANALYSIS (BENCHMARKING)
The overall economic performance of a vineyard can be hard to gauge, as there are often multiple
management units (blocks or patches) and each needs to be assessed individually to see if it is
performing to its capacity.
The collection of vineyard Operating (Variable) Costs in a standardised template allows for
comparative analysis (benchmarking) of the performance of a particular vineyard with similar
vineyards in the same region.
To compare the productivity of one vineyard business with another, it is necessary to measure
productivity in a standardised way. This will show how these numbers were derived and allow
benchmarking of results on a per unit basis, for example return per ha (or acre), per tonne, per
megalitre of water or per vine.
The main measures derived in the ‘Regional Vineyard Cost Indicator’ are:
     Gross Vineyard Income (GVI)
     Operating (Variable) Costs
     Overhead (Fixed) Costs
GVI is determined by Production (tonnes) x Price ($/t) received.
     Price received is determined by fruit quality specifications and bonuses/deductions.
     Production is determined by Area (ha) x Yield (t/ha).

Operating costs are affected by:
    The design of the property (ease of management)
     Mechanisation and casual or contract labour costs
     Cost of supplies
     Environmental characteristics including weather events, water availability etc.
     Intensity of operating management (depending on fruit quality and product targets).
     Incidental costs

Overhead costs are affected by:
    Location of the property (land rates)
     Permanent labour costs
     Scale and efficiency of operation (including vineyard size and cost of machinery )
     Risk management policy
     Financial resources and interest rates
     Outsourcing policy
     Machinery repairs
     Off-site administration / legal compliance costs
     Intensity of staff management (staff development, OH&S etc).
It is important to separate Operating (variable) Costs from Overhead (fixed) Costs for the property. In
addition, a good understanding of the profitability of each management unit will assist wine grape
growers to maximise the productivity of a particular vineyard.
An increased awareness of industry benchmarks provides a good „rule of thumb‟ to monitor vineyard
performance.




Page 14                                                                                 VineBiz Manual, 2008
AGGREGATION OF COSTS
The way the „Operating‟ and „Overhead‟ costs are allocated to individual categories will vary
depending on grower preferences. Where possible, try to aggregate individual costs into the
categories outlined in the ‘Regional Vineyard Cost Indicator’ template outlined in Table 1.
There is a range of approaches used for the collection of benchmarking data For example, activity
based systems calculate costings for a pest and disease control program as a combination of
chemical + labour + machinery + % supervisor into a single total.;.
The activity based system does not allow for the separation of labour, materials or machinery costs,
which are important when examining the effects of changing vineyard size, comparing permanent and
                                                                               1
casual labour inputs, purchased and leased machinery, or the use of contractors .
As a „rule of thumb‟, if a particular operation contains a number of consumables (such as chemical,
machinery hire etc), these sub-items should be listed separately. For other tasks that have a large
labour component and little or no consumables, these operations can be listed in separate labour
categories. For example;
1.   Canopy Management
2.   Pruning
3.   Harvesting
4.   Spraying

There may be a number of different labour tasks captured under the labour category. For example,
harvesting includes:
      Manual labour required to hand pick; or
      Mechanical harvesting costs (keep separate from contractor operations),
      Crop estimation
      Maturity sampling
      Removal of damaged crop
      Fruit transport

All other labour tasks that are not included in the four categories above, are collated together under
the following headings:
      Operating Costs
       −    Labour Miscellaneous (Contractor operations, contract gangs, spraying, specialised
            tasks, include casual labour).
      Overhead Costs
       −    Permanent Labour (including owner, manager, foremen, leading hands, operator or
            family labour).
       −    Owner‟s Labour (often this is an estimate). It is important to acknowledge this cost when
            looking at the true costs of running a vineyard.




1
          This is usually analysed by preparing a partial budget, which is outside the scope of this manual



Page 15                                                                                                       VineBiz Manual, 2008
ASSUMPTIONS
                                     Table 1: Operating (Variable) Costs
                 Sub Unit                                  Description of Items to include in Sub-Unit
                                      Mechanical harvesting, hand labour & associated costs including yield estimation,
 Labour     - Harvesting              maturity sampling, late season crop removal (separate from labour - miscellaneous
                                      costs)
            - Pruning                 Pruning labour or mechanical pruning (separate from labour - miscellaneous costs)
                                      Fungicide or herbicide spray application (separate from labour - miscellaneous
            - Spraying
                                      costs)
                                      Shoot removal and trimming, early season crop thinning, moving foliage wires, leaf
            - Canopy Management
                                      removal, tucking, feathering (separate from labour - miscellaneous costs)
                                      Contractor operations, contract gangs, casual labour, leading hands, operator or
            - Miscellaneous
                                      family used for specialised tasks not already listed in specialised labour tasks
 Fruit Transport                      Fruit transport or cartage costs from vineyard to fruit processor.
                                      Research and development, grower organisation levies.                   Often    deducted
 Levies
                                      automatically from grape payments as a $/tonne amount.
 Chemicals                            Fungicide, insecticide, weedicide, bait, pest control
                                      Fertiliser application, foliar nutrient, petiole testing. These tasks are often carried out
 Nutrition / Fertiliser
                                      an on annual basis.
                                      Soil testing, soil amelioration (lime/gypsum), broadcast fertiliser, cover crop/seed,
 Vineyard Floor Management
                                      mulch. These are normally longer term tasks ie not carried out an on annual basis.
 Sundry Materials and Supplies        Sundry hand tools, miscellaneous items, repairs <$100 ea
                                      Oil, gas and grease, basic servicing and maintenance for vineyard machinery
 Machinery Expenses
                                      (tractors, utes, ATV, pumps)
                                      Fuel (diesel or petrol) for vineyard machinery (tractors, utes, ATV, pumps). This is
 Machinery Fuel
                                      separated to facilitate environmental accounting.
 Machinery, Plant & Equipment Hire
                                      Water delivery costs and electricity to power pumps (include water rates or standing
 Water and Drainage Costs
                                      fees)
                                      Annual water lease (permanent water purchases should be recorded separately as a
 Water Lease
                                      capital expense)
                                      Vineyard repairs and maintenance including re-planting dead vines, trellis repairs (do
 Vineyard Repairs & Maintenance
                                      not include major capital expenses).



                                       Table 2: Overhead (Fixed) Costs
                Sub Unit                                  Description of Items to include in Sub-Unit
                                     Permanent management (including owner or manager who predominantly manages
 Permanent Management
                                     rather than carrying out 'hands on' tasks).
                                      Estimation or actual. Don‟t duplicate this amount if it has already been captured in
 Owner's Labour
                                     'Permanent Management'. A calculator is supplied in the data collection template.
                                     Don‟t include water rates (or standing fees) insert these costs into water and drainage
 Land Rates and Taxes
                                     costs (operating).
 Power (Buildings)                   Electricity (other than power used for pumps/irrigation system)
 Insurance                           Public liability, property, contents or crop Insurance
 Professional Services               Consultant, research, accountant, legal, secretarial, auditor
 Office/Administration               Phone, software, stationary, postage, registration
 Lease or Rent Payments              Land or machinery
 OH&S Requirements                   Personal Protective Equipment (PPE), fire extinguishers, safety signage
                                     Human resource costs, staff training, subscriptions, memberships, course fees, travel
 Staff Development
                                     and accommodation
 Environment                         Revegetation, water treatment, catchment management
 Overhead Repairs & Maintenance      Fences, roads, firebreaks, sheds, grounds
 Debt Servicing                      Interest paid on loans, bank fees & charges. Do not include capital or principal
 (Interest and Finance Costs)        repayments.




Page 16                                                                                                    VineBiz Manual, 2008
Wine Grape Business Analysis
(VineBiz Financial ‘Ready Reckoner’)
BACKGROUND
The „VineBiz Financial Ready Reckoner’ is a financial modelling tool designed to help wine grape
growers analyse their current business model, determine changes that will improve financial
performance and vineyard sustainability, and assess alternatives that can enhance profitability over
the longer term.
                                                                  ®
The Ready Reckoner comprises a sequence of Microsoft Excel spreadsheets. Use of the Ready
Reckoner will require a basic familiarity with Microsoft Excel. These sheets are intended to be easy to
use, whilst providing the degree of sophistication necessary for growers to identify and make decisions
involved in managing wine grapes.
The VineBiz Financial „Ready Reckoner‟ can generate reports suitable for vineyard business record
keeping and presenting to bankers or other finance providers.
The requirements of each grower will vary and the spreadsheets are designed to allow for this
flexibility. Spreadsheets can be used to track the production of up to ten management units for an
individual vineyard on an annual basis. Historical data for the last five seasons can also be captured
and analysed for the vineyard enterprise.


      Before using the results of calculations from this model to make important financial
      decisions, we recommend that you get your calculations checked by a professional
            financial adviser, such as your accountant or farm business consultant.



The VineBiz Financial „Ready Reckoner‟ can be used to compare the health of a vineyard business
from year to year (internal comparison). It can also be used to compare the business with other
vineyards (external comparison) in the same region.

The costs associated with wine grape production are not difficult to calculate and can be sourced from
annual tax returns for the vineyard business. They can be readily compared with the benchmarks in
the Ready Reckoner, to indicate whether there is scope for improvement




Page 17                                                                             VineBiz Manual, 2008
INTRODUCTION
The VineBiz Financial „Ready Reckoner‟ includes a number of topics that aim to improve a grower‟s
understanding of the financial status of their business.
A break down of individual topics includes:
     Management Unit Income Summary to track the production and return from individual
      management units (block/patch/variety).
     Cost of Production Data including allocation of operating and overhead costs for calculating
      the Gross Margin.
     Benchmarking the performance of your vineyard with those from the same region, other
      regions and major international competitors.
     Detailed Management Unit Analysis, which captures all of the costs involved in operating a
      particular block/patch and analyses the profitability using Gross Margin calculations.
     Detailed Vineyard Analysis, which compares production income and costs over the last five
      seasons.
     A Water Purchase Calculator to help determine if extra water is justified and to calculate the
      cost benefit of this decision.
     Cash Flow Budget to plan for income, expenses and financing requirements throughout the
      year.
     Statement of Position that lists all assets and liabilities.
     Financial Summary
A range of analytical tools are offered, which include:
     Gross Margin & Profitability (Sensitivity Analysis)
     Current Water Use and Purchase Requirement analysis
     Water purchase (Sensitivity Analysis)
     Re-structuring (Cost Comparison). Planning and calculating Restructuring costs and time
      taken to get back into full production to achieve longer term profitability of particular
      management units.
     Relating price paid for fruit to end use ($/tonne Vs $/bottle)
     Alternative Business Models



MANAGING THE VINEYARD BUSINESS
The aim of sound economic management of a property is to generate adequate returns on funds
invested to meet the financial and other goals of the vineyard owner. The success of the business will
depend on the skill of the owner/manager but will be also dependant on a number of external factors
such as market forces, exchange rates and extreme seasonal conditions like drought.
When times are good a „gut feel‟ is often sufficient to assess how well the business is travelling, and
sometimes less attention to detail is required.
In harder times, the ability to understand the financial workings of a vineyard business becomes much
more important. This can be difficult if is the grower‟s focus is on growing grapes rather than
„managing the business‟.
To be able to manage a business effectively, it is important to measure productivity in a standardised
way, for example, return per ha (or acre), per tonne, or vine. It is important to know the break even
points and to be able to benchmark them against industry standards.
The overall economic performance of a vineyard property can be hard to gauge, as there are often
multiple management units (block or patches) and each needs to be assessed individually to see if
each is performing to its capacity.



Page 18                                                                             VineBiz Manual, 2008
It is important to identify vineyard expenses and to separate capital and overhead (fixed) costs from
operating (variable) costs for the property. In addition, a good understanding of the profitability of each
management unit will assist growers to maximise the productivity of their vineyard.
An increased awareness of industry benchmarks will provide a good rule of thumb to monitor a
grower‟s performance.



INFORMATION CHECKLIST (BASIC ANALYSIS)
Information required to enter into the worksheets are listed below.
1.        Vineyard Details
               Size of property – area in production, area not yet in production
               Management unit details (Block or Patch name and variety)
2.        Current Income
               Income (tonnes per management unit and $/tonne per variety)
3.        Current Costs (Operating and Overhead)
               Expenses breakdown (from tax returns (P&Ls) or farm records)



INFORMATION CHECKLIST (ADVANCED ANALYSIS)
1.        Cash Flow (a monthly summary of all income and expenses for a 12 month period)
2.        Assets and Liabilities (Balance sheet or Statement of Position)
               Vineyard asset value (estimated market value).
               Vineyard liabilities
3.        Financial Summary
               Off-farm income (if important to viability)
               Drawings (from P&L or records)
               Depreciation (from P&L)
4.        Water Entitlement and Current Allocation
               Current Water Allocation. Reduction due to water restrictions?
               Additional water purchase required?
5.            Restructuring
Price paid for grapes ($/tonne) Vs $/bottle



ENTERING DATA
You will need a basic knowledge of Microsoft Excel to be able to use the VineBiz Financial Ready
Reckoner. This program is designed to be intuitive and avoid repetition of data entry where possible.
If you do not have access to a computer or do not feel confident using Excel you may prefer to have
someone enter the data for you. This can be achieved by recording your figures by hand on the data
entry sheets (Sheet 1a and 1b).
A range of people are available to assist you in entering your data. Potential options include:
     Rural financial counsellor
     Local accountant
     Bank Manager



Page 19                                                                                VineBiz Manual, 2008
SETTING UP
It is a good idea to Print this file to make the instructions easier to refer to when working on specific
spreadsheets.
If you are not confident with making management decisions and developing budgets, the „VineBiz
Program’ or publications that explain the process would be a good investment. This manual focuses
on identifying business decisions that may need to be made to remain profitable. It can also be used
for a range of other uses, including capturing benchmarking costs and gross margins on a regional
basis.
Copy all files from the CD-ROM to your hard drive and put the original version of the software
somewhere safe, in case you change some of the structure by mistake.



GETTING STARTED
    To open the file double click on the icon titled      VineBiz Financial Ready Reckoner V1.xls



You will be presented with a security warning. Click on
the „enable macros‟ button and the program will open.




PRINTING
Click the Print icon to print out all pages in a particular section or go to File then Print
and select the pages you want to print.


You can check the print area using the print preview function
(on the „tool bar‟ go to the print preview icon) or go to (File,
then Page Setup, Page, then Print Preview).



To print these sheets out in black and white;
go to page preview, set-up, sheet and press
the „black and white‟ box. Un-tick the box if
you would prefer to print in colour




Page 20                                                                                   VineBiz Manual, 2008
TITLE PAGE
To enter the „VineBiz Financial Ready Reckoner‟ press on the Main Menu button.




MAIN MENU
The menu is designed to help you navigate your way through the „VineBiz Financial Ready Reckoner.
Each of the headings listed below are embedded with a „hyperlink‟ that will automatically forward you
to the appropriate page. Press on the coloured tab to go directly to the desired page.
It is also possible to navigate to the Report Menu by pressing on the button at the bottom of the
screen.
The menu is arranged in three sections
     Level 1 – Basic Data Input and Report for current year
     Level 2 – Advanced Options and Reports
     Level 3 – Analysis Tools (for the Vineyard Business)
This menu aims to be intuitive. The benchmarks provided on the right of the Basic Data Input and
Advanced Options buttons show you what calculations can be performed with the data requested at
each stage.
Data input requirements for each stage are detailed further in these notes.
To start press on the Start button or on the Basic Data Input button.
The light blue panels will populate when you input the data required to generate these outcomes.




Page 21                                                                            VineBiz Manual, 2008
REPORT MENU
The Report Menu can only be accessed through the Main Menu. It is presented in the same format as
the Main Menu with Basic Data Input, Advanced Options and Analytical Tools.
The buttons are titled with different reports options that can be printed out as required. In some cases,
additional data needs to typed in prior to printing out.
You can return to the Main Menu by pressing on the button at the bottom left of the screen. This menu
remains standard throughout the VineBiz Financial Ready Reckoner.




DATA ENTRY
You are not required to enter data in the first three pages of the model.
These are:
     Cover page
     Main Menu (with links to other sheets)
     Report Menu (with links to other sheets)
The sheets in the excel spread sheet are protected so formula cannot be altered. White cells
highlighted with an orange border require data input and are unprotected.

                                             Data Entry Cell

There is a range of data entry sheets available depending on your requirements (you may not choose
to do them all).
To get started you will need to input data into two Basic Data Input sheets (Sheet 1a and 1b) on the
next page:




Page 22                                                                               VineBiz Manual, 2008
BASIC DATA INPUT SHEETS (SHEET 1A AND 1B)




Data entry into these sheets will allow you to print out a range of reports. Following on from this, you
may wish to go to the advanced options section on the Main Menu. This will allow you to input
additional data and provide additional reporting options.




Page 23                                                                              VineBiz Manual, 2008
BASIC ANALYSIS
Basic Analysis
SHEET 1A
BASIC DATA INPUT – VINEYARD DETAILS (CURRENT YEAR)
This sheet can be accessed from the main menu by pressing the START button.
The first data entry sheet asks you to nominate the Vineyard or Business Name,
enter today‟s date and management unit details. This information is
automatically copied to other sheets within the VineBiz Financial „Ready
Reckoner‟ (you will not need to repeat this).
Enter individual management unit (block or patch) names, variety names,
management unit area (in or out of production) in hectares, tonnes produced per
management unit and the amount paid per tonne.
(NOTE: Do not input total proceeds per management unit here, this will be calculated
automatically).


      NB: To convert acres to hectares divide by 2.47. ie 5 acres ÷ 2.47 = approx 2 hectares




Back and Next Buttons
The Back and Next buttons move you through the sheets within the VineBiz Financial Ready
Reckoner. To move from sheet to sheet, press the appropriate button. These options are standard for
each sheet from this point on. As well, you can choose to go back to the Main Menu by pressing the
Main Menu button.




Page 25                                                                           VineBiz Manual, 2008
Entering Data
Basic Data Input – Management Unit Details and Proceeds – Current Year
Start data input by entering crop details for your vineyard into Sheet 1a above. This will enable you to
assess the performance of different management units in a particular season and to document areas
taken in or out of production.
     Vineyard/Business Name: Enter the name of your Vineyard or Business. This will link
      automatically to the other sheets and will not need to be repeated for each sheet.
     Management Unit Name: In the first column enter the management unit (block or patch)
      name. There are no restrictions on descriptors.
      −     You can enter data for up to 10 different management units. Start at the top row of the
            table and work downwards, leave the remaining cells blank.
      −     If you have two varieties in a particular management unit you may wish to name the
            management units slightly differently eg Block or Patch 1A (Chardonnay), 1B
            (Colombard), etc.
      −     If more than 10 management units or varieties are planted, it is often the case that some
            of them are small. It would be easier and acceptably accurate for financial planning
            purposes, to combine the smaller plantings into one management unit or variety
            summary, with combined totals.
     Wine Grape Variety: In the second column enter the variety grown in that particular
      management unit. There are no restrictions on descriptors.
     Area in Production: Enter the number of hectares of each variety planted. If some of your total
      cropping are has been taken out of production this can be captured in the second column.
     Area not yet in Production: Enter the number of hectares within a management unit that are
      not currently in production. This may be due to less water being available and as a result these
      sections being put „on hold‟ until more water or financial resources are available to manage the
      full management area. Alternatively, these management units may be in the process of being
      re-worked and may not yet be of bearing age. Keep in mind this will result in the apportioning of
      any operating or overhead costs to the management units that are in production, even though
      maintenance and some ongoing management of these sections may be required. This cost will
      be added to those management units which are currently producing grapes.
     Price per tonne: Enter the appropriate price per tonne for each variety or crop. This may be
      sourced from an ongoing purchase contract or estimated on anticipated success on the „spot
      market‟. The sheet will automatically calculate the proceeds ($) from each production
      area on subsequent sheets.


