Production Costs – Cidernomics

The Cost Of That Fizz In Your Cider

February 4, 2017February 4, 2017 @AppleEllie8 Comments

It took us 4 years of making ice cider before we tried to produce a hard cider, or what people in every other country in the world just call cider. In 2007, there were very few ciders on the market, and what most people knew as cider was mass produced, very sweet and low priced, not a market we had any intention of entering. But by 2012 cider had become ‘a thing’, and people were starting to explore a broader variety of ciders, including the wonderful tannic, dry ciders being made by orchard-based cider makers like our friends at Farnum Hill Ciders (NH), Eve’s (NY) and Foggy Ridge (VA).

One of the most important decisions we had to make was how to produce fizz in the cider. It’s not just ‘to fizz or not to fizz’. How you produce fizz can make a big difference for other attributes of the cider, particularly cloudiness and the level of sweetness. The other big issue is how the cider gets into the bottle or can, because that has major implications for processing and equipment costs.

Left to its own devices in a vessel that allows gas to escape, fermenting apple juice, just like fermenting grape juice, will end up totally dry (all of its fruit sugars turned into alcohol), and still (all the CO2 produced by the yeast during fermentation having escaped into the atmosphere).

Here are choices one can make as a cider maker, and their implications and issues:

Pet Nat: Finish fermentation in a heavy, pressure-rated bottle. The sealed bottle will capture natural CO2 from the fermentation process and the result will be a cloudy cider because the dead yeast (called ‘lees’) stay in the bottle. Depending on the quality and cleanliness of the process before bottling, there may be various degrees of stinkiness and/or haziness. This is referred to as Petillant Naturelle (‘Pet Nat’) or ‘Methode Ancestrale’.
Champagne method: Take a still, dry cider base and bottle it with the addition of yeast and sugar. It will cause a new ‘secondary’ fermentation inside the bottle, which will capture the newly-formed CO2. The bottles are stored upside down so that the yeast collect in the neck. Then a process called ‘disgorgement’ is used whereby the cap is removed, the yeast residues are exploded out by the pent up pressure, the bottle is quickly topped off and corked to capture the remaning CO2. This results in a clean, naturally sparkling cider. A ‘dosage’ can be added after disgorgement while topping off to provide some sweetness.
Charmat method: Add sugar and yeast to create a second fermentation in a pressure-rated (brite or Charmat) tank. This enables natural CO2 to be produced in the cider that can be further processed before being bottled. However, any processing – sweetening, filtration, bottling – has to be done under pressure to avoid losing the CO2.
Force-Carbonation: Dissolve pressurized CO2 gas from a cylinder into a finished still cider in a pressure tank using a relatively inexpensive piece of equipment called a carbonation stone.

For any method that doesn’t capture natural CO2 in a bottle, you can’t get the cider into a bottle or can without some kind of counter-pressure filler, otherwise the gas will escape in the bottling process. That means the least capital intensive approaches are the Pet Nat and Champagne methods, however the disgorging process for the champagne method is extremely labor intensive. On the other hand the variability and funkiness of Pet Nats can be challenging for trade and consumers.

At some point, most small producers end up purchasing a brite tank and a counter-pressure filler, which allow for the production of clean, carbonated ciders with less labor cost. That’s an investment of somewhere between $20K – $30K. Note we are still talking just semi-automation. This equipment still requires people to put each bottle one at a time on the filler, to be handed-off to another person putting on the closure, and someone else putting on the label. Automatic bottling lines begin at $100K and go up. We once priced the smallest automated champagne ‘disgorging’ system at $250K. You can rent a system by hiring a mobile bottling or canning line. The minimum size batch for a mobile-canning line to process is 2,300 gallons, which means you have to have a brite tank(s) that can hold that volume under pressure to connect to the canning line.

There are two other factors in costing these options – sweetness and taxation. Those are post-worthy topics in themselves and I’ll get there. In the meantime, next time you are shopping for ciders, try to find an example of each of these four types and see what you think the differences are in taste and cost.

What choice did we make? None of the above at the beginning. We started a fermentation of Kingston Black using champagne yeast, and then added into it, bit by bit, an equal amount of already finished still dry cider from the prior year’s heirloom blend apple varieties that had been aged for eight months. Then we bottled the combined cider near the end of its active fermentation to capture naturally produced CO2. The result is…a Pet Nat that we then disgorged by hand to remove the lees?…or a champagne method with a secondary fermentation done with new juice, not sugar?…or is it just something new, ‘Methode Leger’? Whatever it is, it certainly isn’t cheap.

