8 keys to a better wine grape grower contract8 keys to a better wine grape grower contract
There should be at least eight essential components in a wine grape purchase agreement, from the grower perspective including: identifying what is traded, agreement terms, method of price determination, payment terms, quality standards, inspection and adjustments, viticultue practices (farm plan), and harvest and delivery details.
May 22, 2013
A signed wine grape purchase agreement – a.k.a. ‘the contract’ - between a buyer (winery) and a grower is a long-term committment.
“You need to know who you are committing your life to over the next 1-15 years,” says California wine grape grower advocate Nat DiBuduo.
DiBuduo is president of Allied Grape Growers (AGG), a 600-member wine grape marketing cooperative based in Fresno, Calif. which represents the interests of wine grape growers.
DiBuduo and AGG Vice-President Jeff Bitter understand wine grape contracts since the grower representatives review or write about 500 grape crush contracts (wine grapes and grapes for concentrate) for AGG members annually.
The grower representatives estimate that more than 95 percent of the California wine grape supply is contracted on template agreements written on behalf of the winery, mostly by attorneys. In buyer-grower contract negotiations, some wineries will change the contract to accommodate grower concerns; others may not. Some contracts are written by grower representative organizations, including AGG.
Bitter, Allied’s chief contract negotiator and reviewer, reads every word in a proposed contract.
“We are always on guard for contract terms which are unfavorable to growers,” Bitter said.
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Most wine grape crush contracts are negotiated from the spring through early fall. Most contracts are 3-5 year agreements. Planting contracts usually last more than 12 years.
Grape contracts have two integral parts – grape and legal components.
“Sometimes growers see the price on top, the length of the term, and then sign the contract,” DiBuduo said. “In doing so, growers sometimes give up their rights.”
Eight essential components
DiBuduo and Bitter say there should be at least eight essential components in a wine grape buyer-grower agreement. These include:
One – precisely identify what is traded
The contract should clearly state purchase specifications - the varietal, acreage, and locations from which sourced, specific appellation (if any), and if a limit exists on the purchased/produced tonnage.
“If a crop comes up short in tonnage (due to weather for example), the contract should state if the grower is responsible to find grapes from another source to make up the difference,” Bitter said.
A contract should clearly state whether the winery will purchase all the tonnage from a specified number of acres (with or without limitation), or whether the purchase is strictly based on certain tonnage total, not acreage.
If the agreement is tonnage based, DiBuduo says growers should consider the maximum vineyard production potential over the length of the contract so that any crop overage is not paid at a secondary (lower) price.
Longer contracts should address potential long-term issues. For example, if a vineyard becomes unproductive or non economical due to disease, yield, or if production prices escalate while the market price does not, the contract should state whether the grower can graft the vineyard to another variety, or remove and replant the vineyard.
Two – agreement terms
The contract should state the specific years of the agreement – one-year or multi-years (2013-2015, for example).
A contract can be an ‘evergreen’ agreement where the contract is continuous from year-to-year until one party wants out. The evergreen should be worded precisely so both parties understand how to terminate the agreement.
“Usually an evergreen agreement ends because one party is unhappy,” Bitter said.
In most evergreen clauses, the agreement is honored for one full crop year after the termination notice is given. This gives both parties time to replace the tonnage or replace the buyer.
Three – method of price determination
A grape contract should include either a fixed price or a negotiated price.
For a fixed price, state the price for the length of the contract. For a negotiated price, a price per ton minimum may be stated over the contract period.
“In the current wine grape market, growers tend to have more financial success with a negotiated price which has increase opportunities built into it,” DiBuduo said.
Negotiated contracts are common with large wineries. Wineries can offer to pay a higher price to the grower depending on the wine grape market.
“Even though the winery price can be higher than the minimum it may not be as high as the grower thinks it should be based on other sales,” DiBuduo said. “The buyer may be in control based on the verbiage in the contract.”
The grape price is often tied to the National Agricultural Statistics Service’s crush report – a price index of sorts – where growers are paid according to the average district price in a pricing district.