Where Can I Find This Information?
Some growers may use record keeping software that reports the vineyard cost of production on an
annual basis. This data can be used to aggregate the data into the sub-categories listed on the
relevant page in the VineBiz Financial „Ready Reckoner‟. Remember that once data is combined or
aggregated, it is hard to separate out again unless you have a good feel for the individual costs
involved.
Some growers will keep a hand written ledger or costs or a collation of receipts for a particular year
and this can form the basis of these calculations. This information is required by your accountant at
tax time. An alternative method is to use the Vineyard or Business ‘Profit and Loss’ statement
produced at tax time by your accountant as a reference. This is a statement that is readily available to
all grape growers and is a good starting point for understanding your cost of production. However, the
accountant may use different categories than the VineBiz calculator.




Page 26                                                                              VineBiz Manual, 2008
Profit & Loss (or Income) Statement
The profit and loss statement is a statement of income and costs that shows the results of vineyard
operations in a set period of time. It is also called the income statement, the profit and loss account or
the revenue statement. It is the statement of financial performance or profitability.


SHEET 1B
BASIC DATA INPUT – OPERATING & OVERHEAD COSTS (CURRENT YEAR)
This report can be accessed by pressing on the „Next’ tab at the bottom of the previous page.
This sheet requests a break down of your operating and overhead costs for the whole vineyard. For
more information on aggregating these costs see the section on benchmarking earlier in this manual.




Owner’s Labour
It is important to allocate a value to owner‟s labour (if this has not already been done in Permanent
Management). A cost calculator is included at the bottom of sheet 1b. To access this calculator press
on the button to the right of the „Owner‟s Labour‟ sub unit.
To use the calculator, estimate the percentage of time spent running the vineyard over the year, select
a base salary from the drop down list (this starts at $40K) and the salary (including „on costs‟ is
calculated and automatically updated into the worksheet. To return to the worksheet press on Back to
Overhead Costs Worksheet button.




Page 27                                                                                VineBiz Manual, 2008
SHEET 2A
BASIC DATA INPUT – COMPARATIVE ANALYSIS (BENCHMARKS)
This report can be accessed by either pressing on the „Next tab at the bottom of the
previous page or by pressing on the following button from the Report Menu.
This sheet automatically converts your operating and overhead costs per management
unit, to per hectare. This allows for comparison between vineyards with a standardised
unit or reference.
You are directed to Choose a Region from the drop down menu. You can toggle
between regions to get a feel for the low, average and high costs listed in the sub-
categories for both Operating and Overhead costs.
If you are not able to break down your
operating and overhead costs into
these categories, but your total costs
for each are comparable to one of the
benchmarks, you may wish to use the
breakdown       presented     in   the
benchmark data.




Benchmarking Data
The benchmarking data imbedded in the VineBiz Financial Ready Reckoner was sourced from
growers representing a number of regions in the 2006/07 season. As an outcome of this initial
benchmarking survey a number of modifications have been made including the addition of a number
of new sub-categories for both Operating and Overhead costs. Where these new categories have
been added there is not yet any data available (this may be added in future updates). These cells are
marked with „new category‟.


Page 28                                                                           VineBiz Manual, 2008
SHEET 2B
REPORT – OPERATING & OVERHEAD COSTS ($/HA) (CURRENT YEAR)
This report can be accessed by either pressing on the „next‟ tab at the bottom of the
previous page or by pressing on the following button from the Report Menu.
This report is automatically calculated from data entered previously. You can navigate to
this page by pressing the Next button from the prior sheet or going to the Report Menu
(via the main menu).
This report gives you a feel for what the most expensive costs are for both Operating
and Overhead costs.
„Big ticket‟ items may include machinery hire, water lease (operating costs), permanent
labour and overhead repairs and maintenance. The largest cost categories will depend on the way the
vineyard is managed.



           Reducing your operating costs will positively influence your Gross Margin.

          Reducing your overhead costs will positively influence your Vineyard Return.



Both of these terms will be discussed in more detail in the advanced options section.




Page 29                                                                             VineBiz Manual, 2008
SHEET 3A
REPORT – GROSS MARGIN PER MANAGEMENT UNIT (CURRENT
YEAR)
This report can be accessed by either pressing on the „Next tab at the bottom of the
previous page or by pressing on the following button from the Report Menu.
This report is automatically calculated. It provides an estimate of the Gross Margin
(income less Operating Costs) per management unit as a total by $ per hectare.
Gross margin is a widely accepted measure of the return a particular crop generates,
once operating costs are deducted. This indicates if particular management units are
„paying their way‟ and if sufficient proceeds are left over to service overhead and debt
requirements.
The Gross Margin is the income produced by a particular management unit or vineyard, less all the
direct cash costs of production, including chemicals, labour hire and machinery operating costs.
Remember that costs such as permanent labour (owner‟s salary), debt servicing, depreciation or
financial costs have not yet been deducted, so the Gross Margin may look quite healthy.
The Gross Margin will highlight any management units that are not generating sufficient income to pay
for the costs associated with their production. This may be due to a number of reasons including
apportioning operating costs evenly across all management units, even if these costs haven‟t been
expended on a particular management unit, e.g. a young management unit still coming into full
production or an old management unit that has become unthrifty. To fine tune the apportioning of
these costs go to Sheet 4a: Advanced Data Input & Report – Management unit Income & Cost
Summary (Current Year).




Page 30                                                                             VineBiz Manual, 2008
SHEET 3B
REPORT – GROSS MARGIN SUMMARY
This report can be accessed by either pressing on the „Next tab at the bottom of the
previous page or by pressing on the following button from the Report Menu.
This report provides a standardised way of showing yield per management unit and
income for the year. It is a valuable snapshot when looking at the variation between
management units and can assist in fine tuning management decisions for different
management units.




Page 31                                                                         VineBiz Manual, 2008
For a quick snapshot of how income (yield and $/tonne) impact on
your gross margin you can see this relationship by going to the
Gross Margin and Profitability Sensitivity Analysis (from the Main
Menu).
High operating costs may be a reflection of additional water purchase required to produce the crop,
given the current water shortages.
For a more detail calculation of water budget go to the sheet titled
Advanced Data Input & Report - Water Purchase Calculator
(Current Water Use) or go to the main menu and press this
button.




Page 32                                                                          VineBiz Manual, 2008
ADVANCED ANALYSIS
Advanced Analysis
SHEET 4A
ADVANCED DATA INPUT & REPORT – MANAGEMENT UNIT INCOME
& COST SUMMARY (CURRENT YEAR)
This sheet can be accessed by either pressing on the „Next tab at the
bottom of the previous page or by pressing on the following button from the
Main Menu.
Alternatively, this sheet can be accessed via the Report Menu by pressing on the
following button.
This sheet has been automatically populated with your details, production per
management unit and the price paid for fruit ($/t) entered earlier. The summary of
vineyard operating and overhead costs is automatically transferred from the basic data input sheet.
These costs are automatically allocated on a per hectare basis across all producing management
units.
This sheet provides a summary of production, proceeds and costs per management unit, per hectare
and per tonne. It also provides a break down of the costs and how they relate to gross margin per
management unit (Gross Margin = Income less Operating Costs). It also shows how Overhead Costs
impact on vineyard return.
If some management units have received specialised treatment (ie hand clean up at pruning time,
canopy manipulation etc) and you wish to juggle these costs between management units, you can
change the total for each sub-category in each management unit.
Input these changes into the data entry cells (white with orange border).

                                             Data Entry Cell

A revised sub-total will appear on the right hand column titled. This will be automatically calculated.

                                         Manual Override Totals

It is important to make sure the manual override total for each sub-unit equals the original value (in the
right hand column) otherwise the calculations will be skewed. If you wish to re-enter the original value
this can be done by selecting the value from the drop down list located at the right hand side of the
cell.




Page 34                                                                                VineBiz Manual, 2008
Page 35   VineBiz Manual, 2008
The vineyard financial summary provides a step by step account of where the costs are and how this
impacts on the income either for a particular management unit or the whole vineyard. The following
equation will be used throughout the rest of the VineBiz Financial Ready Reckoner.



                                       GROSS VINEYARD INCOME
                                   less VINEYARD OPERATING COSTS
                                    equals VINEYARD GROSS MARGIN
                                   less VINEYARD OVERHEAD COSTS
                                        equals VINEYARD RETURN
                                   less INTEREST AND FINANCE COSTS
                                        equals BUSINESS RETURN



                                   Table 3: Financial Analysis Structure

     Financial Analysis Sequence                                     What does this tell me?

                                      This is the total income generated for a management unit or vineyard. It funds all
                                      costs (operating costs, vineyard overheads, interest and finance costs), and in
 GROSS VINEYARD INCOME
                                      some cases principal repayments, capital purchases, personal drawings and
                                      income tax.

 less VINEYARD OPERATING              Vineyard operating costs are those costs which directly contribute to the growing of
 COSTS                                the crop.

                                      The gross margin is calculated by subtracting operating costs from income. This
 equals VINEYARD GROSS MARGIN         provides an initial indication of the level of profitability of all management units and
                                      if they can are provide enough revenue to cover additional expense obligations.

                                      Overhead costs are those costs which are not usually directly related to the
 less VINEYARD OVERHEAD COSTS         growing of a crop. These costs are required to maintain the running of the business
                                      regardless of the area in production.

                                      Vineyard return is the Vineyard Gross Margin less Vineyard Overhead Costs. This
                                      indicates if both operating and overhead costs can be serviced and what Vineyard
 equals VINEYARD RETURN               Return (surplus or deficit) remains. It is important to have sufficient buffer to allow
                                      for interest and finance costs and any other costs which need to be serviced from
                                      this amount.

 less INTEREST AND FINANCE            This is the cost of servicing all loans in a particular year but does not include
 COSTS                                principal repayments.

                                      Business return is the amount left over after operating, overhead and interest and
 equals BUSINESS RETURN (not          finance costs have been subtracted from income. Principal repayments, capital
 steady state)                        purchases, personal drawings and income tax are usually paid from the business
                                      return unless they can be funded from off farm income.

                                      Capital obligations include principal repayments reduce the loan principal
                                      outstanding and thus liabilities and capital purchases (or transferring amounts into
 less CAPITAL OBLIGATIONS
                                      a sinking fund for capital purchases) to allow for replacement of machinery and
                                      equipment necessary for efficient farm operation.

 equals STEADY STATE BUSINESS
                                      Required for personal drawing and income tax unless funded from elsewhere
 RETURN




Page 36                                                                                                VineBiz Manual, 2008
SHEET 4B
ADVANCED DATA INPUT & REPORT – DETAILED MANAGEMENT
UNIT GROSS MARGINS
This sheet can be accessed by either pressing on the „Next tab at the
bottom of the previous page or by pressing on the following button from
the Main Menu.
Alternatively, this sheet can be accessed via the Report Menu by pressing on the
following button.
If you have used a computer-based program to analyse production input costs and
breakdown individual inputs that collectively contribute to sub-category totals, this
section may be of interest.




Page 37                                                                            VineBiz Manual, 2008
Page 38   VineBiz Manual, 2008
SHEET 4C
ENTERING DETAILS - DETAILED MANAGEMENT UNIT GROSS MARGINS
Income
   Income: You may enter the destination of your grapes into more than one category – Fruit
    Purchaser #1 and #2.
   This allows you to enter two different destinations for your crop. For example, you may have a
    certain tonnage contracted to a grape purchaser such as a winery, while any surplus crop is sold
    on the spot market at a different price point. You can choose to enter your income either in
    Product Destination 1 or 2. Enter the details in the columns provided (you don’t have to fill in both
    cells if not required).
    $/t: You can choose to enter your income either in Product destination 1 or 2.
   Levies: Levies are often deducted by the buyer of your crop and paid to levy organisations on
    your behalf. Wine grape levies are calculated on a tonnage and an area basis, with the former
    incorporating a sliding scale. This may be either a compulsory or voluntary („opt out‟) levy.
    Examples of levies include State and National grower body levies, Research and Development
    levy, Phylloxera Board levy etc. These levies are generated to provide a range of services back to
    growers.
The worksheet will automatically calculate the gross income for the management unit and gross
income per ha. The next step is to capture the operating costs.

Operating Costs
Each operating cost can be grouped into categories. Each section requires information to be inserted
at several points.

Chemicals and Fertilisers
For convenience with sprays and fertilisers, variable costs are calculated as:
      The product
      Number of Applications
      Application Rate
      Cost per Unit (ie, No. x Rate x Cost).

These prices are accurate as at June 2008. However, with fluctuating costs for chemicals and
fertilisers it is worth checking the most recent costs with your local reseller.
For each section there is either a drop down list of products supplied or you can input the name of a
product of your choice (if it doesn‟t appear on the list).
Application Rates and cost/unit information is embedded in the worksheet for each product on the
drop down list. When you choose a particular product from the drop down list, this information will
update automatically. If you choose to enter your own product, you will need to input these figures
manually.
For chemical application (pest and disease sprays), you will need to nominate the water rate used
L/ha) dilute spray volume. For more information about water rate, see the following websites
http://www.awri.com.au/agrochemicals/spray%5Fdiary/ or http://www.awri.com.au/agrochemicals/spray_diary/CF.asp. For
fungicide sprays this is often in the range of 300L/ha up to 2000L/ha depending on the size of the crop
and the spray unit used.
For herbicide sprays, you will also need to estimate the % area sprayed i.e. this will differ if you are
spraying under vine or tree as opposed to spraying out the mid-rows.




Page 39                                                                                       VineBiz Manual, 2008
Other Operating Costs
Continue to work through the rest of the sheet and include pruning, harvesting, contract operations,
canopy management, machinery and water costs. It is designed to be reasonably intuitive.


                         Make sure all units are converted to units or $/ha
The worksheet calculates totals automatically. You may be interested to see where your most
expensive variable costs are, typically the largest costs are labour and water related (depending on
your property).

Break Even Points
Return per Megalitre ($/ML) of water is a good way to monitor the financial benefit per unit of water
purchase or used. In addition, break even points are provided either as a t/ha, $/t, or a comparison of
Product Destination. This helps to determine the minimum point at which the management unit
generated income. Remember, this covers operating costs only - overhead costs are not yet included
in the analysis.



SHEET 4D
ADVANCED DATA INPUT & REPORT – MANAGEMENT UNIT INCOME
(HISTORICAL SUMMARY)
This sheet can be accessed by either pressing on the „Next tab at the
bottom of the previous page or by pressing on the following button from the
Main Menu.
Alternatively, this sheet can be accessed via the Report Menu by pressing on the
following button.

This sheet allows you to input historical information for a particular management unit for a total of 10
seasons in the following categories:
     Insert the first year of production under the „Vintage‟ column (the sheet automatically updates
      with subsequent vintage dates),
     Area in production,
     Total production,
     Price ($/t),
     Baume,
     Grade,
     Who the grapes are contacted to,

The Spreadsheet will automatically calculate, yield (t/ha), total proceeds and proceeds ($/ha). This
provides a historical summary of management unit performance and return. This can be helpful in
assessing management unit performance over time.
Use the horizontal scroll bar at the bottom of the worksheet to navigate from the first sheet to
subsequent sheets on the right hand side.




Page 40                                                                              VineBiz Manual, 2008
SHEET 5
ADVANCED DATA INPUT & REPORT –VINEYARD DATA (HISTORICAL)
This sheet can be accessed by either pressing on the „Next tab at the
bottom of the previous page or by pressing on the following button from
the Main Menu.
Alternatively, this sheet can be accessed via the Report Menu by pressing
on the following button.
It is important to be able to track the performance of your vineyard over
time. This provides a review of good and bad seasons and helps to
identify the reasons for these changes over time.
The following template uses the same layout as that used on a management unit basis, but it is
designed to capture the total vineyard financials for the current year and the past five seasons. This
can be broken down further to a per hectare basis.
These figures can be used to generate a range of financial ratios. Financial ratios are discussed in
detail in the Financial Summary section.




Page 41                                                                            VineBiz Manual, 2008
Page 42   VineBiz Manual, 2008
The financial summary used in the management unit summary is also used here. The figures show the
progression of gross margin, vineyard overheads and business returns presented over time to assess
how these dynamics have changed with time.




Page 43                                                                         VineBiz Manual, 2008
SHEET 6
ADVANCED DATA INPUT & REPORT – CASH FLOW
This sheet can be accessed by either pressing on the „Next tab at the
bottom of the previous page or by pressing on the following button from
the Main Menu.
Alternatively, this sheet can be accessed via the Report Menu by
pressing on the following button.
Cash flow refers to the amounts of cash being received and spent by a
business during a defined period of time (usually monthly, over a financial
year). A statement of estimated future monthly cash flows is a cash
budget. The cash flow statement reports where the business income was derived every month.
Measurement of cash flow can be used;
     To evaluate the state or performance of a business or project.
     To determine problems with liquidity. Being profitable does not necessarily mean having the
      cash to pay your bills. A company can fail because of a shortage of cash in a particular month,
      even while profitable from one financial year to another.
The cash flow statement can be examined to determine the short-term sustainability of a business. If
cash is increasing (and cash flow is positive), then a business will often be deemed to be healthy in
the short-term. Increasing or stable cash balances suggest that a business is able to meet its cash
needs and remain solvent. This information cannot always be seen in the Profit and Loss statement or
the balance sheets of a company, hence the need for a „Cash Flow Budget‟.

Entering Details – Cash Flow
   Overdraft Interest Rate: List your current overdraft interest rate. You will be able to verify this
    from a recent bank statement or by asking your bank manager.

   Income: List all the income being received by the business (both on and off-farm) for each
    month.

   Expenditure: List all the expenses incurred for each month. This includes operating and
    management costs associated with running the business. Enter the Personal and Debt Servicing
    costs under the appropriate heading.

   Historical Costs: This area is included so you can enter in a summary from a previous year to
    compare. Just enter the financial year in the top cell and the individual costs alongside the
    appropriate sub-headings.
                                                                st
   Opening Balance: Enter your opening bank balance as at 1 July (of the current financial year).

   Actual Closing Balance: Enter the closing balance of your bank account each month. This is a
    good way to compare projected balance with actuals and assess the variance.

   Peak Overdraft Level: The peak overdraft level is the largest negative figure from „Projected
    Closing Balance’ or the extent of your overdraft facility, and will be calculated automatically. Input
    the month with the peak overdraft level so you are aware of your peak debt and when it is likely to
    occur. You may need to make additional provisions (ie short term loan or overdraft facility) to meet
    your expenses.




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Page 45   VineBiz Manual, 2008
SHEET 7A
ADVANCED DATA INPUT & REPORT – STATEMENT OF POSITION
This sheet can be accessed by either pressing on the „Next tab at the
bottom of the previous page or by pressing on the following button from
the Main Menu.
Alternatively, this sheet can be accessed via the Report Menu by
pressing on the following button.



