Reference no: EM131165942

Shutting Down a Vineyard

Business firms can close their doors to shut down, but can a farmer shut down a field?

Many California vintners, faced with falling prices for red wine grapes, did just that in the early 1980s. They simply chose to let their grapes rot in the fields rather than pick them. They kept their vines alive to produce in subsequent years, but they didn't harvest their current crops.

During the expansion of the California wine industry in the 1960s and 1970s, growers had to make a crucial choice-whether to plant grapes such as Zinfandel from which red wines are made or to plant grapes such as Chardonnay from which white wines are made. Leaning toward the preferences of growers and consumers in Europe, where red wines have long dominated the wine industry, most California vintners opted to grow red-wine grapes.

Early in the 1980s, however, consumer preferences in the United States shifted strongly toward white wine and away from red wine.

The result was higher prices for white-wine grapes and lower prices for red-wine grapes. And that spelled trouble for growers of red-wine grapes.

Growers found prices had fallen not just below their average total cost curves, which meant they were losing money, but below their average variable cost curves. Grower Phil Johnson recalls the situation: "When the price fell below the cost of harvesting and hauling the grapes, many growers left their grapes on the vine."
Sean James was one of those growers. "The price fell below our variable cost, and we simply didn't pick the grapes," he said. "We kept our grapes alive because we expected a recovery, which we eventually got. But when prices were down, we didn't harvest."

Shutting Down a Vineyard

Use the except above to answer the questions below:

1. In your own words, describe the illustration of a graph that depicts the situation the red-wine grape growers faced when they decided not to harvest. Be sure to correctly identify each of the curves in the graph and their position.

2. The Case says that the red wine grape growers did not harvest their crops but that they kept the vines alive in anticipation of a recovery. Keeping the vines alive constitutes what kind of cost? What would have had to happen to cause these growers to plow their grapevines under and plant white-wine grapevines instead? Explain your answer in economic terms.