Economists generally believe in the perfect world, based on many, sometimes idealistic, assumptions, and mostly start a sentence with the word “scenario”. This is often to the disappointment of producers who need to base a decision, with financial implications, on idealistic theories thought out behind a computer.
However, by applying some of these theories one would like to inform an industry of the present-day realities of producing wine and the impact of the international market. South Africa exports 60% of its annual production; thus, hail in France, drought in the EU and earthquakes in the US create opportunities. In 2013 South Africa capitalised on this “perfect storm” with world wine levels at their lowest in the past decade, a local record harvest and a weak Rand.
The result? Record exports in both volume and value. Surprising to many is that all this growth in exports was driven by wine producing countries. Suddenly France, Italy and Spain accounted for 20% of our bulk exports, all of this because of adverse weather conditions. So the controversial Morgan Stanley report was not that far off last year, however in one season this “shortage” changed into a surplus situation. We need now to compete with the old-world giants and competitive new-world countries, but are the playing fields level?
Economist Adam Smith’s ‘invisible hand’ will in the perfect world, create a market that is determined by forces of supply and demand. This can only occur with conditions of perfect competition, thus sellers and buyers have no influence on the price, and the requirements for such an ideal world are:
- Large number of buyers and sellers
- Sellers act independently, no collusion occurs
- All products sold are homogenous
- Buyers and sellers have no barriers of entry to the market
- No government intervention.
So, these criteria do not really fit the wine market at all! Especially if the interventions provided by the European Union, specifically for the wine industry and the agricultural sector is taken into consideration. South Africa needs to compete with heavily supported commodities, with much lower logistical cost to the market when compared from the southern tip of Africa. Suddenly the low wine price of Spain makes sense. What then are these wine-specific subsidies?
- Promotional funding: Protecting the designation of origin, geographical indication and wines associated with a specific region; the reason why we can’t call it Champagne or Port.
- Single payment scheme: Direct payments to producers for protection against market volatility with some land and environmental criteria.
- Restructuring and conversion of vineyards: Varietal conversion, relocating of vineyards and improvement of vineyard management techniques.
- Investments: Improvements of infrastructure, product development, production and marketing of wine.
- By-product distillation: Supporting distillation into grape marc and wine lees, also separate funds for crisis distillation.
- Harvest insurance: Ensures producers’ income when affected by natural disasters, adverse climatic events, diseases and pest infestations.
Currently the majority of this support was received by France, Italy and Spain in one year:
A total of R18 billion was allocated, directly and indirectly, to the wine industry by the EU. Compared to this the R11 million for research and promotion received by our local industry is small change. The latest support of government in lobbying the extra 63 million litres under the Economic Partnership Agreement (EPA) with a duty-free quota is certainly a step in the right direction for South Africa, even though we are still light years behind our new-world counterparts, Australia and Chile.
So, as an industry producing only 4% of the world’s wine, with limited state funding, we should identify our strengths and create awareness of our unique characteristics – thus differentiating in this global ‘imperfect’ market and not falling in the trap of playing on price alone. The EU will inevitably favourably protect its own members when negotiating international trade agreements and South Africa should strive to increasingly take control of its own destiny.
The Wine Industry Strategic Exercise (Wise) aims to address the most critical aspects (also see p24) that could result in a more ideal future, with regards to competitiveness, transformation, business intelligence and, importantly, greater collaboration with government. The wine industry contributes R4.7 billion in excise duty, which certainly makes it a worthy industry to partner with.