A statement of assets, liabilities and owners equity at a specific date is also called a Statement of
Position or Balance Sheet. The Statement of Position shows what a business owns; its assets, how
it is financed, its debt and owners equity. It is a statement of financial position. The Statement of
Position follows the fundamental accounting equation:


                                Assets - Liabilities = Owners Equity


Consider your house; it is an asset. It may be owned by you and financed partly by debt (your
mortgage) and partly by your own equity. Assume that the house is worth $300,000 and you have a
mortgage of $150,000. Your Statement of Position would be.


               Asset ($300,000) - Liabilities ($150,000) = Owners Equity ($150,000)

Assets
The analysis of assets, such as the purchase of a new tractor, vineyard redevelopment or other
significant „once off‟ costs are not explored in detail in the Ready Reckoner. Similarly, apportioning
„non cash‟ costs, such as depreciation, are not included but can be calculated in a number of ways.
Depreciation is designed to set aside funds to replace the asset item once it gets old.
The analysis of assets involves the accurate evaluation of equipment value at a point in time (this is
hard to do when assessing re-sale vale) and the effective life of the piece of equipment. This has not
been explored in detail but there is the option of including depreciation in the financial summary
section.




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Assets are the economic resources owned by or controlled by an entity that are expected to have
future economic benefits. They are obtained or controlled by an entity as a result of past transactions
or events affecting the entity.
Some of the terms used to describe assets are:




 Current Assets. Those assets that can be converted into cash or used up within the next
 accounting period or 12 months, for example cash in the bank, accounts receivable and inventory or
 stock on hand.
 Non-Current Assets. Assets expected to remain in use for a greater length of time. These assets
 include equipment, land, buildings and motor vehicles. They are „less liquid‟.




Liabilities
Liabilities are the economic obligations of the business. They represent the obligations of an entity to
transfer assets or provide services in the future as a result of past transactions of events affecting the
entity. Typically they are amounts owed to creditors, employees, the ATO, etc.
The Statement of Position provides important financial information that allows you to calculate a range
of financial ratios and look at the financial status of the business.
It is very important that you take particular care not only to fill in every applicable box but also to put
figures in the correct boxes. It is important to understand which assets and liabilities are important for
the running of the business and how these differ from personal assets and liabilities,
If you‟re unsure of where a given asset or cost should be entered ask your Bank Manager, Accountant
or Financial Consultant because entering a figure in the wrong place can provide a misleading
interpretation of the health and well being of your business.
The following data input sheet requests business assets and liabilities only. The second sheet
provides the opportunity to capture both business and personal assets and liabilities separately.




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Entering Details – Statement of Position
     Current Assets (Cash, etc): Total of revenue received by the business during the financial
      year, including revenue from the sale of all products produced on the property. It includes
      revenue received from royalties, rebates, refunds, plant hire, contracts, insurance claims and
      compensation, and government assistance payments. Enter assets under the headings listed.

     Non Current Assets: The value of capital employed by the business is the market value of all
      the assets used, including leased items but excluding machinery and equipment either hired or
      used by contractors. Market valuations were provided by the owner manager of surveyed
      businesses and included the market value of land and fixed improvements used by the
      business, excluding the value of the owner‟s house. The house value deducted from the total
      value of land and fixed improvements was the present day replacement cost, depreciated for
      age. Don‟t forget to enter every asset and to enter it in the right box.

     Liabilities: Estimated as business debt. Includes all debts attributable to the business,
      excluding personal debt and underwritten loans. Include payments made by the business for
      materials and services and for permanent and casual hired labour (excluding partner and other
      family labour). It includes the value of any lease payments on capital, produce purchased for
      resale, rent, interest, and cropping related purchases. Capital and household expenditures are
      excluded from total cash costs.




Page 48                                                                           VineBiz Manual, 2008
SHEET 7B
ADVANCED DATA INPUT & REPORT – STATEMENT OF POSITION
(BUSINESS & PERSONAL)
This sheet can be accessed by pressing on the „Next tab at the bottom of the previous page.
It is important to have a good understanding of the difference between business and personal assets
and liabilities. In the previous sheet you were asked to input financials for the business. If you feel you
have captured both business and personal assets and liabilities, you can allocate these financials on
this sheet more accurately. This will provide a better estimation of equity (rather than lumping all
assets and liabilities together).




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Page 50   VineBiz Manual, 2008
SHEET 7C
ADVANCED DATA INPUT AND REPORT – STATEMENT OF POSITION
(HISTORICAL)
This sheet can be accessed by pressing on the „Next tab at the bottom of the previous
page or directly by pressing on the following button from the Report Menu.
It is important to assess how a business has performed over time. The Statement of
Position (Historical) provides a sheet which can be used to capture these figures.
It is often hard to estimate the true value of assets. This figure can be found on the
annual Balance Sheet prepared at tax time by your accountant. Often an independent
valuation is required by a licensed valuer to get a true indication of asset worth.
Property is only worth what someone is willing to pay for it and this will fluctuate over time and
depending on the perceived value of an asset.
Often this is over-estimated by the owner or conservatively estimated by the accountant; the real value
is probably somewhere in between. A balance sheet can be used to accurately estimate the liabilities.




Page 51                                                                             VineBiz Manual, 2008
SHEET 8
ADVANCED DATA INPUT & REPORT – FINANCIAL SUMMARY
This sheet can be accessed by either pressing on the „Next tab at the
bottom of the previous page or by pressing on the following button from
the Report Menu.
The financial summary is designed, (along with the ‘Statement of
Position’) to be used when trying to assess the viability or profitability of
your business or when holding discussions with your bank, accountant or
consultant.
Much of this information has been discussed in other sections. It is
important to have a good understanding of the difference between operating and overhead costs.
If you are not sure of the difference between operating and overhead costs, talk with a financial
advisor, but a simple means of understanding the difference is operating costs are those costs that
change from year to year with production (e.g. fuel, oil, repairs). Casual labour or labour paid by the
day or hour is considered an operating cost. On the other hand, fixed costs don‟t change or change
very little from one year to the next and will have to be paid regardless of your production level.




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Entering Details - Financial Summary
Much of the information on this sheet is automatically generated from earlier sheets.
The key difference is non business financial information is taken into account here. This includes
non-business income (off property income), less non-vineyard expenses, personal drawings and
personal income tax.

Depreciation is also considered here. Depreciation is a non cash cost but is important to take into
consideration for tax purposes and where funds need to be set aside over time to replace aging
machinery.




Financial Ratios
Financial ratios have been utilised in many industries to assess business performance over a number
of years, but to be useful they must be put in perspective.
Ratios only identify the symptoms, not the source or cause of the problem. However, analysis of the
ratios and performance measures do allow very specific „guesstimates‟ at what the causes of any
problems are likely to be. These ratios are calculated at the bottom of the Financial Summary.

Problems When Using Ratios
     They are only numerical items and require some interpretation
     Availability of data can make it difficult to calculate certain ratios accurately.
     Different businesses use different accounting methods. This may provide a slightly different
      result depending on the method used.
     Ratios can be manipulated by management.
     Different analysts use different definitions of ratios. It is important a clear definition is provided.
     Historical cost data distorts ratios.
Ratios are used to calculate past performance. They can only be used as an indicator for future
projections.




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                                       Table 4: Ratio Formula & Description

          Ratio                                                   Formula and Description

                             Cost Ratio (Vineyard Operating Costs / Gross Vineyard Income) is a measure of operating
 Vineyard Operating          costs, in relation to income and is a measure of efficiency. This will vary depending on the
 Costs /                     intensity of vineyard management (level of inputs) and the capacity to generate income (yield
 Gross Vineyard              and price). Is important that after costs there is enough gross income to service overhead costs,
 Income %                    debt servicing, drawings, taxation, etc. A ratio of vineyard operating costs to gross vineyard
                             income less than 50% is considered good.

 Vineyard Overheads
                             Overhead Ratio (Vineyard Overheads / Gross Vineyard Income) is one of the most important
 (no debt servicing) /
                             and manageable aspects of a vineyard business. Overheads should not be more than 30% of
 Gross Vineyard
                             gross income.
 Income %

 Business Return /           Profit Margin Ratio (Business Return / Gross Vineyard Income) is an indication of the
 Gross Vineyard              profitability of your vineyard. It is a measure of profit, before drawings and taxation, to gross
 Income %                    income. A ratio greater than 10% is acceptable

                             This ratio indicates how vulnerable the business is to an increase in interest rates or a reduction
 Debt Servicing /            in price or yield. It is affected by the level of principal repayments.
 Gross Vineyard
 Income                      The flexibility (or lack of flexibility) to improve this ratio through reduced principal repayments
                             must be considered when monitoring this ratio.

                             Earnings Ratio (Vineyard Return / Debt Servicing) indicates your ability to cover interest
                             payments (finance costs) and is a measure of the amount of money left over after operating and
 Vineyard Return /           overhead expenses (other than interest) to cover your financial commitments. Earnings ratio
 Debt Servicing %            should be greater than 100%. This is adequate to cover the cost of servicing debt only. A buffer
                             of above 100% is required to allow for vineyard return. Therefore a percentage greater than
                             150% is considered good.

                             This is used to measure the total assets of the business against the money owed by the
   Equity %
                             business. The ratio is usually expressed as a %.

                             The most commonly used measure of operating performance is vineyard return on assets, also
                             called return on investment or simply, rate of return. It is the ratio of earnings before interest and
                             tax to total assets. It indicates how „efficient‟ the company has been in earning profits from its
                             assets.

 Vineyard Return /           Return on Assets = Vineyard Return divided by Assets x 100
 Assets %                    Vineyard Return removes the effect of interest and taxation and focuses attention on the profits
 (before interest and tax)   made from operating decisions made by managers about issues like price, marketing, cost
                             control etc.
                             The return on assets ratio indicates how well the resources at the business‟ disposal have been
                             used to create wealth (profit). It ignores the method of financing and hence focuses on
                             operations.



Case Study - Ratios
For example, if you have purchased some machinery using debt finance, your liabilities will then increase
and the ratio of liabilities or income will be high. At the same time, the value of plant will also increase
relative to income and the ratio of income to plant value will fall. This tells you that some of your
machinery is not earning its keep.
Perhaps, if the machinery loans are hard to pay, then some of the machinery could be sold to reduce
debt. This sale would then reduce your liabilities, reduce your interest, increase equity and provided you
can continue producing the same income, the machinery sale would improve the business return on
equity. Hence, it is through interpretation of these ratios that the causes of poor business performance
can be identified and solutions put forward.
The benchmarks are utilised to tell whether the ratios and performance measures calculated for a specific
business are „good or poor‟.
It should be stressed that these benchmarks are not absolutes and will change depending upon the data
collected. Nonetheless, use the ratios and benchmarks to see how your business is performing.



Page 54                                                                                                     VineBiz Manual, 2008
If one or more of the ratios fall outside of the acceptable limits, try to figure out why. For example, if your
equity is very low (less than 70%), then this means that your debts are too high for the amount of assets
you own. Are the debts high because your overdraft has been increasing? This would mean that the ratio
of interest to income is high.
Similarly, have you purchased machinery on debt that has resulted in the low equity and forced up the
ratio of interest to income? If the cause is increasing overdraft then you‟ll know because you realise that
your machinery is old and only just coping. This tells us then, that you need to find a way of reducing debt
without reducing income too much. Perhaps it is possible to sell some assets and reduce the debt more
than the resultant reduction in income. This might happen when you receive, say, a big payment for land
sale but the land wasn‟t earning very much.
The best idea would be to enter your data, let the program calculate the ratios and then discuss them with
your Bank Manager, Accountant or Consultant as these are people who deal with these figures every day
and want to see you stay viable and profitable.
To help understand the ratios, the table below shows how each is calculated. Below the table, is an
explanation of what each ratio means and with a bit of practice over time it will be possible to look at the
figures within the program and work out very quickly how your business is performing.



SHEET 9
ANALYTICAL TOOLS - GROSS MARGIN & PROFITABILITY SENSITIVITY
ANALYSIS
This sheet can be accessed by either pressing on the „Next tab at the
bottom of the previous page or by pressing on the following button from
the Main Menu.
Alternatively, this sheet can be accessed via the Report Menu by
pressing on the following button.
Sensitivity analysis can be used to evaluate the impact of price
variability and yield on the gross margin. The sensitivity analysis results
in a cash break even price for wine grapes grown on a particular vineyard. A base line is included to
show overhead costs (black horizontal line).
This section of the worksheet shows the impact of variations in yield or price received on the Gross
Margin per hectare.

Data Entry
Operating Costs: This figure updates automatically but you can override this amount if required. If
you wish to re-instate the original value select this from the drop down tab (right hand side of cell).
Overhead Costs: This figure updates automatically but you can override this amount if required. If
you wish to re-instate the original value, select this from the drop down tab (right hand side of cell).
Yield: Input your expected lower yield. The cells to the right will self calculate in increments of 2t/ha.
Price: Input your expected lower price paid for grapes ($/t). The cells to the right will self calculate in
increments of $100/ha below this cell.
The ‘Gross Margin and Profitability Sensitivity Analysis’ compares the revenue lines for each yield
level less operating costs. The horizontal line represents ‘Fixed Costs’ and these costs need to be
accounted for before any profits are realised.
The model has the facility to present a sensitivity analysis of the impact on profitability of changes in
yields and prices. Crop yield and price are the key drivers to calculating gross margin return.




Page 55                                                                                    VineBiz Manual, 2008
Summary
     The values in red indicate the management unit is not breaking even at the Gross Margin level.
     The values in blue indicate the management unit is breaking even (Gross Margin) but is not
      covering Overhead Costs.
     The values in green indicate the management unit is breaking even by producing enough
      income to cover Operating Costs and Overhead Costs.




Page 56                                                                           VineBiz Manual, 2008
FURTHER ANALYSIS
     (ADVANCED)
Further Analysis (Advanced)
WATER DECISION CHART
      Figure 1: Deciding on Appropriate Water Saving Strategies – Decision Making Chart
                       (Modified from ‘Drought Strategies for the Almond Industry’ SRHS, 2007)




               How much water is available? Is this enough?
                                                                                                 YES
                                  NO

            Can sufficient water be saved by reducing irrigation to
               windbreaks, minimising weed competition etc?
                                                                                                 YES

                                  NO

                    Can sufficient water be purchased?                                                   PROBLEM
                    This requires capital and availability.                                               SOLVED
                                                                                         YES
                                  NO

                          Is redevelopment of older,
                      less productive blocks an option?




             NO                                  Is the amount of
                                              water saved sufficient?
                                                                                                 YES
                                                     NO

               Can RDI strategies be implemented? Can the drip
          irrigation system be modified to reduce wetted area? How
              much water can be saved by reducing vine water use
              through reduced fertiliser inputs and hence vigour?




             NO                                  Is the amount of
                                              water saved sufficient?
                                                                                                 YES
                                                     NO

          Only water blocks which provide the best return. Consider
           putting remaining vines ‘on hold’, or out of production
                         until the situation improves


Page 58                                                                                            VineBiz Manual, 2008
SHEET 10A
WATER PURCHASE CALCULATOR (CURRENT SITUATION)
Advanced Data Input & Report
This sheet can be accessed by either pressing on the „Next tab at the
bottom of the previous page or by pressing on the following button
from the Main Menu.
Alternatively this sheet can be accessed via the Report Menu by
pressing on the following button.
This spreadsheet provides a summary of your current water situation
(depending on the current water allocation available). A break down of
income less operating costs highlights which management units are
your most profitable and where water is best used.
The purpose of Sheet 10a is to determine which management units are providing the best
return.
     To identify those management units which are not breaking even (Gross Margin) and determine
      if this is because they are young management units where the vines are still to reach full
      production or if the vines are old and weak and water which would normally be used on these
      management units could be used elsewhere to provide a better return.
     To determine how much water you have available (give current % allocation) and to determine
      how much extra water is required (per management unit and per for the vineyard).
Sheet 10b can be used to take blocks ‘in’ or ‘out’ or production and work out how much
additional water purchase may cost.

Data Entry
     Water Licences. Enter your current water licence details, the current allocation (%) and any
      carry over water from the prior season. The spreadsheet will automatically calculate how much
      actual water you are able to use this in the current season.

     Available water. The spreadsheet will automatically calculate how much water is available for
      use in each management unit (averaged across all management units). This may be below the
      vine water requirement for vine survival or for full vine production.




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     Area in production is updated automatically. If you wish to alter the area in production this
      can be done in Sheet 10b.

     Vine water requirement. Enter the vine water requirement depending on the management
      strategy you wish to employ this season (ML/ha). The spreadsheet will calculate the volume of
      additional water required per management unit and a total for the vineyard (ML).

     Income. Enter the anticipated yield per management unit. The spreadsheet will convert this
      figure into t/ha and t/acre for comparison. Enter the anticipated revenue for each variety
      ($/tonne). This is often hard to predict as there is often uncertainty about final grape prices
      depending on who is purchasing the grapes and the quality achieved. The spreadsheet will
      automatically calculate anticipated revenue per management unit (and per hectare for each
      management unit).

     Gross Margin. The spreadsheet will automatically generate gross margins for each
      management unit on a per ha and per tonne basis for comparison. This provides a clear
      indication of which management units are able to break even, which management units provide
      the best return and which management units are costing you money. It is better to reallocate
      water from management units not generating profit to the ones which are more likely to provide
      a good return.




     Which are my most important management units? Rank your most profitable management
      units in order. The spreadsheet automatically identifies any management units which do not
      provide a profit.




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     Current Water Availability. The spreadsheet will generate a chart which indicated how much
      water you have available for use, the vine water requirement and the surplus/deficit. If deficit
      you may wish to consider additional water purchase (either permanent or temporary).




SHEET 10B
WATER PURCHASE CALCULATOR (WITH ADDITIONAL WATER
PURCHASE)
Advanced Data Input & Report
This sheet can be accessed by either pressing on the „next‟ tab at the
bottom of the previous page or by pressing on the following button from
the Main Menu.
Alternatively this sheet can be accessed via the Report Menu by
pressing on the following button.


The Water Purchase Calculator (Current Water Use) is used to
assess if you have enough water to meet your current crop requirements, based on the current
allocation. The Water Purchase Calculator (With Additional Water Purchase) can be used to used
to decide if some cropping area needs to be taken out of production and how much it will cost to
purchase more water, if you have less water than is required to meet basic vine needs.
The water purchase calculator allows the user to calculate how much additional water is required to
water vines in production to generate an adequate yield, and how much this may cost depending on
the allocation available (this may vary throughout the season).
The Gross Margin calculation is useful when deciding if the value of the water purchase can be
sufficiently covered by the expected increase in production.
This sheet picks up the relevant data from Sheet 10a: Current Water Use and calculates how much
extra water you would need to purchase to meet vine requirements and desired cropping levels. This
amount will vary depending on what % of the purchased water can be utilised.
Keep in mind that this strategy may need to be flexible to take into account the changes during the
season (ie rainfall and changing allocation).
It is important not to grow too much canopy or set too much crop if this can not be ripened through to
maturity because of water shortage. For further information on 'Grapevine Management Options in
Times of Drought and Water Restrictions', see:
http://www.winesa.asn.au/media/docs/vineyardmgmt.pdf




Page 61                                                                            VineBiz Manual, 2008
Water Purchase Calculator (With Additional Water Purchase)
Entering Details
The most profitable management units and any additional water requirement have been identified
using the Water Purchase Calculator (Current Water Use). Use the Water Purchase Calculator
(With Additional Water Purchase) to determine how you will use the additional water and if the
decision to purchase more water can be justified by just keeping vineyard alive or producing additional
income which will offset the purchase price of water.