Vintage (Cidrage?): The Surest Sign of a Cider Underdog

December 26, 2016 @AppleEllie5 Comments

We set up our first bottling line during June of 2008, seven months after pressing, and 8 months after the apples were harvested at Scott Farm and Champlain Orchards. In our 800 square foot basement we had a pallet of bottles in cartons, a little bottle sparger that screwed onto the tap over our basement sink, a plastic bottle tree to dry the bottles, a hose that ran from the tank through a pump to a small filter to our little 4-head gravity filler, then finally a hand corker resting on a piece of plywood set on two saw horses. Friends and family had volunteered to come and help our first bottling in return for ice cider.

The team: One person sparging bottles, one person at the filler, one person on the corker, and a final person wiping the bottles and putting them back into the cartons. We would pull them out again for labeling and capsuling another day. Four people working a good eight hours to bottle a little over two thousand bottles. Not to mention two hours to get everything sanitized and set up, and another ninety minutes at the end to clean everything up. Let’s just say that labor efficiency wasn’t our priority that day – although we noticed a clear linear relationship between good tunage on the boom box and the pace of the line. The only casualty was the guy on the corker, who couldn’t raise his right arm above his waist for two days afterward. As his wife I took a little heat for that. But hey, we were done for the year – one day of bottling for inventory with a retail value of a little over $26,000. One day, one year, one batch of ice cider.

As a cider producer, we are technically a Winery, so we are subject to federal wine regulations, yet we cannot use a number of wine terms on our labels because we use apples instead of grapes. We produce our ciders with the same techniques and values as used by vintage wine makers, one harvest = one cider, but are prevented from communicating that on our labels with a ‘vintage’ date. Or maybe we need a new word, since ‘vintage’ itself has ‘vin’ referring to grape wine in it. Perhaps we should argue for the ability to have a ‘cidrage’ date?

There are all sorts of differences between a cider made in one annual batch from fresh, harvest-pressed apples and aged for at least 6 months before release, versus a cider made from concentrate or from apples pressed out of cold storage, fermented quickly for 2 weeks and released 2 or 3 weeks after that. Regardless of whether the outcome is pleasing to your palate in either case, a ‘cidrage’ cider is an underdog cider because of the significant economic disadvantages of producing one batch per year. What are those disadvantages? One is lower asset utilization, the other is higher working capital requirements. In this post I’m going to cover asset utilization. I’ll cover working capital later.

In my last post ‘Breaking Bad or Breaking Even‘, I described how equipment is considered an asset, to be expensed over 7 years. Now consider the impact of producing multiple 4 week batches of cider one after the other throughout the year, rather than one batch per year for the same volume of product. If Cidery A produces 2,000 gallons of one ‘cidrage’ cider once per year, they might invest in two 2,000 gallon tanks, one of which will be full most of the year (the other is to pump into). Cidery B produces 2,000 gallons of 4-week cider. That means they can produce about 10-12 batches per year, so they only need to invest in two 200 gallon tanks. Even though the cost of the 2,000 gallon cost is less than 10 times the cost of the 200 gallon tank, Cidery B has significantly lower equipment costs, so their fixed costs are lower, their break-even volume is lower, and their profitability is higher at each volume of production.

Bottling equipment is a little more complicated, but basically Cidery B can size their bottling equipment for a 200 gallon bottling day, whereas Cidery A may need to use larger equipment capable of bottling 2,000 gallons in only 1 or 2 days. So just to reiterate, for the same annual gallons of production, a true ‘cidrage’ producer can incur 4 to 5 times the equipment cost of a 4-week cider producer. Now that’s an underdog for you.

Breaking Bad or Breaking Even

December 18, 2016December 18, 2016 @AppleEllie4 Comments

It’s been lovely hearing from those of you who have signed up to follow Cidernomics. A number of you have asked “So what scale IS sustainable?” There is no easy answer. That’s the whole project I’m on. This post gets at just some of the basics needed to start figuring it out. Meanwhile, keep the questions and comments coming!

Just up the road into Canada there is a medium sized producer of ice cider, run by an interesting woman who had succeeded in getting a contract to export to the Nicolas chain in France. All of a sudden she was building out more space and putting in some much larger tanks. We benefited from this because she was happy to part with 4 600L tanks and a 4-head gravity bottle-filler for less than $2,000. We didn’t own a truck, so my man was going to take the Toyota Highlander SUV and bring the stuff back in 2 or 3 trips.

