Eric N. Sims
French Oak barrels are considered a vital input for the finest wines, and comprise a very large portion of wine production costs. Wineries in the United States purchase French oak barrels priced in Euros, and have the opportunity to pay for their barrels early, in April, with a discount or in September with no discount. Given the inherent complexities in fluctuating exchange rates and limited resources of the average winery, little consideration has been placed on this purchasing decision despite potentially large cost implications.
The present work analyzes historical and barrel-specific data over the last fifteen years to find a huge monetary advantage to early purchasing and obtaining the price discount, even accounting for exchange rate volatility and opportunity costs. Barrel-specific prices were obtained from Continuum Estate in Napa, California, though the authors provide detailed analysis and a broader interpretation to aid in practical decisions of typically structured wineries in the United States.
Early purchasing of French oak barrels over the past fifteen years, accounting for lost interest, would have decreased average winery costs by over $60,000 as compared to paying upon delivery. For larger producing-wineries, this savings is even more pronounced.
This is the first paper to investigate the existence of an optimal decision rule regarding the purchasing of wine barrels, a vital input to wine production. This is of interest to not only those involved in the growing industry of wine-making, media and wine connoisseurs, but also to any similarly structured firm facing early commitments at a reduced price.
This article was written by Karl Storchmann