Page 62                                                                             VineBiz Manual, 2008
     Management units in Production. Identify any management units which are currently bearing
      which may need to be taken out of production. Input the area in hectares into the management
      units in the production row and this will automatically be reflected in an increase in the
      corresponding value in the management units not now in the production row.

     Vine water requirement. Fine tune the vine water requirement for each management unit to
      reflect optimal growing capacity given the water available. This will calculate the additional water
      requirement. Update the vine water requirement depending on the management strategy you
      wish to employ this season (ML/ha).

     Income. Update the anticipated yield per management unit (assuming additional water
      purchase to provide optimal vine yield and fruit quality).

     Purchase price for water ($/ML). Enter the current water price per Megalitre. This may vary
      greatly throughout the season and will be dependent on market forces of supply and demand.

     Cost Benefit. The spreadsheet will automatically update the gross margin assessment
      (including the additional income less the additional operating cost of water) to indicate the value
      of water purchase. If the gross margin is negative, this means either the increase in revenue is
      not high enough or the cost of water is too high to justify purchasing additional water.

     Irrigation benchmarks are becoming increasingly important to viticulture as water becomes
      limiting and more expensive. Yield per Megalitre (ML) is calculated from the information
      provided. Water use (ML/t or L/kg) can be useful to determine efficiencies of using your water
      allocation on one management unit in preference to another. This is becoming increasingly
      important as the concept of „virtual‟ water is explored for the production of difference
      commodities.




     Water Report Diagrams. The management unit income summary will indicate the income prior
      to additional water purchase versus anticipated income with additional water purchase less
      operating costs (including additional water purchase) gives gross margin.

     The second diagram shows the vineyard summary of income, operating costs and gross
      margin, without and with additional water purchase.




Page 63                                                                               VineBiz Manual, 2008
SHEET 10C
WATER PURCHASE SENSITIVITY ANALYSIS (WINE GRAPES)
This sheet can be accessed by pressing on the „Next tab at the bottom of the previous page
To achieve a general snapshot of how much extra income (tonnes and $/tonne) needs to be
generated to cover the purchase of additional water, a sensitivity analysis can be used. This works in
the same way as the Gross Margin Sensitivity Analysis but has an additional step involved in
calculating the additional water purchase component which is added to the operating cost to be
covered.




Page 64                                                                            VineBiz Manual, 2008
Data Entry
Operating Costs: This figure updates automatically but you can override this amount if required. This
does not include additional water purchase.
Water Purchase: Input data for the additional amount of water required per hectare (ML/ha) and the
anticipated price per Megalitre ($/ML). This total then gets added to the existing operating cost which
needs to be incorporated in the Gross margin calculation.
Overhead Costs: This figure updates automatically but you can override this amount if required.
Yield: Input your expected lower yield. The cells to the right will self calculate in increments of 2t/ha.
Price: Input your expected lower price paid for grapes ($/t). The cells to the right will self calculate in
increments of $100/ha below this cell.
The ‘Water Purchase Sensitivity Analysis’ compares the revenue lines for each yield level less
operating costs. The horizontal line represents ‘Overhead Costs’ and these costs need to be
accounted for before any profits are realised.

Summary
     The values in red indicate the management unit is not breaking even at the Gross Margin level.
     The values in blue indicate the management unit is breaking even (Gross Margin) but is not
      covering Overhead Costs.
     The values in green indicate the management unit is breaking even by producing enough
      income to cover Operating Costs (including additional water purchase) and Overhead Costs.




SHEET 11A
RESTRUCTURING COST CALCULATOR (DATA INPUT)
Advanced Data Input
This sheet can be accessed by either pressing on the „next‟ tab at the
bottom of the previous page or by pressing on the following button from the
Main Menu.
The Restructuring Cost Calculator is designed to assist you make decisions about either;
     Removing your crop and leaving an area out of production for the long term
     Removing a crop and replacing it with another crop
     Top working an existing crop to another variety, or
     Managing your management unit with minimum inputs until things improve.
Some indicative costs are provided for restructuring grapevines at the end of this worksheet.
The sheet works on the assumption of „what if‟. For example if there is no change, the yield will be a
certain amount over the next five seasons. If you decide to restructure a portion of the management
unit, the expected income is likely to remain the same (with consideration to seasonal fluctuation, price
paid per tonne and vine health) for the unchanged section. The production is likely to be less initially in
the modified section and then increase over time until it provides a better return than the unchanged
section.




Page 65                                                                                  VineBiz Manual, 2008
Entering Details - Restructuring Cost Calculator
The Restructuring Cost Calculator is set out in two sheets. Sheet 11a asks a series of leading
questions. The answers to these questions will be automatically updated into the Restructuring Cost
Calculator Report Sheet – Sheet 11b. You can fine tune these figures further while in Sheet 11b. To
reinstate the original data, select this value from the drop down menu (this will appear at the right hand
side of the cell).




Page 66                                                                                VineBiz Manual, 2008
SHEET 11B
RESTRUCTURING COST CALCULATOR (REPORT)
Report
This sheet can be accessed by either pressing on the „next‟ tab at the
bottom of the previous page.
Alternatively this sheet can be accessed via the Report Menu by pressing
on the following button.




Understanding the Report
This sheet is set out in two sections. The first section calculates the potential revenue generated from
a management unit (existing) Vs the restructuring comparison (including time taken to return the
management unit into to full production), while the second section captures the restructuring tasks
and associated costs involved in restructuring the management unit.
     Change of revenue: The first section of the spreadsheet is designed to capture the change in
      revenue in the year of restructuring and the break even point as the management unit gets back
      into full production. This may be something along the lines of changing a variety over by top
      working it etc. The current management unit details and the proposed changes are updated
      from the data entry sheet (Sheet 11a). You can fine tune these figures entering new figures in
      white cells with orange borders.
     Year: The year you intend to restructure the management unit is updated from Sheet 11a; this
      will automatically update the cells below for the following four years.
     Existing management unit: These columns capture the anticipated production and revenue of
      the management unit over the next five seasons. The size of the management unit (ha), the
      anticipated yield (t/ha) and price ($/t) is updated from Sheet 11a.
     Changes to management unit: These columns capture the anticipated production and
      revenue of the changed section of the management unit (either a portion or the whole


Page 67                                                                              VineBiz Manual, 2008
      management unit) for the same period (over five seasons). The unchanged area of the
      management unit is updated from Sheet 11a (the changed area to the right automatically
      calculates). The anticipated yield (t/ha) and price ($/t) for the modified areas of the
      management unit and the estimated time back into production is updated from Sheet 11a. A
      typical scenario may be:
      −        Year 1 - No revenue due to restructuring,
      −        Year 2 - A small amount of revenue (ie estimate this in % terms of expected yield when
               back into full production).
      −        Year 3 - Greater return etc, depending on modification, crop and climate.
          The management unit is likely to get back into full production in Year 4 or 5 (ie 100%).
      The worksheet will automatically calculates the expected crop from the management unit
      (assuming it is unmodified), and compare this with the modified section and the time taken to
      get it back into production. It will also highlight break even point when the lost revenue has been
      covered by increased financial return.
     Costs involved in restructuring: There will be costs associated with carrying out any type of
      management unit modification. These costs are captured from Sheet 11a and worked into the
      cost benefit scenario (over five seasons).
     Restructuring tasks: The individual restructuring tasks are requested in Sheet 11a. A list of
      indicative restructuring prices for wine grapes is included at the bottom of Sheet 11b which may
      help guide you.

The estimated restructuring costs are calculated per ha (this helps to benchmark with other growers).
The total restructuring costs are calculated and estimated over a 12 month period. You may wish to
include this in your cash flow budget.




The Gross Margin over the 5 year period will indicate the return from the modified management unit.
This can be compared to a „do nothing‟ approach.




Page 68                                                                                  VineBiz Manual, 2008
UNITS OF COMPETENCY
Mapping the Content of the ‘VineBiz’ Program to Related Units of
Competence
The VineBiz program has been designed to link with the learning and skills development for National
Rural Production, Amenity Horticulture and Business Services competency standards. If you are
enrolled in one of these programs you may seek to have your skills in those competencies recognised
through assessment. Your course facilitator will be able to arrange this for you. Please make your
facilitator aware, early in the program, of your intention to be assessed using content within the „VinBiz
Program. This tool provides learning and skill development in a range of elements covered under the
following unit of competencies headings.


                                       Table 5: Competency Standards

    Training
                   Training Package         Unit Code                          Unit Name
  Package Code
      RTE03         Rural Production        RTE4913A    Analyse and interpret production data

                                                        Design irrigation system maintenance and monitoring
      RTE03         Rural Production        RTE5602A
                                                        programs
      RTE03         Rural Production        RTE5912A    Plan and monitor production processes

      RTE03         Rural Production        RTE5902A    Develop and review a business plan

      RTE03         Rural Production        RTE5906A    Monitor and review business performance

      BSB01        Business Services       BSBMGT503A   Prepare budgets and financial plans

      BSB01        Business Services       BSBMGT504A   Manage budgets and financial plans

      BSB01        Business Services       BSBSBM402A   Undertake financial planning

      BSB01        Business Services       BSBSBM404A   Undertake business planning

      BSB01        Business Services       BSBSBM405A   Monitor and manage business operations

      BSB01        Business Services       BSBSBM406A   Manage finances




Page 69                                                                                         VineBiz Manual, 2008
   RELATING WINE PRICE
POINTS TO GRAPE PRICES
Relating Wine Price Points to Grape
Prices
INTRODUCTION
The intention of this part of the project is to „demystify‟ the wine value chain by identifying the costs of
producing a bottle of wine from the vineyard to the retail shelf in the domestic Australian market. It
may also help growers to understand the broad mechanisms of adding value to grapes and
distributing the branded products into a range of markets.
The model has been developed to illustrate these costs in a simple format. It is therefore possibly
simplistic in ignoring many real life scenarios of wine making, packaging and distribution, particularly
into export markets where around 60% of Australia‟s wine is sold.
The model broadly attempts to demonstrate that a bottle of wine at retail (referred to as price point) is
subject to a series of margins and taxes between the winery and the consumer, as well as direct costs
within the winery, one of which is the purchase of grapes.
The price paid for the grapes ($/t) generated by the model can then be used by grape growers to test
the viability of their own enterprise by entering actual yield and production cost data from the vineyard.

What is the Objective of the Model?
The initial framework for this model was based on the premise that grape growers want to know the
answers to a number of questions, for example:
1.     If I am paid $500/tonne for my grapes, what price point is the wine likely to be, after the grapes
       are made into wine and sold through a wholesaler to the retail level, with typical costs
       structures?
2.     Conversely, if the winery indicates that my grapes are destined for a particular price point
       (brand), for example $10/bottle retail, then what range of grape prices might wineries offer,
       considering typical cost structures in the value chain?
And . . .
3.     If I am paid $500/t for my grapes, can I make a profit from my business, with my current
       vineyard yields and costs structures in place? Is my business sustainable, supplying grapes into
       this market?
The model produces a range of grape returns that allows a grape grower to understand the following:
      The importance of vineyard crop yields in driving profitability;
      The role of variable and overhead production costs in determining profitability;
      The scope to improve grape grades, improve grape returns and lift profitability;
      Options for the future of the vineyard enterprise.
The model will also be useful to both winery and grape suppliers when discussing grape prices and
negotiating contracts that specify an end use payment system.




Page 71                                                                                   VineBiz Manual, 2008
SHEET 12A
RELATING WINE PRICE POINTS TO GRAPE PRICES
From the VineBiz Financial „Ready Reckoner‟ this sheet can be accessed
by either pressing on the „next‟ tab at the bottom of the previous page or by
pressing on the following button from the Main Menu.
Alternatively this sheet can be accessed via the Report Menu by pressing
on the following button.

How to Use the Model
As previously mentioned this is a simple model and has limitations. A grape grower should use this
model to better understand the wine value chain rather than attempt to develop complex scenarios on
grape price and vineyard profitability.
As with other sheets within the VineBiz Ready Reckoner white cells highlighted with an orange border
require data input and are unprotected.




STEP 1: Choose Two Wine Price Points
The model shows a theoretical value chain for two different wine price points. These two price points
are entered by the grower and reflect a likely range for that particular region.
Table 6 broadly illustrates the how the Australian wine industry is categorized into regions (warm,
temperate and cool) and price points. This may help in determining your price points.

Margins and Taxes
     Retail margin is generally set at 30% on top of wholesale price plus WET;
     GST is 10% of retail;
     WET (Wine Equalization Tax) is 29% on top of the wholesalers or winemaker‟s cost of wine
      destined for the domestic market only;
     Distribution margin is 30% on top of winemaker‟s costs.
In summary, a $10 bottle of wine at retail will attract around $6.00 of margins and taxes, leaving
$4.00/bottle or $5.33/litre for the winery to purchase grapes, produce, package and store the wine and
generate a return on their investments.




Page 72                                                                            VineBiz Manual, 2008
                     Table 6: Australian Wine Grape Production and Price Point Categories


                         VINEYARD REGIONS                                                 WINE PRICE POINTS ($/bottle)

    WARM                                                                  BULK/CASK <$3.50
                                                                                                      34%
                                                                                                      of sales
    Riverland (SA)                     55,000 ha
                                                                          POPULAR $3.50-$10
    Murray Darling (VIC & NSW)         27,000 ha (VIC)                    For example
                                       18,500 ha (NSW)                    Jacobs Creek
                                                                          Banrock Station
    MIA (NSW)                          19,000 ha                          Nottage Hill                              86% of market
                                                                                                       44%
                                                                          Lindemans Bin                of sales
                                                                          Oxford Landing                            62% of production

                                                                          POPULAR PREMIUM $10-$15
                                                                          For example
                                                                          Koonunga Hill                16%
                                                                                                       of sales
                                                                          Jamiesons Run
                                                                          Rosemount Diamond Label
    TEMPERATE                          Barossa                            Leasingham Bin
                                       Limestone Coast                    Wynns
                                       Langhorne Creek                    PREMIUM $15-50                            12% of market
                                       McLaren Vale                       For example
                                       Coonawarra                         Wolf Blass Grey                           37% of production
                                       Mudgee/Hunter                                                   4%
                                                                          St Hugo                      of sales
                                       Central Victoria                   Penfolds 407
                                                                          Pipers Brook
    COOL                               Adelaide Hills                     SUPERIOR >$50
                                       Tasmania                           For example                               2% of market
                                       Southern Victoria                  Petaluma
                                                                                                       2%
                                       High Country                       Leeuwin Estate               of sales     1% of production
                                                                          Hill of Grace
                                                                          Grange
    Data derived in consultation with Lawrie Stanford from the AWBC – June 2008




Table 6 shows that a large proportion of total wine production ends up in the bulk or basic category at
less than $3.50/bottle equivalent. The production costs of these types of wine are quite different to the
example above, particularly if the wine is made and immediately shipped in bulk.

Winery Costs of Production
Winery costs will vary substantially, depending on the scale and efficiency of the operation.
The major costs are:

          processing, wine additives and storage at around $1.75 - 2.10 per litre;

          packaging at around $1.50 per litre;

          grapes at around $0.65 to $0.90 per litre (5-7% of retail price) depending on the extraction rate.




Page 73                                                                                                           VineBiz Manual, 2008
STEP 2: Enter Vineyard Data

Grape Prices
Once the two price points have been entered into the model, a range of grape prices is generated,
based on the above margins, taxes and winery costs and calculated at 700 litres of juice per tonne of
grapes. This figure can be altered if lower or higher juice extractions are appropriate for the region,
variety or condition of the fruit at harvest.
The grape prices presented at the top of the vineyard costs section are a range of prices showing the
average for each of the two scenarios plus 10% each side of the average. This provides the grape
grower with an array of possible prices that winery may offer for grapes of this calibre (grade, quality)
in any one season.
Having two scenarios running at once, shows a choice of six grape prices from low to high.




2.1: Yields
Enter the yield (t/ha) that reflects the capacity of the vineyard or management unit i.e. the average
yield over recent years. Once all of the vineyard data has been entered, the yield figure can be altered
to test the impact of a marginal increase or decrease in crop on the bottom line profitability.

2.2: Operating and Overhead Costs
The historic sub-totals for Operating and Overhead Costs will update in the sheet automatically
alternatively these can be altered to reflect difference management scenarios. Use the drop down list
to go back to the original values (sourced from the Ready Reckoner data entry sheets).




Page 74                                                                               VineBiz Manual, 2008
STEP 3: Analysis of Data
Once all of the grower‟s data have been entered into the model, there should be a snap-shot of the
following:
     Two wine price points that reflect the region where the grapes are grown;
     Two winery and distribution cost scenarios showing margins, taxes and costs of producing the
      two wine types;
     A selection of three grape prices for each wine price point that reflects what wineries may pay
      for those grapes;
     Two crop yield levels that may reflect growing lesser quality grapes and higher quality grapes;
     Three net profit/loss figures for each wine price point to show relative profitability;
     Gross margin percentages for both scenarios.
There is now an opportunity to test some „what if’ scenarios by making small changes to the entered
data.
For example testing yield levels, determining breakeven points at certain grape prices, changing input
costs to suit the grades and grape prices being offered by the wineries, seeing the effect of reduced
extraction rates on profitability.


SHEET 12B
RELATING WINE PRICE POINTS TO GRAPE PRICES – SENSITIVITY
ANALYSIS
In addition to Sheet 12A, Sheet 12B provides a snapshot summary of the information contained in
Sheet 12A in the form of a Sensitivity Analysis (similar to Sheets 9 and 10c).




Data Analysis
By altering either the Retail Bottle Price, Extraction Rate or Grape price as a percentage of bottle
price, this will automatically calculate the Grape Price Point ($/t). This can be done by selecting a
value (from a range) in the drop down list.
This will automatically update the figures in the three sensitivity analysis calculating grape price ($/t)
as a product of:
     Grape to bottle price ratio (based on bottle price).
     Grape to bottle price ratio (based on extraction rate).
     Extraction rate (L/t) (based on grape to bottle price ratio).


Page 75                                                                                  VineBiz Manual, 2008
Page 76   VineBiz Manual, 2008
CAPABLE AND COMPETENT PRODUCERS
When developing effective negotiation skills, whether it is for negotiation of a new or ongoing grape
purchase contract, or in everyday life; there are a few communication strategies which can help to
improve this process.
The table below lists the differences between dialogue and debate when communicating with others.


                            Table 7: Differences Between Dialogue and Debate

 Communication Strategies

 Dialogue is collaborative: two or more sides work together toward common understanding.
 Debate is oppositional: two sides oppose each other and attempt to prove each other wrong.

 In dialogue, finding common ground is the goal.
 In debate, winning is the goal.

 In dialogue, one listens to the other side(s) to understand, find meaning, and seek agreement.
 In debate, one listens to the other side in order to find flaws and to counter their arguments.

 Dialogue enlarges, and possibly changes, a participant's point of view.
 Debate affirms a participant's own point of view.