Our biggest concern was coming back across the border. It’s not like you can hide a stainless steel tank under a coat in the back seat. We had no idea what kind of rigmarole we would need to go through – paperwork, exorbitant duty charges, official signatures, pledging of first-borns, etc. He eased up to the border guard in Lane 1 at the Port of Derby Line and rolled down the window. Yup, he was told to pull into the parking area and go inside the border station to see the customs officer on duty. Man, if this didn’t work our back up plan was pretty much unaffordable.

After waiting in line a mere 10 minutes or so, he got to the front and explained that he had two stainless steel wine tanks purchased second hand. The border guard asked what price we had paid, and proceeded to hand him a form. “Write a one sentence description here, put the value here, and sign it here.” he said, “That will be $10.75.” Done! Piece of cake! We really were going to try this ice cider thing after all. Three trips and three hours later, it was all in our basement. If we’d had a big enough vehicle, it would have only cost us $10.75 for the one trip. We were delighted to spend just $32.25.

Along with the tanks and the filler, we had purchased a small press and some plastic containers to freeze the juice outside for the ice cider process. We also needed a pump, small filter, hoses, some fittings, and some kind of corker, capsuler and labeler. These all fall under the category of “plant & equipment” in the broader category of “fixed assets”. Going back to the question at the end of the value chain post “Apples to Cider to You” – can I make money at $12.60 per bottle of ice cider FOB price? – knowing my fixed versus my variable costs is the key to the answer.

Variable production costs: apples and/or apple juice, production supplies (yeast, filter pads, etc.), bottles, corks, labels, capsules, cartons, and any hourly labor cost for pressing, bottling, labeling etc. Calculate these per bottle, and make sure to allow for some waste.

So, if my FOB price is $12.60 and my variable costs add up to $6.50, then the incremental money I’m going to bring in from each bottle I sell = $6.10. Also known as marginal contribution.

Fixed production costs: equipment, rent, utilities (mostly at our scale).

OK, so you don’t count the full cost of equipment in one year – that’s what depreciation is for. Most equipment is assumed to have a useful life of 7 years, so take 1/7 of the equipment cost as your annual fixed equipment charge. (We’ll talk about the difference between cash flow and profitability later.)

Overhead: Then you have all sorts of things that are typically considered “overhead” – sales, marketing, general, administrative expenses. For simplicity’s sake we’ll just call this all fixed cost. However, in future posts, I’m going to do a pretty deep dive on sales economics where we’ll parse that more finely.

The basic concept of break-even is the math that tells you how many bottles you have to sell at your marginal contribution rate to cover your fixed costs, after which the marginal contribution of each bottle goes toward your bottom line profit. In this example, if my total equipment purchases are $18,000, and I estimate that office, utilities, marketing and sales will cost me $5,000 per year, then I will need to sell (($18,000/7) + $5,000)/$6.10 = 1,241 bottles of ice cider, or just about 100 12-bottle cases, to break even.

You have to play around with this quite a bit, because 1) your variable costs per unit are different depending on the quantity you purchase, as we saw in the label example in “Economies of Scale, Cider Style“. And 2) fixed costs are really only fixed for a certain range. For example, you can make anywhere from 100 – 600 liters of cider in a 600 liter tank, after which you have to purchase a new tank.

The trick is to know where the ‘steps’ are in your fixed costs, and see if the volume at the steps will be sufficient to break even or better. In the diagram below, you want to be in situation B as you grow. Situation A is truly Breaking Bad. This picture is one of the key issues I worry about with small food/drink businesses!

My capacity at that point was 1600 liters (3 full tanks plus one to pump into, less some loss during fermentation). That’s 2,068 375ml bottles, and the variable costs of $6.50 per bottle are what I expected to pay to produce and bottle at that quantity. So theoretically, I could generate $6.10 of incremental profit on every bottle over 1,241: (2,068 – 1,241) x $6.10 = $5,044 of profit on a little over $26,000 in revenue. I would be paying myself a little over $1,000 in hourly wages as part of my variable production cost, and I could pay 5% interest on the $18,000 I invested in equipment, and take home another $4,000 or so for the year that it would take to produce and sell the ice cider. Sounds good, and might work as a secondary ‘hobby’ income, but it’s not going to support me at that level. So I’ll need to grow beyond that. (SO easy to say…)

If you are being smart, you spend a lot of time calling vendors and asking for quotes at different quantities and building a sophisticated spreadsheet that lets you model the picture of growth with some precision. (If you don’t know how to use Excel, find someone who does!) On the other hand if you are being romantic, what the hell. This is why they say that to make a small fortune in the wine – or cider – business it helps to start with a large one.

