Business in China and Risk Pricing

Unfortunately, I have to miss class this week. So, I wanted to do a bit of research on the China topic, since I found it interesting. I reached out to one of the Napa wineries mentioned in the case (not Frederick) and spoke with the person who runs their export business. This winery had chosen the logistics partner option and worked with Gliding Eagle for a couple of years when they first entered China. After some disappointing performance, they moved to Napa Reserve as their logistics partner for a spell. Turns out that the China performance was only partially due to the partners and that a lot of the problem was China itself and trade with the country. The winery end up pulling out of the country entirely about four years ago when China imposed a 14% tariff on U.S. wines. This has since risen to 29%. Even before the latest tariff, U.S. share of China's wine declined in actual (volume) and relative (share) terms significantly -- the winery I spoke to was not alone in its pain. (source)

Bringing it back to the case, I'd point out that the difference between discounted cash flows of the (high or ~100% probability) bulk grape sale cash flows and the potential China cash flows becomes negligible when you use appropriate discount rates. Specifically, there's no difference in NPV when you price China ~15% higher (in discount rate terms) than the bulk option (depending a bit on your probability-weighting for the China scenarios). Such a gap in discount rate is fair, in my opinion, given the different risk profiles, which you see play out in the above winery’s experience.

To round things out, I would be curious to hear how grape prices in Napa have trended. There’s not more land being added to the Napa AVA, as far as I’m aware, and I was surprised to see flat prices in the bulk forecast at ~$5,900 per ton. A friend at a (different) upper/mid-tier Napa operation using very similar grapes to Frederick’s pays closer to $6,500 per by this point, for example. Therefore, I think the default option of bulk sales is understated in its attractiveness.