 Dialogue reveals assumptions for re-evaluation.
 Debate defends assumptions as truth.

 Dialogue causes questioning of one's own position.
 Debate causes critique of the other position.

 Dialogue opens the possibility of reaching a better solution than any of the original solutions.
 Debate defends one's own position as the best solution and excludes other solutions.

 Dialogue creates an open-minded attitude: an openness to being wrong and an openness for change.
 Debate creates a closed-minded attitude, a determination to be right, and to win.

 In dialogue, one submits one's best thinking, knowing that other people's reflections will help improve it rather
 than destroy it.
 In debate, one submits one's best thinking and defends it against challenge to show that it is right.

 Dialogue calls for temporarily suspending one's beliefs.
 Debate calls for investing wholeheartedly in one's beliefs.

 In dialogue, one searches for basic agreements.
 In debate, one searches for glaring differences.

 In dialogue, one searches for strengths in the other position.
 In debate, one searches for flaws and weaknesses in the other position.

 Dialogue involves a real concern for the other person and tries to avoid alienating or offending him or her.
 Debate involves countering the other position without focusing on feelings or relationship and often belittles the
 other person.

 Dialogue assumes that many people have pieces of the answer and that together they can put them into a
 workable solution.
 Debate assumes that there is a right answer and that someone has it.

 Dialogue remains open-ended.
 Debate implies a conclusion.

Modified from: http://www.makingmorefromsheep.com.au/capable-confident-producers/tool_4.2.htm




Page 77                                                                                         VineBiz Manual, 2008
NEW VINEYARD BUSINESS
              MODELS
New Vineyard Business Models
INTRODUCTION
Many grape producers, particularly those in warm irrigated areas, are small scale commodity
producers and cannot:
     Reduce costs substantially except by major increases in scale; and
     Differentiate their product sufficiently to command substantially higher prices.
Typically, gross margins received (gross income less variable costs) cover farm overheads and may
contribute to finance costs but little remains to contribute to capital repayments, provide an owner
operator allowance or family wages and pay tax. Consequently, changes in business structure by
implementing new vineyard business models, or structural adjustment possibly out of the industry may
be required.



CURRENT SITUATION
Wine grape growers are currently being squeezed from all directions as a result of low prices, water
restrictions, fertiliser and fuel price increases, etc. Some ways that growers can manage their
vineyard businesses to cope with these changes and maintain profitability are;
     Increase the income by increasing yield, quality, price, or all of these components of income.
     Increase the price received for grapes by developing a strong relationship with the grape
      purchaser, value-adding by group marketing, or converting grapes into wine.
     Reduce input costs, generally as a result of more efficient use of production technology, labour,
      and mechanisation. However, the main opportunity for increasing Business Return is via income
      increase, rather than a reduction in input costs (operating and overhead) which is often difficult
      to achieve.
The current situation within the wine grape industry and horticulture in general, is also making it
difficult to be able to increase the income of a vineyard business. Some of the factors working against
this are;
     The drought, water restrictions and the high cost for temporary water.
     Caps on contract tonnages by wineries that limit the capacity for growers to receive the full
      benefit from high production seasons.
     Globalisation of the Australian wine industry and the lack of differentiation of wine from the
      warmer production regions, meaning that companies can source wine from other countries at
      cheaper prices.
     The high Australian dollar ($0.96US) means that returns to wineries for wine sold overseas are
      much less than when the dollar was about $0.70US not that long ago.
     Changes in varietal preferences by markets are making it difficult for growers to meet winery
      expectations, even when under contract to the winery. Chardonnay is an example where
      vineyards that were planted 3 or 4 years ago under contract are now not required by the winery
      because of a downturn in the market demand for Chardonnay overseas.
     To change the variety in a vineyard or orchard by either replanting or top-working results in
      significant capital investment and a time delay to return to full production.




Page 79                                                                                  VineBiz Manual, 2008
ALTERNATIVE APPROACHES
Grape growers are finding that all of the above factors are working against their vineyard businesses
and most of these factors are external and beyond their control. However, there are a number of
examples of approaches some growers are using in their businesses that may help them cope with
the decline in vineyard business income/profit. Some are:
        Understanding their financial position by regular analysis and review.
        Internal restructure within the vineyard based on profitability of individual blocks or varieties.
         Carefully assess the use expensive water on parts of your vineyard that are not profitable.
        Vineyard ownership/management: Look at changing the way your vineyard is owned or
         managed (lease, share-farm, group management with neighbours).
        Reduce the need for individual equipment ownership by sharing, use of contractors, etc.
        Reduce production inputs by group purchasing through marketing groups, wineries, etc.
        Market grapes collectively in groups to increase the size of parcels of grapes presented to
         wineries. This may be done via a marketing group (eg CCW), or via a third party.
        Process your grapes into wine and market the wine.
Some details of ways of managing your vineyard business are presented in Table 8 below. While they
may not all work in your particular business, many are worth thinking about.

                       Table 8 : Examples of Alternative Ways of Doing Business
                                                       Owner/Manager
    1.        Vineyard Ownership/Management            Lease (lessor)
                                                       Sharefarmer
                                                       If you combine with neighbours this may give an
                  Combining Vineyard Units              opportunity for off-farm employment
                 to Increase Size and Scale            Can stay in home, but not manage the vineyard
    2.
            Work with neighbours, purchase, lease      Still own asset but lose control of vineyard operations
                     or sharefarm nearby               More steady annual income which reduces risk, but at a
                                                        cost to you
                                                       Chemicals, fertiliser
                                                       Equipment maintenance
            Group Purchasing of Production Inputs      Technical services (moisture monitoring, IPM, soil/tissue
    3.         by Marketing Groups, Wineries,           testing, etc)
                   Neighbourhood Groups                Fuel
                                                       Phones
                                                       Insurance/Banking
                                                       With neighbours
                     Sharing Equipment                 Formal groups
                     Use of Contractors                Contractors
    4.
            (Harvesters, sprayers, weedicide units,    All require good coordination, management and mutual
                    hedgers, pre-pruners)               trust
                                                       Formal agreements beneficial in times of dispute
                                                       Grape growers are often not good marketers
                 Group Marketing of Grapes
                                                       Parcels of grapes may either be combined or marketed
    5.       eg. CCW (Riverland), Valley Grower         separately by a third party
             Coop Ltd (Barossa), VTA (Mildura),
            Wine Grapes Australia (McLaren Vale)       Wineries seem keen to reduce the number of grape
                                                        growers they deal with
                                                       Grower holds more risk and must pay for winemaking and
                                                        storage
            Process Grapes into Wine (contract) &
    6.                                                 Requires better marketing skills than to sell grapes
                       Market Wine
                                                       Must have high personality profile and image unless have
                                                        a quality product that is different



Page 80                                                                                      VineBiz Manual, 2008
CASE STUDIES
A recent report by Street Ryan and Blueprint Consulting Services (February 2007) prepared for
Mildura Rural City Council and other Sunraysia organisations investigated “Opportunities for Gaining
Economies of Scale through Collaboration”. They presented a number of Case Studies that provide
some real examples for wine grape growers to consider.
Examples of Case Studies taken from the Street Ryan (2007) report for a number of Alternative
Business Structures are listed in Table 9 below.


                         Table 9: Examples of Case Studies from Street Ryan Report

         Alternative Structure Type                   Relevant Parameters               Street Ryan Report
    Leasing extra land                       Annual lease $2,750 per ha pa                  Case Study 2
    Share farming                            Share profit after all outgoings – owner       Case Study 3
                                             40%, sharefarmer 60%.
    Collaborative horticultural precinct –   All contiguous owners must agree – did         Case Study 6
    allow owners to live in houses on        not happen
    property but 80% of each property
    farmed as one
    Machinery ring (UK, Tas), (Canada)       Purchase annual membership;                Case Studies 7, and 8
                                             surcharge for Ring operator
    Sharing grape harvester                  Cost sharing in proportion to tonnes or        Case Study 9
                                             hours
    Private diversion irrigation scheme -    Annual rate per ML                            Case Study 14
    Morquong
    Group purchasing – Yenda Coop            Membership ($10 pa) plus annual               Case Study 16
                                             dividend of 5-7% retained and
                                             accumulated into shares.
    Collaborative marketing – Vintage        Unlisted public company; pledge a             Case Study 22
    Traders Australia                        minimum of 20 tonnes of grapes


Full copies of these Case Studies are presented at the end of this section of the report.
The examples most likely to be of immediate relevance to wine grape growers are:
         Machinery sharing;
         Group purchasing;
         Collaborative marketing of grapes.

Machinery Sharing
Examples of machinery sharing were given from UK, Canada, Tasmania and Sunraysia (grape
harvester and almond harvester).
The key points from these Case Studies were:
         Rural networking provides links between those with machinery and those requiring machinery
          leading to more efficient use of resources.
         Needs good management structure.
         Strict rules on maintenance and repairs.
         Commercial advantage to all parties.
         Flexibility in scheduling of the machinery use.
         Strong contract obligations and long term vision for the parties.




Page 81                                                                                      VineBiz Manual, 2008
Group Purchasing of Production Inputs
The Yenda Producers Cooperative Society in NSW has been established for over 80 years and
supplies merchandise to its members and others. It is a franchise of Landmark.
Members receive rebates and annual dividends on the volume of purchases made. The Coop
commented that with some products it is difficult to obtain significant bulk discounts from wholesalers
as the margins are not high.

Collaborative Marketing of Grapes
CCW (Consolidated Cooperative Wineries Limited)
CCW was formed in 1982 when Berri and Renmano Cooperatives combined. The subsequent merger
with Thomas Hardy & Sons (BRL Hardy) led to the grower members of CCW being offered rolling 5,
10 or 15 year grape supply contracts. The terms of these contracts are considered by other growers
to be better than normal grape supply contracts, mainly because of the length of the supply period.

Wine Grapes Australia (WGA)
Wine Grapes Australia started in 1992 as a company based in McLaren Vale that markets wine
grapes produced in a number of regions by its members to a wide range of winery buyers.
WGA is a group or third party marketer with members committing to sell all of their grapes through
WGA. Members are required to use high viticultural production standards and produce above average
fruit quality. An annual fee based on area is charged to cover administration, marketing and profit for
WGA.
Last season 30,000t of grapes were marketed through WGA.

Vintage Traders Australia Limited (VTA)
VTA was established by Murray Valley Winegrowers in Sunraysia to provide an alternative marketing
structure for their wine grape grower members.
Members of VTA buy $250 of shares and they are obliged to commit an agreed amount of fruit
(minimum 20t) to be marketed by VTA. All grapes are independently assessed and graded for quality.
Growers are required to enter into a contract with VTA to make the grapes available and not to sell to
another entity, even if VTA cannot sell for them.

North East Valleys Wine Group (NEV)
NEV was established in 2007 in North East Victoria (King Valley and other nearby areas) to market
grapes produced by grower members to wineries. There is a business connection to Wine Grapes
Australia in McLaren Vale and NEV uses the same business model developed by WGA.



RELATION OF WINE GRAPE TRANSACTIONS TO THE VALUE CHAIN
The value chain from the growing of wine grapes to the purchase of a bottle of wine by a consumer
includes a number of components from suppliers of inputs to grape growers, production of wine by
wineries, packaging, sales, distribution and retailing. The components over which wine grape growers
have some control are limited to the transactions between input suppliers and the grower, and the
grower and the winery.
Using the Value Chain in Figure 2, opportunities can be identified to improve efficiency and
effectiveness by increasing scale, reducing overheads per unit (hectare or tonne) and reducing
operational constraints.




Page 82                                                                             VineBiz Manual, 2008
                                            Figure 2: Value Chain Diagram



                                                    Consumers




                                             Sales and Distribution
                                              Domestic and Export




                                                         Marketing Processing
              Vertical                 Wineries
                                                              Procuring
              alliances                                                                             Information
               reduce
            transaction          Transaction costs
                costs


                                Wine grape producers            Viticulture                     $


                          Horizontal Alliances create
                                                                                    Product
                          scale, bargaining capacity

                                                           Chemicals, machinery,
                                    Input suppliers          Finance etc, RD&E,
                                                           Information & Advice


                            WGGA scope



Alternative business structures that can be used in the components of the value chain are shown in
Table 10 below.
                 Table 10: Value Chain Stage and Alternative Business Structures

     Value Chain Stage                            Function                              Alternative Structures
 Input and resources supply         Supply chemicals, services,               Outsourcing or group ownership of
                                    finance, advice, land, water              machinery or services;
 Transactions                       Cost effective and timely                 Group purchasing of inputs or services to
                                    procurement                               reduce unit costs;
 Grape Production process           Manage inputs and resources to            Expand vineyard area by leasing, share
                                    produce quality grapes or juice           farming; Reduce risk and labour by leasing
                                    and $ surplus                             land to other grower or engaging a
                                                                              sharefarmer ; Add value by processing to
                                                                              juice
 Transactions                       Cost effective and timely                 Long term contracts with preferred suppliers
                                    procurement of grapes or juice            to reduce risk and transaction costs; spot
                                    of specified quality                      market - opportunistic; Group marketing
                                                                              schemes to increase bargaining power
 Wine production process            Produce wine of required cost             Winery owned or controlled vineyard;
                                    quality relationship

The section of this manual on the relationship between wine price and grape price shows that the
grape grower only receives a small percentage of the final price paid for a bottle of wine by consumers
(see section “Relating Wine Price Points To Grape Prices”).


Page 83                                                                                                 VineBiz Manual, 2008
FINANCIAL PERFORMANCE OF DIFFERENT SIZE VINEYARDS
It is widely believed that larger vineyards achieve higher returns per hectare. To test this belief, data
collected from grape growers in the Riverland (SA), Sunraysia (Vic), Riverina (NSW) and Barossa
(SA) regions has been analysed to determine whether vineyard size influences the financial
performance of the vineyard business.
Vineyards were grouped into size ranges and the Gross Margin (income less operating expenses) and
Business Return (income less operating and overhead expenses) figures were compared with
vineyard size. Table 11 presents the size of the vineyard having the lowest and highest values for
Gross Margin and Business Return per hectare.


   Table 11: Financial Viability (Gross Margin and Business Return) for Vineyards of Various
          Sizes in Riverland (SA), Sunraysia (Vic), Riverina (NSW), and Barossa (SA)
                                                              Area (ha) and Actual Figure
           Region                        Gross Margin ($/ha) (a)                       Business Return ($/ha) (a)
                                       Lowest                 Highest                 Lowest                 Highest
                                      5-10ha                 10-20ha                   <5ha                  10-20ha
 Riverland (27 vineyards)
                                     $1,357/ha              $12,934/ha              -$5,411/ha              $6,424/ha
                                      10-20ha                 5-10ha                  20-30ha                 5-10ha
 Sunraysia (19 vineyards)
                                      -$1,021               $18,231/ha              -$10,017/ha             $15,027/ha
                                       >100ha                 5-10ha                  5-10ha                 5-10ha
 Riverina (19 vineyards)
                                     -$2,149/ha              $6,738/ha              -$7,051/ha              $5,726/ha
                                      40-50ha                10-15ha                 40-50ha                 10-15ha
 Barossa (10 vineyards)
                                      -$393/ha              $10,142/ha              -$4,135/ha              $1,766/ha
(a) Note that the lowest and highest GM or BR for a region does not necessarily belong to the same vineyard business.



The number of vineyards included in this analysis of Gross Margin and Business Return were
between 19 and 27 for each of the warm inland irrigated districts and 10 for the Barossa Valley.
The vineyard sizes with the highest Gross Margin and Business Return were in the range of 5-20ha,
while the lowest Gross Margin and Business Returns were in the range of 5-100ha.
Clearly this data did not show better financial performance from larger vineyards due to “economies of
scale”.



INFORMATION REQUIRED BY GRAPE GROWERS TO ASSESS MEDIUM
TO LONG TERM VIABILITY
Grape growers need to regularly ask themselves a series of simple questions to self-assess whether
they are achieving a realistic return for their vineyard investment, their labour and their management.
The VineBiz Ready Reckoner has been developed to assist grape growers to self assess their
financial performance. This assessment can be done by the grape grower, or by an accountant or
financial adviser.
The questions grape growers need to ask themselves to gather information before seeking
professional advice will also provide answers that they and their families can use in planning their
future. Remember that finance providers dislike surprises, but can be sympathetic if kept informed of
any financial changes to your business.
The basic issues and a set of questions that must be asked are presented in Table 12 below. The
answers to these questions will not only help you think through your position but will also be helpful if
applications for EC assistance, Rural Adjustment, or Centrelink are required.




Page 84                                                                                                VineBiz Manual, 2008
                       Table 12: Issues and Implications for Grape growers

          Issues                          Questions to Ask                                      Implications

 Vineyard Business

 Income                Is vineyard income sufficient to cover operating,               If the vineyard business
                       overhead and debt servicing costs?                              cannot achieve positive
                       Are their any opportunities to generate more income             Gross Margin and business
                       from different marketing strategies or looking for off-         return without off-farm
                       farm income?                                                    income, viability will be
                                                                                       threatened.

 Operating Costs       Can operating costs be reduced without                           Group purchasing.
                       compromising business income or the condition of
                                                                                        Contracting.
                       vines?
                                                                                        Mothballing.
                       Do you know what you “big ticket” items are? Usually
                       they are labour/hire costs, water lease, or machinery
                       R&M.

 Overhead Costs        Can overhead costs be reduced?                                  Often reducing overheads is
                       Usually the major items are debt servicing, permanent           difficult.
                       labour and overhead R&M.

 Debt Level            What is your credit limit (overdraft) with the bank?            Can you manage the debt
                       Are you paying principal and interest or just interest?         level with current income
                       What is the trend in debt level over the last 5 years?          levels?

 Financial             Have you reviewed the financial performance of the              Is the business in decline?
 Performance           business using the last 5 years to analyse trends,              Can you use VineBiz yourself
                       financial ratios, etc? Do you know which blocks are             or will you need some help?
                       performing and which are not?

 Markets               Do you understand the winery contract including time            There may be some other
                       left, terms of contract, yield and quality conditions?          options available for selling
                                                                                       your grapes.

 Assets                What is the condition of the vineyard infrastructure            If assets run down, they will
                       (land, house, irrigation system, fencing, vines, trellis,       either require capital for
                       sheds, equipment, etc)?                                         replacement, of R&M costs
                       Are you maintaining these assets or “mining” them?              will be much higher.

 Personal

 Income from           What salary are you drawing from the vineyard                   If the business cannot
 Vineyard Business     business? Is it reasonable compensation for your                support your living expenses
                       effort? Is this salary included in the financial                you need to question whether
                       assessment of the business?                                     it is a rewarding place to
                                                                                       work.

 Other Income          Do you or other family members earn off-farm income             Can you find full-time
                       to support you and the vineyard business?                       employment and sell the
                                                                                       vineyard?

 Housing               Is the house on the vineyard the main reason why                This question must be
                       you have not considered selling the property and                seriously considered.
                       living and working elsewhere?

 Business Succession   Do any other family members want to take over the               If not, ask why you are
                       vineyard business when you retire?                              continuing? Is it your
                                                                                       superannuation “nest egg”? If
                                                                                       property values decline so
                                                                                       does your super “nest egg”.