Apple choices: What’s in YOUR cider?

December 10, 2016December 11, 2016 @AppleEllie2 Comments

It all started for me because I wanted to plant some apple trees. Just at the time I was mulling over what and how, we happened to visit my sister-in-law in Montreal. After dinner she pulled out a gorgeous skinny bottle and said “you must try this!” It was Neige, an ice cider from the original, premier producer in Southern Quebec, and it was freeking delicious. I looked at my better half across the table and said “yes we’ve got to try this!” Fateful words.

So, apples? Yes…but.

Concentrate? Left-over storage grocery apples? Fresh-harvested grocery apples? Organic apples? Bio-dynamic apples? Heirloom apple varieties? Bittersweet cider apple varieties? Abandoned or un-managed apple trees? Wild apples?

There are apple trees involved in every one of those options, but it’s an amazing range of options. At one end of the spectrum: low cost, predictable supply, juice consistency, low flavor. At the other end: scarcity, biennial-ism, high cost, variability of sugar/acid/tannin levels, more flavor (hopefully?).

There is much to be discussed about the economics and markets for growing apples. I’m not going to deal with that now, but here’s a quick view of what’s out there from the perspective of someone deciding what kind of cider to make. And if you are growing your own apples, you have to do the same comparison, and recognize that farming apples and manufacturing cider are two VERY different businesses, although in the same value chain.

China is the largest apple grower in the world, producing 37 million tons per year, 70% of which is Fuji. The US is the second largest producer at a mere 4 million tons, with 67% grown for the fresh market – Red Delicious, Gala and Granny Smith being the top three varieties. The top 5 apple growers in the U.S. are all in Washington state, with over 5,000 acres each. The labor costs associated with picking mean that the US is not an efficient producer of apple juice concentrate. Most apple concentrate used in hard cider production comes from Argentina, Italy, France, Turkey, or Poland. US orchards work mightily to make sure as high a % as possible of their crop makes the grade for sales to the grocery market, as that is where they can get the highest price. The other 33% goes to processing. Washington State has enormous bulk juice processing and cold storage facilities. You can buy tanker trucks full of bulk juice pressed out of cold storage pretty much all year round.

The largest two apple growers in Vermont are 400 and 300 acres, respectively. Then there’s my friend Steve Wood, who back in the late 1980s top-grafted trees in his family’s 60 (not a typo, not 600, 60) acre New Hampshire orchard over to British bittersweet and American heirloom varieties that had NO possibility of being sold to the grocery store market, with the crazy idea that they might be better suited for making specialty hard ciders. Finally, at the far extreme, Andy Brennan at Aaron Burr cidery in the Hudson Valley of NY, makes a cider from apples foraged from a couple of trees growing wild on Maine’s Isle Au Haut. OK those apples were “free”…all like 5 bushels of them, all like 500 miles away of them.

Buyers at stores and restaurants sometimes screw up the courage to ask me why the ciders in 750ml wine bottles are SO expensive. Here’s an approximate price comparison (vetted with other producers so a pretty good ballpark) for a gallon of liquid going into a tank to be fermented into cider –
– Frozen foreign concentrate, reconstituted with water = $0.70
– Bulk juice from left-over grocery apples, pressed out of cold storage = $1.80+
– Harvest-pressed grocery store apples in New England = $4.00+
– Heirloom and Cider variety apples, harvest-pressed at small scale = $10.00+

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In the case of ice cider, we use our Vermont winter weather to do a natural concentration outdoors before fermentation during which we lose 80% of the volume of juice we started with. That increases the cost of the gallon of liquid going into the tank by a factor of 5 times.

And all of this begs the question “does it taste any better”? Hmmm, depends what the cider maker does with it, and who’s tasting.

The worst-case scenario is when you plant 1,000 trees of 42 different varieties on 3 acres in a biodynamic management program and hire someone 3 days per week during the season to do the work. That’s the route we chose of course. The $64 tomato has nothing on the $100 bushel of apples! While we wait for the trees to grow and start producing apples at their full potential (soon? I hope?), we purchase fresh apples – a mix of heirloom, cider, and grocery varieties – from 4 other regional orchards and press them, usually within 6 – 10 weeks of harvest. So we’re operating at the base cost of somewhere in between the two bars on the right hand side of the chart, MULTIPLIED BY 5.

It makes it especially rewarding when you are giving a tasting of ice cider at the farmer’s market and the elegant lady who’s been listening and nodding to your explanation finally takes a sip and says “That’s delicious! What grapes do you make this from?”