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What is Making Investment in the Texas Vineyard Industry Tick? A Real Options Analysis of Entry and Exit*

Published online by Cambridge University Press:  08 June 2012

Don Cyr ,
Roger D. Hanagriff  and
Lester M.K. Kwong
Don Cyr
Affiliation:
Department of Finance, Operations and Information Systems and Fellow of the Cool Climate, Oenology and Viticulture Institute, Brock University, 500 Glenridge Avenue, St. Catharines, ON, Canada, L2T 3T4, e-mail: dcyr@brocku.ca (contact author).
Roger D. Hanagriff
Affiliation:
Texas A&M University Kingsville, MSC 228, 700 University Blvd, Kingsville, Texas 78363–8202, e-mail:kurdh000@tamuk.edu
Lester M.K. Kwong
Affiliation:
Department of Economics and Fellow of the Cool Climate, Oenology and Viticulture Institute, Brock University, 500 Glenridge Avenue, St. Catharines, ON,Canada, L2T 3T4, e-mail: lkwong@brocku.ca
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Abstract

The Texas wine industry of the United States has experienced substantial growth in recent years and yet is constrained by a significant lack of supply of Texas grown grapes. Using a real options framework we examine the role that wine grape price uncertainty plays on the financial decision to invest in vineyard operations in the state of Texas. Given reasonable estimates of required rates of returns, investment and operating costs for typical Texas vineyards, it is found that grape price uncertainty results in a delay in investment and subsequently a lack of grape supply. This delay in investment, known as hysteresis, is often found in situations involving large fixed investments combined with uncertain returns. In general the results indicate that average prices for Texas grapes would have to increase by 30 to 40 percent in order for a significant expansion in Texas vineyards to take place. (JEL Classification: Q120, Q140, G310, D920)

Type
Articles
Information
Journal of Wine Economics , Volume 5 , Issue 2 , Spring 2010 , pp. 236 - 255
Copyright
Copyright © American Association of Wine Economists 2010

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