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                                                             Figure 3: Some Critical Questions to Ask About Your Vineyard Business

                                         BUSINESS INCOME                                                                                                          PERSONAL INCOME

                      Does the vineyard cover operating costs, overhead costs, debt                                                          Are you using off-farm income to provide living expenses not able to
                     servicing, owner salary, asset replacement, return on investment?                                                                     be provided by the vineyard business?




                                                                                                                                                                               Yes
    Yes
(going well)                                                                                  No
                                           Sometimes


                          Are you paying              Are family                  Can vineyard
                             yourself a               members                                            Can costs be                                           Is off-farm income also being used
                                                                                    income be                                                                    regularly to support your vineyard
                            reasonable             earning off-farm                                       reduced?
                                                                                   increased?                                                                                 business?
                              salary?                 income?


                                                                                                                                                                         Yes         Sometimes
               Yes                           No                       Yes                No        Yes           No



                                                                                                                                                                                        This can be a way of temporarily
                                                                                              Redo financial                                 Your vineyard is not a viable             coping with difficult times, but if it is
                                                                                                analysis                                              business                        needed regularly you must assess the
                                                                                                                                                                                       viability of your vineyard business.




                                                                                                    No                                                            If you cannot make
                                                                                                                                                                    enough from the
                                                                                                                               If you enjoy living on the      vineyard business and
                                                                                                                                  land but not making                you do not feel
                                                                                                                               money, this is a lifestyle        comfortable with the
                                                                                  Are you close               Have you            decision for you and        lifestyle, seek advice on
                                                                                   to your debt              considered               your family.            how to exit the business.
                                                                                 limit? Can you            selling, leasing,                                     You may be happier
                                                                                 continue in the            sharefarming                                      working off-farm and not
                                                                                  short/medium              the vineyard?                                        owning the vineyard.
                                                                                       term?




                                                                                 Seek advice from your Accountant, Banker,
                                                                                    Rural Counsellor, Financial Adviser,
                                                                                      or Centrelink before you position
                                                                                            deteriorates too far.




   Page 86                                                                                                                                                                                   VineBiz Manual, 2008
EXAMPLES OF CASE STUDIES
(Taken from the report “Opportunities for Gaining Economies of Scale Through Collaboration”
prepared by Street Ryan and Associates for the Mildura Rural City Council).

Case Study No. 2: Calculating the Risks of Leasing – A Wine Grape Example
A wine grape grower is considering a lease on a 40 hectare property adjacent to his existing 45
hectare block which has 35 hectares under wine grapes. The lease property is in good condition and
will bring his total area under wine grapes to 75 hectares, of which 73 hectares are under bearing
vines. The proposed period of the lease is four years. His approach to assessing the viability (and risk)
of the proposal is to:
1.    Estimate the additional working capital he will need to operate the expanded property. Taking
      into account the likely benefits of economies of scale he estimates his additional working capital
      requirements as follows.
      Working Capital               The lease costs $2,750 per hectare, paid quarterly in
                                    advance. Annual cost                                        $110,000
                                    Additional annual fertiliser & chemical costs               $31,000
                                    Additional annual labour/contractor costs                   $28,000
                                    Additional R&M, fuel & oil, water, power,
                                    incidentals, interest etc                                   $55,000
                                    Total additional working capital p.a.                       $224,000

2.    Estimate likely yield. (73 hectares at 16.5 t/ha) = 1,204 tonnes, compared with 569 tonnes at
      present, ie an additional 635 tonnes.
3.    Estimate likely income. Currently, he has a contract with local wineries for 400 tonnes of grapes
      and discussions with the wineries indicate he will be able to secure a contract for 90% of his
      harvest in year 1, or 1,080 tonnes. Assuming an average farm gate price of $420 per tonne, he
      estimates he will generate an additional $266,700 as a result of his expanded property size.
4.    Estimate the net benefit or disbenefit:        $266,700 less $224,000 = $42,700
5.    Test sensitivity to changes in key outcomes.
          a) Lower average farm gate price in future as a result of smaller % under contract, competition
             from overseas and/or oversupply of wine grapes
                   at $350/tonne, the net benefit is reduced to                                ($1,750)
                   at $250/tonne                                                               ($62,250)
          b) Lower yield due to a climatic event affecting part of the property.
                   at 12 tonnes/hectare, the net benefit is reduced to                         ($22,400)
                   at 8 tonnes/hectare                                                         ($89,600)
          c) Lower price and lower yield
                    at $350/tonne and a yield of 12 tonnes/hectare,
                     the net benefit is reduced to                                              ($56,000)
                    at $250/tonne and 8 tonnes/hectare                                     ($144,000)
                     He believes he is most vulnerable to changes in price, and observes that the four
                     year term of the lease should provide sufficient leeway for normal or good seasons
                     to compensate for a poor season.
6.    He decides to proceed with the lease agreement, but also to investigate other cost saving
      avenues as a means of providing an additional buffer and to improve his chances of securing
      contracts with wineries. He begins negotiations with neighbours to jointly purchase a truck and
      larger bins to facilitate delivery of larger quantities of grapes to the wineries in a shorter period
      of time.




Page 87                                                                                     VineBiz Manual, 2008
Case Study No. 3: Share Farming an Operating Property - Mildura Region
Overview
Steven has a 20 acre wine grape property in Merbein. He has been developing the property with new
plantings and improved irrigation systems since he purchased it 12 years ago.
The property is now well established and set up for mechanical pruning and harvesting and automated
watering.
At the same time, Steven held a full-time, professional position in Mildura. In 2002, a promotion
opportunity arose requiring him to work and live in Sydney for five years. This forced him to make a
decision to either sell the property or enter into some form of management arrangement.
Steven‟s neighbour Joe has 80 acres of wine grapes and all of the necessary equipment to manage
both properties. Joe also has one full time farm labourer.
Steven discussed his circumstances with his neighbour Joe and they negotiated an agreement.
The rationale for collaboration:
        Joe has the capacity to increase his area under production with his existing tractors and
         equipment.
        Steven has a fixed-term career opportunity that requires him to live away from Mildura.
        Steven retains ownership of the farm property, so that if/when he returns from Sydney, he has a
         home and can resume the farm venture.

Operational Factors
Steven and Joe reach a mutual agreement for share farming. The terms are as follows.


    The Owner – Steven The Share Farmer – Joe                            The Share Farmer – Joe

     Will give Joe full access to the planted area       Is responsible for selling/marketing the crop and
      being shared and associated infrastructure           receives a proportion of the income.
      such as irrigation systems and buildings.
                                                          Will provide all moving equipment/machinery and labour
     Insists Joe maintains a public liability             required to manage the property.
      insurance policy covering Steven‟s property.
                                                          Agrees to manage the property using „best practice‟
     Agrees to pay Joe for all work done, at              horticultural farming techniques.
      market contract rates.
                                                          Cannot make fundamental changes to the plantings
     Agrees to pay all other costs and outgoings–         − eg. cannot change from conventional to minimal
      water and council rates.                                pruning methods.
     Pays all crop management expenses –                 Has access to the full water entitlement associated with
      irrigation, pest and disease control, pruning,       the planted area being leased, but does not have the
      harvesting etc.                                      right to temporarily lease any water in excess of
                                                           requirement.
     The agreement is for an initial term of five
      years.                                              Agrees to maintain accurate records, including time
                                                           sheets for work completed.
     Agrees to a 40% share of the profit after all
      outgoings.                                          The agreement is for an initial term of five years.
                                                          Agrees to a 60% share of the profit after all outgoings.




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Outcomes
Advantages
        Joe has increased his planted area:
         −      with no capital costs to develop the plantings
         −      improving his overall efficiency, as he can manage the extra plantings without purchasing
                any new tractors or equipment.
        Joe is able to employ his worker full-time, benefiting both parties.
        Steven is able to accept his work promotion and live in Sydney.
        Steven‟s property is maintained. If/when he returns from Sydney, Steven may revert to running
         the property himself.
        Steven maintains ownership of his property and benefits from any capital gain due to rises in
         property values.

Disadvantages
        Joe will not achieve any long-term gain for his efforts maintaining the crops.

Risks/ Potential Problems & Possible Solutions
Any arrangement between two or more parties has the potential for disputes where one party is
aggrieved by the actions of another.
Potential problems with the arrangement between Joe and Steven are summarised as follows.


                     Potential Problem                                         Possible Solution
    The agreement is based on a document prepared by         Utilise a professional to ensure the agreement covers
    both parties, without any legal advice.                  unforseen circumstances.
    The owner may dispute the management practices of        It can be written into the agreement that disputes of
    the share farmer. Eg. The owner is dissatisfied with     this type are arbitrated by a nominated horticultural
    the pest and disease management, the irrigation          consultant, whose appointment is agreed by both
    management or the pruning method.                        parties and whose decision is binding.
    Steven and Joe have agreed to an initial term of five    The agreement should include an exit clause for both
    years. They did not foresee the extent of the downturn   parties or be based on a shorter term with an option
    that would impact on the property‟s profitability.       for re-negotiation.


Critical Success Factors
        An agreement (preferably in writing and signed by both parties) that clearly details the
         responsibilities of both parties.
        An agreement that is workable and provides benefits to both parties.
        A genuine preparedness to work together for mutual benefit.

Summary
Joe and Steven developed a share farming agreement at a time when wine grape properties were
generating profitable returns.
Three years into the agreement, wine grape prices plummeted and the returns were insufficient to
cover all costs. Both parties maintained their agreements, but the net result for Steven was that he
had to subsidise the running costs of the property from his off-farm income.
For Joe, the regular work at contract rates contributed to his cash flow, however, over the longer term,
he determined that the contract rate (which is generally based on a farmer using his own equipment)
was not sufficient to cover the real cost of providing a paid man and machinery. This is exacerbated by
the contract driver not having an intimate knowledge of the property – when, for example, a tyre was
staked on an old star post that was never removed, resulting in $1,500 damage for a replacement tyre.



Page 89                                                                                            VineBiz Manual, 2008
Joe also struggles with maintaining the paperwork and often finds himself doing extra jobs such as
checking irrigation pumps in the middle of the night or checking on a driver, which he doesn‟t record
on a time sheet.
In this instance, the concept was workable, but the agreement was ill conceived. Neither party had
adequately evaluated the potential impact of the agreement under different circumstances. Access to
professional assistance in structuring the agreement (or checking its terms) may have averted the
difficulties encountered.



Case Study No. 4: Share Farming Agreement
Tony is a third generation table grape grower with a property of 40 acres just outside Mildura.
However, he has not always worked the property. With four sons in the family and livelihood from table
grapes uncertain, Tony‟s father encouraged him to get a University education. He graduated with a
Bachelor of Commerce from Melbourne University and worked for five years with an export marketing
agency. During this time he travelled regularly to Asia and established a number of very useful
contacts.
After 5 years, however, family circumstances required him to return to Mildura where he eventually
ended up purchasing his 40 acres. He has operated the block now for 10 years, is a diligent grower
and innovative in his on-farm practices. He invested in state of the art irrigation technology to help
reduce water usage and improve productivity and quality. However, Tony realised some time ago that
his block was too small to generate sufficient income on a reliable basis for him and his family.
Consequently, he joined forces with a good friend (Peter) who operates a much larger table grape
enterprise (120 acres) nearby. For a couple of years now, they have been sharing labour and
combining product before sending it to markets in Melbourne and Sydney and to their export agent.
Last year Tony and Peter decided they would try exporting directly to Thailand without using their
export agent. Tony had good contacts in Thailand from his previous position. Consequently, he made
a visit and secured a contract to provide fresh table grapes to a small supermarket chain on a trial
basis. The deal worked out, but it was not without hiccups and took Tony away from his block for
longer than anticipated. However, he was excited about the prospects and was now starting to pursue
a lead to provide grapes into Vietnam as well.
Tony realised that establishing and overseeing export market development was likely to be close to a
full time job, at least in the early stages. He had hired an overseer to take his place on the block, but
this was eating through any returns he was likely to generate and the quality of his work was no match
for Tony‟s, with a resulting decrease in yield. He wanted to stay in the business, but believed the
future was in direct exporting, possibly even establishing a brand and wanted to cement his and
Peter's export market prospects. Consequently, he approached Peter about a share farming deal.
They sat down and nutted out an agreement.

Operational Factors
The basis of the agreement is as follows.
     Peter will “farm” Tony‟s land for a two year period with the income and cost share arrangement
      to be monitored and reviewed after 12 months.
     During that time Peter will:
      −      have full access to Tony‟s land and infrastructure with the exception of the house. Entry
             to the house, which is fenced from the remainder of the block is by invitation or prior
             arrangement.
      −      follow Tony‟s established vine management practices and continue with the same regime
             of application of fertiliser and nutrients. Tony is to specify applications.
      −      use Tony‟s equipment. Tony already had the range of equipment required and preferred
             to see it used and maintained, rather than mothballed.
      −      be responsible for repairs and maintenance of Tony‟s equipment, unless the repair
             relates to a pre-existing fault, in which case Tony will be responsible for payment of the
             repair.
      −      be responsible for hire and organisation of staff.


Page 90                                                                                VineBiz Manual, 2008
            −        be responsible for the ordering and storage of, and pay for, all inputs.
            −        pay for all crop management costs.
            −        be responsible for packing harvested product and transportation of that product.
            −        maintain accurate records of purchases and expenses, including timesheets for labour
                     used.
            −        notify Tony of any problems or issues seeking clarification within 40 hours of the
                     problem/issue arising.
           Tony will:
            −        provide his land, equipment and facilities, with the exception of the house and provide
                     access to Peter (again, except to the house).
            −        maintain public liability insurance on the property.
            −        maintain insurance on relevant equipment.
            −        be responsible for marketing his (and Peter‟s) product.
The agreed cost share arrangement for the initial 12 months was as follows.


                                                                         Tony % Share       Peter % Share
                             Income                                             35                 65


    Cash Costs
    Fertiliser & Nutrients                                                       0                 100
    Chemicals                                                                    0                 100
    Fuels                                                                        0                 100
    Power                                                                        0                 100
    Water & Irrigation                                                           0                 100
    Labour                                                                       0                 100
    Repairs & Maintenance
    - fences and permanent fixtures                                             100                 0
                                                                                    1                   1
    - machinery & equipment                                                     0                 100
    Packing & Freight                                                            0                 100
    Marketing                                                                   100                 0
    Overheads
    Accountancy                                                            Own Costs            Own Costs
    Banking & finance fees                                                 Own Costs            Own Costs
    Own Labour                                                             Own Costs            Own Costs
    Insurances
    - machinery                                                                 100
    - land, buildings & permanent equipment                                     100
    - crop                                                                                         100
    Rates                                                                       100
Notes:          1. Contingent upon it not relating to a pre-existing problem.



They also agreed, that in the event of a dispute that is not able to be resolved between them, they
would appoint an arbitrator (another experienced table grape grower) recommended by the Australian
Table Grape Association. They would each share the cost of engaging the arbitrator.
They had the agreement checked by their respective legal firms, then signed and dated the
agreement.




Page 91                                                                                           VineBiz Manual, 2008
Outcomes
During the first season water allocations were reduced significantly due to the drought. Consequently,
the yield and quality of product was down. While Tony successfully negotiated contracts in both
Thailand and Vietnam, he and Peter had difficulty sourcing sufficient volume of quality product. They
were able to meet their contract commitments but ended up having to buy product from other growers.
They hadn‟t anticipated this eventuality in their agreement, but decided to split the cost of purchasing
product from other grower‟s in the same proportion as their respective shares of their joint production -
ie if 25% of their combined production in that year came from Tony‟s property, then Tony would pay
25% of the cost of purchase.
As well, Tony‟s travel and marketing costs were higher than expected. Neither felt they had generated
returns in year 1, but were still confident that their approach was correct.
They reviewed their respective costs for the year (associated with the share farming deal) and the
income split and agreed to increase Tony‟s share of income to 40%.
Fortunately, the drought situation eased considerably towards the end of year 1 and water allocations
returned to normal. Year 2 was far more productive and both Tony and Peter were able to sell all their
product, with just over 60% going directly to Thailand and Vietnam and a small proportion to a new
contact in Malaysia.

Advantages
     The arrangement enabled Tony and Peter to secure export contacts without having to pay
      export agent fees.
     Tony‟s property is maintained in good working order.
     They jointly do not lose any scale in production as a result of Tony focusing on export
      development.
     As a larger operator, Peter was able to oversee Tony‟s property without any significant increase
      in overheads.

Disadvantages
     Both suffered as a result of cut backs in water allocations, however, this does not relate to the
      share farming deal.

Risks/Potential Problems & Possible Solutions
The main risk for Tony and Peter is that of moving too fast. If they had not been able to source product
from other growers to meet their export contracts they may have permanently damaged their
prospects in those markets. A solution might be to engage other like minded growers in their direct
export strategy, and to develop their own chain to service export markets. This could also involve the
development of a brand and the formation of a separate entity to oversee export arrangements.
A more significant risk is continued cut backs in water allocations which, if severe enough, could
threaten the viability of their enterprises. Solutions to this eventuality, other than increasing efficiency
in water use, are difficult to foresee and may involve a move to different crops. If the share farm
agreement was longer than
Tony‟s and Peter‟s, growers may find themselves locked into an untenable situation under these
circumstances.

Critical Success Factors
     A well thought out and structured agreement.
     Provision for a review in arrangements in line with changing circumstances.
     Good record keeping arrangements to feed the review process.
     Flexibility.
     Trust and a willingness to work together.




Page 92                                                                                   VineBiz Manual, 2008
Case Study No. 6: Redevelopment Proposal: Great In Theory – Not So Good
                  In Practice
Overview
Irymple was mostly developed in a grid pattern made up of 20 x 10 acre properties in each section.
The Planning Scheme allowed properties of 10 acres to be subdivided and most properties now have
a second home site of one quarter of an acre or more, which has been sold and developed as a home
site.
Typically, the houses front the roadway so that they are close to connected services. There are
however some properties where the house has been constructed in the middle or at the rear of the
site.
Most properties are planted to crops from the four main horticultural industry sectors – dried fruit, wine
grapes, table grapes and citrus – but some are planted to olives, vegetables and other crops and
some are used for other lifestyle pursuits including pleasure horses and trotting horses.
This structure worked well for many years, but as general property size has increased to improve
efficiency, individual 10 acre properties are no longer viable in the four key industry sectors.
The diagram below depicts a typical section in Irymple.




David is a wine grape grower in Irymple. He originally had just ten acres, but over the years has
purchased five more properties in the same section so that he now has 60 acres.
Purchasing the additional properties has allowed David to expand his planted area. However, the
additional houses have caused him numerous problems with tenants and he has determined that the
rental income is not worth the hassles related to finding suitable tenants, administration, chasing rental
payments and repairs, maintenance and upkeep.
With six of the 20 properties in the block, David contemplates ways to improve efficiencies for him and
the other landholders.




Page 93                                                                                 VineBiz Manual, 2008
The rationale for collaboration:
     David has 60 acres, but due to land being used for residential purposes, he only farms 50
      acres.
     David has re-planted the fifty acres to the main wine grape varieties, but does not fully benefit
      from economies of scale as the properties are not all adjoining and have separate irrigation
      systems.
     David is visionary and sees a better way to develop the properties to benefit all.

