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82 W i n e s & V i n e s O C T O B e R 2 0 1 4 A succession of great harvests, coupled with rising prices, have every competent winegrower in California comfortably in the black and feeling secure. It's starting to feel a lot like it did right before the economic crash. Or maybe it reminds you more of the late 1990s? Hopefully when we think back to those good times, we also remember the years of depressed prices that followed and how disastrous they were for the unprepared. When that downward turn arrives depends on where your vineyard is, what varieties you're growing and who your fortuneteller is. What we do know with certainty is that winegrowers must prepare now for future challenges. The Do's Improve your cash position now. This may be obvious, but the benefits are often underestimated. Your bank account isn't just a cushion against falling prices, it's your war chest. Financial hardship breeds future opportunities: lower land prices, distressed sales of vineyards and other wine assets, advantageous long-term leases, equipment liquidations. You may want to crush your own grapes once prices approach a trough, and sell bulk wine when they rise. Just make sure you're tim- ing this properly and not hampering cash flow for little reward. Invest wisely now. Any investment— whether in machinery, land or vineyard im- provements—should be analyzed through the prism of four questions: What will be my return? How will this affect cash flow? How will this affect operational and finan- cial risk? Is there a better use for my money? In good times, the last question is often for- gotten, ignored or answered impartially. Cash flow may be strong, but that doesn't mean that a new 7.3-liter Power Stroke die- sel is a better investment than, say, a down payment on a mechanical harvester (and it's probably not a better investment than just leaving money in the bank). If you're spend- ing your war chest, make sure it's not only for a good reason, but for the best reason. You should, however, always be looking for investments that improve your yields, re- duce costs or mitigate risks. Plan wisely. Work with colleagues, your banker, your CPA or a consultant to aug- ment your financial planning. Perform sce- nario analysis and sensitivity analysis. These similar techniques come from different angles. Scenario analysis looks at "what if?" situations. What happens if grape prices drop to a certain level for a certain period of time? How do you then respond? How do you prepare for this? What if prices fall and labor costs spike at the same time? Sensitivity analysis involves taking your financial plans and quantifying the likeli- hood and severity of deviation from your expectation. In terms of grape prices, this involves projecting prices and then, as I do at VFA, assessing the probability they devi- ate up or down by certain amounts. You can then graph these probabilities and crunch some numbers to determine how likely those prices are to hurt you by how much. The same can be done for yields and some costs. Improve your line of credit now. Securing additional credit in a tough market, when you really need it, will be difficult or im- possible. The reason you'll need money is the same reason you'll be labeled a "credit risk." Luckily, banks are often more short- sighted than farmers. You might not need more credit when things go sour, but ask for it now, while your financials look en- ticing to the banks. The Don'Ts Forget about opportunity costs. Now that you have money coming in, this may be the ideal time to replant or otherwise invest in your vines. Then again, it may not. A replant will reduce yields to zero for years, and not all years are created equal. Your projected returns and discounted cash flow analysis must reflect price fluctuations. Replant now and you'll miss out on the next few years' great prices and start crop- ping just in time for falling prices. Depend- ing on your specific situation, you may be better off replanting when prices are falling, to reduce opportunity costs. Assume that a flat, nominal price and multi-year contracts are best. If relevant grape prices are set to rise for the next few years, then any multi-year contracts are best indexed to the numbers in the crush report. Once we get closer to the crest and fall in prices, you would be wise to ask for a long-term contract with as stable a price as you can get. Just make sure to check with that fortuneteller first. None of the above advice is ground- breaking or surprising. What is surprising is how often growers fail to do this type of planning. The main reason, I think, is that actually doing the associated analy- sis can be complicated and/or cost money. Not doing this type of analysis, however, will lead to much more costly, complicated situations in the future. Viewpoint Growers Should Prepare for Lean Times Ahead By Gabriel Froymovich We welcome commentaries from readers on issues of current interest in the wine industry. Send your topic idea to edit@winesandvines.com, and we'll contact you. G U E S T E D I T O R I A L Gabriel Froymovich specializes in grape price projections and provides financial, strate- gic and operational consulting to vineyard owners, wineries and other members of the wine industry through his company, Vineyard Financial Associates, in Healdsburg, Calif. Your bank account isn't just a cushion against falling prices, it's your war chest.