Drought, financial pressure, decreasing vineyards and increasing prices – these are only some of challenges facing the South African wine industry. WineLand magazine looks at the most notable trends that have emerged from the 2018 Vinpro Production Plan.

With a decline in overall production and increasing pressures brought on by the recent drought, many producers will remember 2018 as a watershed year.

With ageing and declining vineyards, it’s clear that a possible structural shift is coming to a halt as demand exceeds supply and drives retail prices up.

Last year Vinpro’s agriculture economic services, under the leadership of agricultural economists Pierre-André Rabie and Elriza Marcus, and supported financially by Winetech, the National Agricultural Marketing Council, Standard Bank, Absa, Nedbank and FNB, conducted its annual production plan survey for the 15th consecutive year.

The findings show that although the average producer still doesn’t generate a sustainable income, the industry has improved year on year, with an increase in production units that are financially viable and a decrease in the units that suffered losses.

However the beginning phase of the recovery process is vulnerable, with vineyards overall ageing and decreasing. The effect of the drought on vines is still noticeable and affected the size of the 2019 harvest and financial profitability of several producers. Fortunately the much smaller harvest and decline in local and global wine stocks in 2018 have led to the start of a much-needed price correction in the wine value chain. Among the trends discerned in the 2018 Vinpro Production Plan are:

TREND #1:
PRICE INCREASE

The most significant trend is the price increase, Pierre-André says. He says gross income has increased with the smaller harvest, not necessarily due to an increase or decrease in production, but rather due to an increase in price. “There were times when supply and demand weren’t in sync. But this is perhaps the second time in 15 years that supply and demand are proving to be more balanced. At R677.31 per hectolitre (for bulk white wine) and R894.25 per hectolitre (for bulk red wine), the price is not quite where we want it to be – we need about R1 or R1.50 per litre more, but I think we’re on the right track.”

A double-digit price adjustment is on the cards for this year’s harvest. “In contrast to previous years where gross income was coupled with increases in production, this year it’s due to an increase in price.”

The price increase is not as significant as he’d hoped, wine grape producer Kallie Kirsten of the farm Goedvertrouw near Stellenbosch says, but he remains positive it will have a productive effect on grape producers in the future. “I think our wine price structure requires more attention. We need various pricing structures for grapes depending on their quality. If producers are delivering high quality Cabernet Sauvignon grapes for premium wines, prices must be adjusted accordingly.”

While he had a satisfactory harvest last year, the price increase is still not enough to “relieve the debt grip”, for many other producers says wine grape producer Gawie du Bois of the farm Sonop near Koelenhof, Stellenbosch.

TREND #2:
PRODUCTION IN DECLINE

Pierre-André predicts that the overall wine production will decrease in the coming year. “Some of our vines are too old and we’ve seen a marked increase in producers uprooting vines in 2016.” According to the production plan, nearly 50% of vineyards in South-Africa are older than 16 years and will have to be replaced within the next 10 years, which could mean a capital layout of R13 billion. The industry norm is to replace 5% of vineyards a year to maintain current levels. “We’ve been unable to achieve that since 2007. Red vines that are infected with leaf roll after 16 years become less profitable.”

The production plan states there won’t be a drastic increase in the size of our harvest over the course of the next 10 years. “However I believe a smaller, higher-value industry instead of a bigger, lower-value industry will prove to be better for producers in the long run,” Pierre-André says. “Hopefully everyone in the wine value chain will benefit.”

All the running costs considered, wine grape producers need to work on a figure of R100 000/ha in order to farm sustainably and profitably, Kallie says, while Gawie says last year he farmed grapes at about R60 000/ha.

“Hopefully we can reach the R100 000/ha mark with the 2019 harvest,” he says. “Unfortunately, I see a lot of vineyards being uprooted to make way for more profitable crops. Sadly smaller producers who don’t get the necessary added value won’t make it. Overall, the vineyards in and around the Western Cape aren’t looking good and I predict a dramatic decrease in hectares over the coming years.”

TREND #3:
THE DROUGHT EFFECT

The recent drought had a severe impact on the direct, mechanical and labour costs of South African wine producers, Pierre-André says. It had a definite impact on direct costs with a 4.6% decrease in expenditure/ha compared with 2017. “Crop protection and fertiliser costs decreased by 10.6% and 1.8% respectively, while the most interesting observation was the sharp increase of 17.6% for herbicides.” The latter can be attributed to a perceptible increase in the tolerance and resistance of certain weeds to certain herbicides, while producers also took greater care to eliminate any competition for available soil moisture.

Although Kallie’s wine production was largely unaffected by the drought, he says it remains a severe problem for many wine grape producers. “But the drought isn’t the only factor that impacted direct costs. For me it’s the overall change in climate that’s forcing producers to change their approach.”

Gawie says he’s definitely seen a rise in his herbicide costs due to the drought creating super weeds. “My herbicide costs were more than my fungicide costs.” However it’s forcing producers to farm more in detail and become more specialised.

TREND #4:
STRUCTURAL CHANGES IN LABOUR

Another interesting observation in the 2018 production plan is the composition of labour, with a decline in the permanent labour component and an increase in seasonal and contract labourers.

“A large percentage of the study group is diversified and the phenomenon can be attributed to the permanent labour force, which is usually more skilled and predominantly used in other branches of the wine production process,” Pierre-André says. Although labour costs and wages, the largest cost contributor to the cultivation of wine grapes, increase annually and often exceed the Consumer Price Index (CPI), a 1.1% decrease was observed. Pierre-André says the context of this decline is important, as it’s directly related to the smaller harvest and number of deciduous management actions, and doesn’t necessarily indicate an increase in labour productivity.

Gawie says he’s seeing a dramatic structural change in labour. “Labour is one of my highest costs. And with the significant increases in the minimum wage, it’s forcing me to decrease my permanent workforce and increase my seasonal workforce. I simply can’t afford a bigger permanent team.”

Gawie is in the process of upskilling his permanent staffers so they can execute more tasks on the farm such as driving a tractor or branching into other aspects of the operation, leading to a smaller but more skilled permanent workforce.

TREND #5:
SPEND SMARTER, NOT LESS

“Being more cost effective doesn’t necessarily mean less spending as you can also ‘save’ yourself into bankruptcy,” Pierre-André says. The trend now is smarter spending, in many cases using precision technology. One of the most notable observations of the top producers over the past nine years is that they tend to spend more on direct costs. Similarly, many of those who do better don’t just spend more on fertiliser, but also selectively apply fertiliser depending on the soil’s potential.

Kallie agrees. “Top producers have curbed their cash expenses in 2018 as would be expected with the availability of water and affordability considerations,” he says. “Top producers are not known for spending less per hectare.”

For more information, or to participate in the 2019 Vinpro Production Plan Survey contact Soria Muir at 023 347 1566 or e-mail muirs@vinpro.co.za.