The Proposal
David proposes that all landholders in the section work together to re-develop the section to a
collaborative horticultural precinct.
Within the precinct, each ten acre property has two one-acre house blocks, which are located close to
the perimeter, so that the remaining land can be farmed as a single venture.
The proposal requires landholders to form a management committee responsible for major decisions.
Representation on the committee and share of returns is proportional to land contributed.
The proposal requires that all landholders agree to some major changes to the way they have been
operating their horticultural properties:
     All properties are to be redeveloped to a single crop type – possibly with 3-4 varieties.
     Most property owners will not have an active role in the day to day tasks.

Structure
     David proposes that the landholders in his section form a new legal entity – a company called
      Irymple Horticultural Precinct – and that representation in the Company be based on the
      number of acres contributed to the precinct.
     Each property in the Precinct has an easement established so that the rear-most 8 acres are for
      the sole use of horticulture development through the Company.
     All work is completed on a contract basis – with preference given to members of the Company.
The layout of the proposed collaborative horticultural precinct is shown in the diagram overpage.

Advantages
     The net horticultural area has not increased, however, managing it as a single entity provides
      economies of scale.
     The new plantings are in very long rows, which minimises time spent turning and maximises the
      number of acres which can be managed per hour for most tasks.
     The Company can use modern, efficient equipment which is not viable for small property
      owners.
     The property has just one irrigation system.
     The single 160 acre property is more attractive to fruit buyers/processors, as they only have to
      deal with one client, compared with up to 20.
     Individual landholders do not need to work their land – they can seek off-farm work.
     Landholders enjoy the benefits of living in a rural area.
     The net return to members should be sufficient to pay all land-related costs – municipal rates
      and water rates.
     Individual landholders can sell their farm equipment.




Page 94                                                                                 VineBiz Manual, 2008
Disadvantages
     Landholders moving from other areas may not appreciate all aspects of the country lifestyle and
      may complain about noisy irrigation pumps or machinery operating throughout the night.
     Landholders do not have access to their land for other lifestyle purposes.

Potential Issues
     Some members may not agree with the decisions of the majority of the management
      committee.
     What happens if the horticultural precinct operates at a loss?
     The return from four acres may not be sufficient to warrant participation in a scheme of this
      type.

Summary
Although some of his neighbours could see great potential in being part of the collaborative
horticultural precinct, David was unable to persuade several others to participate.
It was simply not viable for neighbours with houses at the rear of their properties to re-build and some
that were not operating horticultural ventures were not prepared to make major changes to
accommodate the new venture.
In reality, a project of this type will only work when planned from the beginning, before the land is used
for any other purpose. It would require stringent planning approvals and the entity would need to be
covered by a comprehensive constitution to cover all possible scenarios. Nonetheless, a venture like
this one has some distinct advantages for all involved and is worthy of further consideration,
particularly as small properties close to the city are converted to commercial or residential use and as
new areas are opened up for horticultural development.




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Case Study No. 7: The UK Model of Large Machinery & Labour Sharing Rings
Background
CKL is a typical UK co-operative project through which farmers and agricultural contractors share their
machinery and labour. It covers the whole of Cornwall and the Isles of Scilly. However the whole of the
UK is covered by Machinery Rings (thirteen in England, three in Wales and fourteen in Scotland) and
a system is presently being developed to link their databases together in order to give members
access to resources throughout the UK. This will allow Ring Managers to use suppliers from wherever
they are located in the UK and so provide the requested service or commodity within the timescale
and price required.
BMR, the first Machinery Ring to be formed in the UK in February 1987 by 23 farmers and contractors,
has the aim of rationalising labour, machinery and input costs. Since 1987 BMR has grown to offer its
members a constantly increasing range of benefits to help sustain and improve business viability.
Currently, there are nearly 670 members.

Operational Factors
UK Machinery Rings require a formal management structure with a competent manager familiar with
business management skills and typically at least one administrative support.

How it Works in the CKL Case
     The member requires a service and contacts CKL.
     CKL locates suitable suppliers.
     Work is arranged between the Demander and the Supplier.
     The Supplier completes a simple job sheet and sends it to CKL.
     CKL produce two invoices, including Suppliers VAT (GST) and the commissions:
      −     2% per member for machinery jobs; and
      −     5% per member for labour jobs.
     Payment is collected by Direct Debit from the Demander within 21 days of invoice.
     The Supplier is paid by Direct Credit within 28 days of invoice.
For CKL, the cost of being a member is currently £100 per annum and a commission is charged on all
invoices to cover the running costs of the Ring.
Annual Subscription: £100 + VAT (which varies from Ring to Ring).
Commission: rate varies from 4% - 10% depending on service (varies from Ring to Ring).

Operating Procedures
The UK PMR Machinery Ring publishes the following operating procedures:
1.    Annual Subscription. Every member shall pay to the ring an annual subscription decided by the
      Board before the beginning of any accounting year of the Ring.
2.    Levies. In respect of every transaction between a member demander and a member supplier
      the Ring shall be paid a levy as decided upon by the Board of Directors.
3.    Information. Every member must furnish the manager with such information regarding his/her
      machinery and its availability and their likely requirements for the use of the machinery as the
      manager reasonably requests from time to time. From time to time the Ring will circulate
      amongst members a list of available machinery with charges asked.
4.    Arrangements for Use. When a demander has a specific requirement for the use of machinery
      or service he/she must contact the manager as soon as practical. When the manager is
      contacted, if possible, he/she will match the requirement with machinery or service available
      from a supplier and notify the demander and the supplier accordingly.


5.    Payment:

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          a)   Unless the demander and the supplier agree otherwise and notify the manager, all work is
               undertaken at the charge specified in the then current list circularised under Regulation 4.
          b)   When work has been completed to the satisfaction of the demander a schedule of the
               work done must be prepared, signed by the demander and the supplier and returned by
               the supplier to the manager. The manager will arrange for the work to be invoiced to both
               the demander and supplier on the next weekly invoicing run.
          c)   The manager will arrange for the demander to be debited the sum due 21 days after the
               invoice date and the supplier to be credited with the sum due 30 days after the invoice
               date. The demander shall receive due notice of fourteen days of amounts to be debited.
          d)   Every member shall have a current account at a bank and shall provide a Direct Debit
               mandate to facilitate the making of debits and credits under Regulation 6c.
6.    Role of the Ring. In arranging a transaction between a demander and a supplier and effecting
      payment, the Ring acts as an intermediary and not at any time as a principal. The Ring is not
      liable for any default in payment by a demander, nor for any loss, injury or damage caused by a
      supplier.
7.    Insurance. Every supplier must ensure that he/she is fully insured to cover contracting work and
      public liability. Every demander must ensure that he/she is fully insured to cover personal
      accident and injury occurring in the course of works being done on his/her farm.
8.    Liability. Unless the demander and the supplier agree otherwise and make such special
      insurance arrangements as they consider necessary, any liability of the supplier for any loss of
      crop or reduction in yield suffered by the demander as a result of any use of the supplier's
      machinery is limited to the amount of the charge payable in respect of that use.
9.    Machinery. The supplier must ensure that their machinery is in a proper state of repair and is fit
      for its purpose and that it complies with all safety requirements of the law. The demander is
      responsible for any damage to the supplier‟s machinery caused by the neglect or default of the
      demander or his/her employees.
10.   Breakdown. The manager must be notified immediately of any breakdown of a supplier's
      machinery while working for a demander. The manager will allow what he considers to be a
      reasonable period for repairs, taking into account the practical requirements of the demander. If
      the repair is not completed in that period or at any time the manager judges that it will not be so
      completed, the manager may arrange for another supplier to complete the work, in which case
      each supplier will be paid for that part of the work done by his/her machinery.
11.   Complaints:
          a)   Every complaint regarding transactions between members must be made in writing to the
               manager for mediation or adjudication, as he/she thinks fit. If a member is dissatisfied with
               the decision of the manager or mediation fails to bring about a settlement, a member has
               the right, on application to the manager, to put the matter to the Board. The Board will
               consider representations by each member concerned, who submits them and shall decide
               the issue. The board's decision shall be final.
          b)   Any complaint by a member about the administration of the Ring by the manager may be
               raised with the chairman or the vice-chairman of the Board, either orally or in writing as
               the officer concerned directs. If no mutually acceptable settlement is achieved, the matter
               will be referred to the full board.

Outcomes
CKL promotes the following benefits:

Benefits for the 'Demander':
     Saves money! The amounts will vary with each member
     Reduces investment in resources by getting others to do the work.
     Provides quality service, at the right time, at the right price to suit your need.
     Supplements your existing contractors.
     The Demander has the choice of Supplier, enabling contacts to be maintained.


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Benefits for the 'Supplier':
     Earn Extra Income!
     More efficient utilisation of the machinery you own.
     Central accounting.
     Prompt payment - no chasing clients for money.
     Increased customer base.
     Use other Ring services to help satisfy your own customers.
The dramatic growth in Machinery Rings in the UK since 1985 and their large memberships across a
diverse range of production and services indicates the likely benefits provided to individual members
(since annual membership fees are not insubstantial) which will of course vary from member to
member and their utilisation or provision of equipment and the services provided through the
organisation.

Risks/ Potential Problems & Possible Solutions
There are common concerns expressed by members of machinery ventures and similar issues were
raised in discussions with industry groups in Mildura. Nevertheless, as the case studies demonstrate,
trust and good communication among members can usually overcome these potential problems,
which include:
1.    Need to schedule machinery use equitably when timing is critical to planting, spraying and
      harvesting.
2.    Lack of care by some members when using machinery, leading to excessive repairs and
      depreciation.
3.    Lack of flexibility in tillage, planting and harvesting systems when everyone is using the same
      set of machinery.
4.    Need to clean machinery between farms, to avoid co-mingling different types of grain or to
      prevent transporting weed seeds and insects. Removing trash and cans from the cab after each
      person uses a tractor or harvester is also important.
5.    Need to have seed and chemicals available when fieldwork is to be done on each farm.
The CKL Machinery Ring advises its members on a number of common concerns as follows.
     Prices - From time to time the Ring will circulate members with a list of resources available and
      an indication of prices.
     Machinery ownership - All machinery is owned by individual members. CKL registers this on a
      central database.
     Damage, wear & tear - When contracting work it is the responsibility of the supplier. With self
      drive CKL provides legal hire agreements.
     Insurance - All members are required to inform their insurers to ensure they have the
      appropriate cover for any work they expect to perform.
     Independence - All members are free to offer as much or as little of their resources as they
      wish. Members can also specify their preferred 'Demander' & 'Supplier'
     Travelling - The distance you wish to travel is up to you.
     Disputes - The Manager will attempt to resolve any disputes and in the event of failure the
      Ring's Board decision is final.
BMR also identifies frequently asked questions and solutions.
     Q. Who can join the Ring?
      The Ring is open to all farmers, contractors, self employed workers, mechanics, advisers, hire
      firms and any business offering or demanding services broadly related to agriculture.
     Q. The idea sounds good in theory, but can it work in practice if everyone wants
      machines at the same time?
      The Ring is able to search for a supplier amongst a lot of members over a large area. There will
      always be a strong seasonal demand for certain machines and services but even in the most


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      difficult of seasons there are always some people who have finished long before others and are
      looking for extra work. The Ring is there to co-ordinate and make sure that suppliers and
      demanders can immediately be put in touch with one another.
     Q. I have spare machines at certain times of the year but I am reluctant to let anyone else
      use them.
      What do I do?
      Most machinery today is highly sophisticated and needs skilled operation. That is why most jobs
      the Ring organises will involve the supplier member providing both machine and their own
      operator. There will be some items of machinery that will be hired without an operator if the
      supplier and demander wish. Remember, the Ring is only there to match supply and demand. It
      is left entirely up to members as to which of their machines they offer and when and how they
      are to be offered.
     Q. What other services can Machinery Rings offer?
      As well as machinery and labour, many Rings also offer a wide range of additional services
      such as commodity and fuel supplies, group purchasing, business services and training.
      Contact your local Ring for details of services available in your area.

Comment
The sheer size of the UK Machinery Rings where all the equipment is owned by individual members
and fees and charges can support a professional management and administrative infrastructure with
defined rules and procedures virtually negates the risks of failure by an individual piece of equipment,
enterprise or activity.
A small Tasmanian Machinery Ring based on the same principles has struggled since its inception
largely because the scale of operation has been limited making it difficult to support its management
infrastructure (see attachment to this case study).

Critical Success Factors
     The UK machinery Rings are so large and cover such a range of enterprises (farmers,
      contractors, labour agencies and commodity suppliers) that shortages in one area can be
      equalised across the Ring.
     A formal structure and well resourced administration.
     Clear procedures, guidelines and rules.

Summary
The Machinery Ring: A Focus for Joint Action for Operational Benefits
The machinery Ring is essentially a rural community networking initiative which efficiently links those
with available resources (other farmers, contractors and suppliers) with those requiring them (mainly
other farmers). The outcome could be more efficient utilisation of community resources, rural and non-
rural, but depends on the degree of commitment to the network by potential stakeholders.
Commitment will require demonstration of meaningful commercial benefit to members, largely through
strong governance and a competent self funding management infrastructure. Secondly, under the UK
model a large membership is necessary, including both farm and industry members, to ensure a large
pool of machinery and services on both the demand and supply side. Consequently, a regional
approach could be considered as with the CKL Ring in Cornwall, UK.
There are some 3,000 producers of horticultural products in the Mildura Region. If the local industry
organisations together consider there is commercial benefit to be achieved from greater cooperation
and collaboration to drive down costs (of machinery, fuel, fertiliser and chemicals) and as a focus for
other initiatives (collaborative marketing, labour sharing, formal and informal training and to build a
supply or value chain culture), it is suggested seed funding would be required to initiate an
arrangement based on the UK model. An initial target membership of say, 200 is desirable to ensure
sufficient scale to fund ongoing operations and avoid machinery shortages.
A competent manager and an assistant would be required with skills along the lines of the CKL
Machinery Ring. The initiative would require a dedicated web site from the outset and all members
would need to be able to access the site. Some sort of incorporated structure would be required with
members as shareholders.


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This would not necessarily be a cooperative but should work on cooperative principles (one member,
one vote), be designed to become self funding though membership fees and transaction fees (user
fees), but be non-profit.
Any initiative developed in the Mildura Region for horticultural producers specifically needs to be
tailored to local circumstances and requires canvassing widely through well developed workshops,
information evenings and general consultation taking into account some of the critical success factors
canvassed in the overview document. In particular it would be an advantage to demonstrate some
clear commercial benefits early, such as through the establishment of a group buying initiative
focussing on fuel (see Carwarp case study) and chemicals through Landmark or a similar
organisation. The take up on the machinery sharing could take longer as different businesses adjust
their thinking and business practice to the new possibilities on both the demand and supply sides.
Existing member based business organisations such as Yenda Producers Cooperative which has
1,800 members may see value in extending their existing activities by offering the management of
machinery sharing in addition to other member benefits. Yenda has the advantage of an existing
administrative, management and executive structure in place.

Attachment - Case Study: Tasmanian Machinery Ring (TMR)
TMR is a cooperative society established in 1993 with seed money from a Federal grant. Turnover in
1993 was $18,500. By 1998 turnover had increased to $880,000, servicing 120 members. Then
manager John Speed decided to withdraw because his income (then $27,000 per annum) for full time
employment was unsustainable. After a decline TMR appears to have recovered and now has 40
members (farmers and contractors) and a broad-based (12 members) governing board including
representatives of industry groups, such as the Horticultural Officer of the Tasmanian Farmers and
Graziers Association. (This apparently provides a useful forum for discussion of local rural issues).
John has continued his consulting role but he has established a separate casual labour agency.
TMR charges a $50 membership fee and a 2% fee on contracts negotiated. TMR owns no machinery.
A margin on negotiation of group fuel supplies has been a major source of income for TMR. A second
hand machinery register is also maintained for hire purposes by farmers given the depressed state of
the second hand machinery market.

Critical Success Factors
John Speed argues the manager has a full time role in continually promoting the services of the Ring
with farmers. The diversity of agriculture in northern Tasmania is claimed to assist the effectiveness of
TMR. In an area where there is a strong monoculture, such as cereal cropping, John argues
everybody would want the same machinery at the same time (although this is disputed in the UK
cases). TMR has no web site which may affect its effectiveness. The use of increasingly sophisticated
farming equipment, such as electronically controlled equipment, requires trained operators, usually
equipment owners operating as contractors to ensure adequate care and timely and effective repair
and maintenance.




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Case Study No. 8: The Canadian Model of Smaller Machinery & Labour
                  Sharing Rings - The Kipling Agricultural Machinery
                  Co-operative Ltd
Background
The Kipling Agricultural Machinery Co-operative Ltd. (KAMCO) was formed in April 1996 by four farm
families involved in the production of dryland cereal, oilseed and specialty crops. The impetus behind
its formation included the difficulty of hiring competent seasonal labour and the desire to reduce the
costs of machinery by increasing scale.

Operational Factors
The members decided to limit their commitment to the co-operative to the ownership and use of farm
machinery and to the contribution of labour. Land, crops, and other assets are not pooled and the farm
economies are kept separate.
While members plan their own cropping program and keep their grain separate, critical production
decisions are made together. Once the member‟s planting decisions are made, the group meets to
decide on a strategy to complete key farm operations, such as seeding and harvesting. The strategy is
based on agronomically sound principles. If one parcel of land is dry, for example, then that is where
the co-operative begins planting.
Machinery operating and maintenance expenses are shared by members on a per-acre basis. The
costs of maintaining and purchasing the machinery owned by the co-operative are covered each year
by dividing total expenses by total acres. The costs are then allocated to each individual farm based
on spring seeded acreage. Throughout the year, the co-operative makes cash calls when money is
needed to meet its expenses and loan payments. Each member provides the co-operative with a
promissory note to ensure that obligations to lending institutions and suppliers can be met.
Labour is contributed by all members on a per-acre basis. Shortages in labour contributions are
assessed at $10 per hour, and any excess is paid out at $10 per hour. The sharing of labour has
helped solve some of the members‟ problems in getting reliable, experienced farm help.
In addition, members contribute different areas of expertise to the coop. One of the members handles
the bookkeeping and accounting. Two others contribute their knowledge and experience with previous
cooperative endeavours, including a hog-breeding operation. The fourth is in charge of equipment
maintenance and repair. The co-operative is charged a fee for this service, which includes labour,
tools and a shop facility.
One of the initial steps in organising the co-operative was to determine the equipment needs of the
group. After an inventory of member equipment, five tractors were sold and two were retained, three
combines were traded or sold, one was kept, and another was purchased, and two seeders were
traded and two retained. Out of the original inventory, the group kept one swather, two cultivators and
four grain trucks.
Each member‟s contribution of equipment was accounted for through a member loan granted to the
cooperative, which equalled the agreed value of the machinery less any debt owing. The sale of the
equipment or its transfer to the co-operative resulted in both credit and tax implications for the
members.
As is the case on most farms, some of the equipment was held as collateral for its purchase, or to
secure a line of operating credit. As members sold the equipment or transferred it to the co-operative,
their collateral disappeared. As a result, some members had to mortgage land to secure the
necessary credit. In addition, the sale or the deemed sale of the partially or wholly depreciated
equipment resulted in recapture of Capital Cost Allowance, which had negative tax implications for
some members.