Whatever price tool is utilized, get it in writing. Remember to have a remedy clause in the event a price cannot be agreed upon.
Four – payment terms
Spell out exactly when and how the grower will be paid.
Many wineries prefer to stretch out the cash flow since it takes awhile before a bottle of wine appears on the retail shelf. Many smaller coastal wineries request extended payment timelines which can exceed one year after crushing.
Growers usually prefer to get paid within 30 days after delivery to the winery since they have invested one year’s worth of finances into growing the crop.
For some growers, the preferred payment period can be tied to taxes. Some growers’ tax years follow the January-December calendar. Others have different tax-year arrangements with government.
“For growers, there is no reason not to get paid 30 days after delivery unless a tax reason exists,” Bitter said.
Five – quality standards
Minimum and maximum brix (sugar) standards should be stated in the contract and whether the winery prefers brix in the mid range level. This is usually not stated and can lead to problems.
Another issue is grape quality near harvest or at delivery. Wineries may want to discount the price or reject the load due to a too high or too low brix level, rot, mildew, raisining, or excessive plant trash in the load.
Bitter says growers should be aware of the grape quality wording. While a grape load may pass a state inspection, the buyer may have more stringent standards in the agreement which are almost always graded subjectively.
Six – inspection and adjustments
If a grape-quality disagreement exists between the buyer and the seller, a third-party inspection is an option through a State of California contractor. These inspections are common in the San Joaquin Valley.
If one test of a load suggests a problem (brix level for example), Bitter says it is best to conduct a second test of the load to determine if a problem truly exists.
For example, it is not uncommon to see one or two loads out of a series of loads from the same vineyard fail to meet the minimum brix level required by the winery. If this is the case, the loads should be retested.
“From the grower standpoint, it is desirable to use the brix level for the entire field versus grading each load independently,” Bitter says. “After all, it usually goes into the same tank at the winery.”
The farm plan
Seven – viticulture practices (farm plan)
Additional viticultural practices are often required to produce higher quality wine grapes for wineries which want produce premium grapes. Some of these practices - shoot thinning and leaf pulling, for example – can be outside of the grower’s normal, customary farming practices.
Wineries sometimes want a specific farm plan spelled out in the contract which specifies the required viticultural practices.
DiBuduo said, “A farm plan is fine as long as the winery and grower jointly agree to it. The grower should be financially compensated to cover the costs of the additional viticulture practices.”
Growers should include costs increases for the practices over the life of the contract.
Eight – harvest and delivery
The contract should state whether the grapes will be harvested by hand or machine. While both parties have agreed to machine harvest the grapes in the past, it does not mean that is the expectation in the future. Get this in writing.
The agreement should also specify the types of containers to transport grapes to the winery.
“We’ve had growers who delivered grapes in containers, only to find out the winery could not handle the containers in terms of size or format,” Bitter said. “When the truck showed up at the winery, both parties looked at each other bewildered. There was a major lack of communication.”
The certified weight of the crop can also be an issue. Some wineries do not have a certified scale. The grower must utilize an independent scale on the way to the winery and on the way back to gain the actual weight of the grape load.
“The grower and the buyer should make sure issues like this are understood upfront so there is no misunderstanding,” Bitter said.
DiBuduo and Bitter offered several other points between the buyer and the grower. The buyer should notify the grower if the hours of the winery change. Sometimes grape processing at the winery is delayed for various reasons. This can push back the grower’s harvest and delivery schedule.
Some wineries in recent years have asked growers to wave their producer’s lien right.
“Never waive the producer’s lien for any reason,” the grower representatives said. “The lien is there to make sure the grower gets paid.”
The actual length of buyer-grower contracts can range from a single page to multiple pages. Sometimes the use of a small-sized font and boiler-plate legal jargon makes it difficult to read and interpret the clauses in a contract.
“Be sure to read the contract from front to back, including the fine print,” the grower advocates suggest.
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