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Outcomes
After three years of operation, the co-operative accumulated approximately $675,000 in assets, which
included two combines, two zero-till airseeders, a swather, four trucks, two cultivators, one harrow bar
and three grain augers. The recent purchase of a used high-clearance sprayer has been particularly
beneficial. With a purchase price of $80,000, none of the members could have afforded the machine
on their own. Shared ownership, however, has given members an advantage in being able to spray
earlier and in wet conditions, in addition to saving money by eliminating the cost of custom spraying
services.
The pooling and optimum use of the equipment through the co-operative has reduced equipment-
related costs for the small farms involved from $40 per acre to $14 per acre, and for the larger farms,
from $20 per acre to $14 per acre. Time savings is another important benefit. Since joining the co-
operative, for example, one member‟s land was seeded in four and a half days and harvested in three.
When farming independently, the same member required twenty-one days to seed and fifteen days to
harvest.

Critical Success Factors
     Willingness to co-operate and recognition of the benefits of sharing skills and experience as well
      as resources.
     Size is manageable.
     Shared risks and benefits.



Case Study No. 9: Sharing A Grape Harvester – Mildura Region
Overview
Vince is a wine grape grower with a 150 acre property north of Wentworth. The property is planted to a
mix of the usual wine grapes, with roughly 30 acres each of five varieties.
For the first two years, Vince engaged a contract harvester. While the performance of the contractor
was satisfactory, it was often difficult to get the harvester at the exact time needed to fulfil his
obligations to deliver grapes to the winery at the specified time.
Vince‟s annual contract harvest bill was $46,000.
Vince was determined that it was worth looking at alternatives and investigated buying a second hand
harvester.
Vince‟s first inquiry was to his bank. Despite initial advice that he would be better to continue engaging
a contractor, the bank suggested a lease arrangement and supported Vince‟s application for finance.
Further, the bank was aware of a suitable second hand harvester that was available due to a
repossession and assisted to put together a deal.
The harvester under consideration was $120,000. The lease arrangement was for five annual
payments of $28,000 and a 10% residual ($12,000) at the end of the term.
Vince was immediately satisfied that this was a better option than using a contractor. However, it
occurred to him that this good deal would be a great deal if he only had to pay half the total costs.
Vince approached his neighbour Mark to discuss a sharing arrangement. Mark has a property around
the same size as Vince‟s and immediately saw the potential benefits and agreed on the spot.
The rationale for collaboration:
     The relative remoteness of Vince‟s property dictates that harvesting requires more planning
      than properties located only a short distance from a contract harvester – being self sufficient is
      almost a necessity.
     Vince figured that if he could secure and maintain his own harvester for around the same
      annual cost as engaging a contractor, the convenience of having the machine available on-
      demand was in itself sufficient reason to proceed.




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Operational Factors
Vince and Mark discussed various options and developed a sharing arrangement with the following
general conditions:
     Vince and Mark formed a formal partnership, with its own ABN, bank account and taxation
      returns.
     Each partner was to deposit their share of the lease payment into the bank account before the
      annual payment falls due. Initially this was set at 50% each, with the intention of adjusting the
      contribution based on usage.
     The GST component of the lease payment was credited back to the bank account and not
      withdrawn.
These funds were then applied to maintenance.
     All costs would be shared on a pro-rata basis, based on the number of hours the harvester was
      used by each person.
     The machine would be „booked‟ by either party on a „first in, first served‟ basis, by faxing the
      other party a winery intake booking confirmation.
     The machine was to stay on the property of last use, until there was a need to move it to the
      other property, in which case the person who needed it would be responsible for getting it.
     The machine was to be clean, in good working order and have a full fuel tank after each use,
      ready for the other party to collect.
     The only formal document was an agreement signed by each party that if the other party
      defaulted on their payment, ownership would transfer to other party.

Outcomes
The arrangement proceeded and worked well for both parties through the full five year lease term.
At the end of the first harvest, a comparison of the hours used showed that both parties had virtually
the same usage. From that point on, it was agreed for simplicity that all costs would be shared equally.
Accounts were established with parts suppliers.
Vince and Mark (through the partnership) bought a tradesman‟s trailer and purchased a
comprehensive set of spare parts which was always with the harvester. (Being some distance out of
town, and using the machine in the middle of the night, they needed to be prepared for any repair).
When parts were used from the trailer, they were immediately replaced.
After five years, when the lease term expired, Mark chose to end the agreement and offered to
purchase Vince‟s share in the harvester. It was agreed that the harvester was worth $120,000 (the
same as the purchase price five years earlier).
For Vince, the cost of ownership over five years was approximately $80,000 in lease payments and
maintenance. At the end of five years, he received $60,000 for his share, so that his net cost was
$20,000 – or just $4,000 per harvest compared with the contractor cost of $46,000 per annum.

Advantages
For both parties, the harvester is available when needed (except if there is a conflict with harvest
times) and the per-hectare harvest cost is significantly lower than the contract rate.

Disadvantages
There is potential for conflict if both parties are required to harvest at the same time. In practice, this
was not an issue, as once the machine was „booked‟ by either party, the other would work with their
winery to arrange another time. On the rare occasion when a clash was unavoidable, they worked
together to resolve the situation (by starting earlier at one property or getting most of the crop in on
time and making an arrangement for the balance).




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Risks/ Potential Problems and Possible Solutions
Any arrangement between two or more parties has the potential for disputes, where one party is
aggrieved by the actions of another.
Potential problems with the arrangement between Vince and Mark are:


                     Potential Problem                                      Possible Solution
    The agreement is based on a handshake and it is well    Document and sign the agreement, and have it
    known that “a verbal agreement is not worth the paper   checked by an appropriate expert.
    it‟s written on”.


Critical Success Factors
This arrangement worked well because:
        each party had a property of similar size;
        each party had good mechanical aptitude – this meant that they are kind to the machinery and
         alert to potential problems before they escalate to major mechanical problems; and
        each party was flexibility and prepared to work in with the other party whenever possible.

Summary
Importantly, Vince suggests that the lack of a formal agreement was an important factor in the success
of this arrangement. This is contrary to mainstream business advice, however Vince believes that had
a legal document been prepared it would have been so stringent that neither party would have
proceeded. In contrast, the lack of a formal agreement meant that when a problem occured the two
parties got together and thrashed out a solution.



Case Study No. 10: Sharing Machinery – A Mildura Region Model
Background
Red Cliffs Almond Growers is a group of four almond growers who share almond harvesting
equipment which is owned and operated by the group. The group was established 25 years ago
(1985) and has had up to 12 members but some have left the industry. One member has only recently
joined the group.
The members of the group farm 120 acres of almonds but also have other horticultural or off farm
income (school teaching). One grower has 60 acres of almonds and is looking to expand but he also
grows asparagus and citrus.
Almonds yield about a tonne to the acre and are valued at $7,000 per tonne. Direct operating costs
are $2-3,000 per tonne. All production goes to the one processor, The Almond Company. There are
no joint marketing activities.

Operational Factors
The group is formally structured with a constitution and a designated secretary (who has an
accounting background). There are clear rules and procedures with defined mechanisms for joining or
leaving the group.
Operating costs are distributed on an acreage farmed basis.
There is a wide geographical spread of members, up to 20 kilometres, which provides a slight
seasonal variation in crop ripening and hence demands for equipment at harvest time. There is a
roster system and a user with first call this year will go to the back of the queue next year.
The shared machinery consists of an almond shaker, two sweepers, almond pick-up machine and an
elevator.




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Outcomes
The group shares only harvesting equipment which has a high capital cost. Its history of operation
suggests that members have benefited from the sharing of the capital costs of the machinery and
ensuring its greater utilisation though the year.

Risks/ Potential Problems & Possible Solutions
The Almond acreage average of the current four members is 120 acres, with one member having 60
acres. This could provide difficulties but this farm is 20 kilometres from the main group on different
soils and with different harvest timing avoiding overlap in demand for equipment.

Critical Success Factors
The success of the group was attributed to the fact that all members were initially good friends with
“similar intellectual capability and no left field thinking”. Other factors which seem to contribute to its
success are:
     formal written operating procedures; and
     procedures for entry and exit.

Summary
Red Cliffs is in the Mildura area. The Almond group appears to mirror the CUMA model of France and
Canada without the formal governance structures. The group has been in operation for 20 years,
which suggests it has proved relevant and successful. Further study of this group or presentations
from the leadership could provide guidance for those considering similar initiatives locally.



Case Study No. 14: Co-Operative Irrigation Water Delivery
Overview
Morquong, located just north of Mildura, in New South Wales is an irrigated horticultural precinct with a
mix of citrus, wine grapes, table grapes and dried fruit. Land in the Morquong area was allocated by
ballot in the 1950‟s in a scheme similar to other soldier settlement programs in the region.
The Morquong Cooperative Rural Society Ltd is registered under the New South Wales Cooperatives
Act.
The entity was established in 1961 to own, establish and operate an irrigation water distribution
system on behalf of members. The aims and objectives of the Cooperative are to:
     provide and maintain efficient irrigation infrastructure for the Morquong area;
     provide water to the farm gate; and
     strike a charge at a uniform rate per unit of supply.
The Cooperative comprises 24 members, 15 of whom have 50 acre properties and 9 members with
smaller properties. Shares were distributed at the time the Cooperative was formed and are tied to the
property.
Shares cannot be sold or traded and only change hands when a property is sold. Members have
shares and voting rights in proportion to their land-holdings.
The Cooperative has a bulk water entitlement of around 4,000 mega-litres.
As a not for profit co-operative, water is distributed to members at cost. The cost to members is
generally considered competitive with other irrigation water providers, but may be slightly higher than
the net costs incurred by private diverters.




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Operational Issues
The Cooperative‟s responsibilities include:
     holding the bulk water entitlement licence;
     providing and maintaining a pump station and distribution pipelines;
     extracting water from the Murray River and delivering to the farm gate;
     paying Murray River charges;
     maintaining, repairing and replacing the system as required;
     providing a water ganging service (through a paid employee); and
     administering a billing service (through a paid employee), to seek recompense from shareholder
      members.

Outcomes

Advantages
     The Cooperative offers the benefit of economies of scale, minimising the per-member costs to
      maintain and repair the pumps and pipeline.
     The scheme requires just one pump set and pipeline system to get water from the River to the
      point where it is diverted to individual properties. The alternative would be to have a separate
      pump and pipeline to each property.
     A group scheme lends itself to the uptake of new technology. For example, the installation of
      pump automation equipment may cost $50,000 per pump for an individual. The Cooperative has
      four pumps on the river and the total cost of automation may be around $100,000, as it would
      be completed as a single job, using equipment common to all four pumps.

Disadvantages
     The Cooperative scheme incurs some administrative costs that do not apply to private diverters,
      however economies of scale minimise the effect of these costs on individual members.

Risks/Potential Problems and Possible Solutions
Water is distributed to members at a set rate per mega-litre which is determined each year to recoup
all water and administrative charges. The amount charged and held in reserve by the Cooperative for
future repairs and maintenance may not be sufficient to cover the full cost of those repairs. The Board
are aware of this issue and have taken the view that as the Cooperative is taxed on profits, it is better
for funds to be retained by the members, who are likely to incur a lower tax impost. If additional funds
are needed in the future, members will be required to contribute on a pro-rata basis.
The increased level of temporary and permanent water trading occurring in recent years is a
challenging issue for the Cooperative.
As the holder of the bulk water entitlement, the Cooperative has, for several years, temporarily traded
unused water entitlement. The income generated has been treated as general revenue and used for
maintenance or returned to all members on a pro-rata basis. Some members believe that income from
traded water should be returned to the members whose water was traded and that the current system
does not encourage growers to be efficient. An alternate view is that those members who do not use
all of their allocation are not making their full contribution to the Cooperative.
Changes, which will come into effect next year, will remove the link between a property‟s water
entitlement and the property title. Although the Cooperative holds the overall bulk water entitlement,
they need to review their constitution to ensure that processes and safeguards are in place should
members want to sell some or all of their entitlement.




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Critical Success Factors
     Preparedness to work together.
     A solid constitution/written agreement.
     Willingness to negotiate disagreements/difficulties and jointly review practices.
It should be pointed out that an arrangement of this type is unlikely to be replicated on this scale, as
the region is largely developed and the irrigation authorities are all in place. However, there is scope
for smaller groups (of 3-5 growers) to operate a similar scheme, particularly where new horticultural
precincts may be declared.



Case Study No. 16: An Approach To Group Purchasing – Riverina Region
Background
Yenda Producers Cooperative Society Ltd, established in 1925, merchandises agricultural supplies
and provides services such as fertiliser spreading and agronomic advice to customers across the
agricultural sector, including broad acre dryland farmers, large area irrigation producers and irrigated
horticulture. The Cooperative is registered under the NSW Department of Fair Trading. The
Cooperative has outlets in Yenda, Griffith and Leeton. It is also a franchisee of Landmark, the AWB
owned rural services and merchandising company.

Operational Factors
Yenda Producers Cooperative has 1,800 shareholders. Membership costs $10. Shareholders receive
annual rebates based on the volume of purchases and annual dividends, which average 5 to 7% of
shareholding. The average accumulated shareholding of members is $3-4,000 derived from retained
earnings, including rebates on purchases and share dividends, which are accumulated into shares.
The decision to retain accumulated earnings is a decision the Board makes annually.

Outcomes
Peter Calabria, Managing Director of Yenda Producers Cooperative, outlined potential gains from a
buying group but weighed these gains against the loss of services, including agronomic advisory
services and loss of rebates and share dividends.
Peter noted some products provided little opportunity for discounting. Fertilisers typically provided a
7% margin or up to $35/tonne. Yenda could only offer about $5/ tonne discount to continue the
business, ie about 1-2% saving at a maximum. Agricultural chemicals averaged margins of 15% but
the Cooperative would be unlikely to drop its margin below 10%. Bulk cartons often do not achieve
economies where the manufacturer takes back the containers but charges a cleaning fee. For
example, Roundup had the same ultimate cost per litre irrespective of using 20 litre containers or bulk
drums.
Buying direct from manufacturers was rarely possible for branded products where the manufacturer
protected its local distributor. Peter said they would discontinue lines where the manufacturer
discounted product direct to growers.

Risks/ Potential Problems & Possible Solutions
An alternative for buying groups is to form their own cooperative or incorporated body to deal direct
with manufacturers, but this also involved administrative, management and financial (annual reporting)
costs thereby reducing the potential savings.

Critical Success Factors
The Cooperative structure enables members to benefit according to the volume of business with the
organisation. Yenda Cooperatives selling point is that the profits stay in the region.




Page 107                                                                                  VineBiz Manual, 2008
Summary
Yenda Producers Cooperative has an established membership of 1,800 shareholders and a sound
management, administrative and decision making infrastructure which could provide the platform for
developing other business or marketing initiatives. This could include initiating a machinery ring for
interested members including provision for a labour sharing database, training and other services, the
cost of which could be met along lines similar to the UK machinery rings.



Case Study No. 22: Collaborative Marketing Of Wine Grapes
Background
The Mildura area is at the heart of the Murray Valley NSW/VIC wine industry, with the designated wine
regions of Murray-Darling and Swan Hill forming the second largest wine grape producing area in
Australia.
In 2006, 416,000 tonnes of wine grapes were harvested from around 20,000 hectares of vineyards.
This represented just less than a quarter of Australia‟s total 2005 crush and is only slightly less than
the 464,000 tonnes produced in the nearby Riverland Region of South Australia, with which the
Mildura Region has many synergies. A further 295,000 tonnes was harvested in the neighbouring
Riverina region in New South Wales.
While the wine industry continues to be an Australian success story and vital to the Mildura Regional
economy, some aspects of the industry are going through a difficult period. Grape supply is currently
in excess of demand, resulting in rapidly declining prices paid to growers for wine grapes.
Uncontracted growers attempting to sell grapes on the spot market are most at risk, with some getting
a return less than the cost of production and many unable to sell their crop at all. As individuals,
growers inadvertently compete with each other to supply their product to a diminishing number of
buyers.
Murray Valley Winegrowers' Inc. estimates that 50,000 tonnes of wine grapes remained unsold in the
area at the end of the 2006 vintage. Nationally, up to 200,000 tonnes were not sold.

Operational Factors
Murray Valley Winegrowers' Inc. (MVW) decided that a collaborative approach was essential for
growers to regain some balance as suppliers of the raw product to a booming industry.
Approaches to the 1,300 growers on the MVW database generated interest from around 200 growers.
After further communication and information sessions, 126 growers paid $250 each to fund the
preparation of a business plan and establishment of a new business entity.
Vintage Traders Australia Ltd (VTA) has been created. It is an unlisted Public Company with a
minimum shareholder stake of 500 50 cent shares.
VTA has A and B Class shares. A class shares are held by those committing to supply grapes while B
Class shares are available to investors, interested persons and growers that have not committed to
supply grapes.
While 126 growers have shown their support by contributing $250 to develop the venture (and thereby
becoming shareholders) the real test of commitment is the requirement for these shareholders to
pledge a quantity of fruit to the venture (a minimum of 20 tonnes per variety).
Growers committing fruit will be entering into a contract to make that fruit available to VTA and
importantly, not to sell that fruit to any other entity, even if VTA is unable to sell it. The pledge is
perpetual, that is, it is ongoing year after year with an opportunity for either party to modify/change the
pledge up until June 30 each year.
All grapes will be classified by an independent assessor into three quality streams, A, B and C, using
basic criteria in common use throughout the industry. Members will be required to meet quality
procedures such as completion of spray diaries and maintenance of HACCP certification.
All fruit sales will be pooled within each quality category (A, B and C) and members will receive a
payment based on their contracted pledge. For example, if VTA sells 500 tonnes of Group A Shiraz for
$500 per tonne, out of a total pool of 1,000 tonnes of Group A Shiraz, each member will receive $250


Page 108                                                                                 VineBiz Manual, 2008
per tonne whether their fruit has been harvested or not. (This is a simplified example – in practice, the
member that has incurred harvest costs will receive a higher net payment than members that have not
harvested their crop. Of course, the distribution will vary with the numbers in the pool).
VTA will develop a marketing team to promote the venture to prospective buyers, which will include
not only wineries seeking fruit but also other businesses seeking finished wine.
The sale price (and therefore the return to growers) will be determined by a mix of market forces and a
„fair‟ return based on the costs of production.

Outcomes
Advantages
      All growers have the opportunity to participate.
      Growers will be in a stronger marketing position, with the support of an industry-backed
       organisation.
      The success or otherwise of the venture will be shared equally by all members, irrespective of
       whether fruit from their property is sold.
      Over time the venture could be a suitable vehicle for facilitating other cost savings and
       marketing initiatives.

Disadvantages
      Growers‟ patience and support for the medium and long-term vision is essential. Initially, due to
       establishment and development costs, the growers participating in the venture may receive less
       than if they were competing in the marketplace on their own, particularly in a year of strong
       demand.

Potential Problems
      Grower members that have not had fruit harvested may be tempted to sell fruit outside of VTA if
       they receive an offer late in the season. This would be in contravention of the contract terms.
      Growing optimism that the supply and demand equation may be heading back towards balance
       for the 2007 Vintage, due to a below average crop (affected by frost, drought and water
       restrictions). Growers may decide that the situation has improved to the extent that they don‟t
       need to be part of the VTA.
      Other groups may set up in competition, detracting from their competitive advantage.

Critical success factors
      A sufficient volume of fruit to market.
      Grower support.
      A longer term perspective.
      A genuine partnership approach.
      Transparency in costs and returns.




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