Struggling wine producers face structural shift

South African wine grape producers are under continued financial pressure due to the prevailing drought and economic challenges, but a structural shift is on the cards.

This is according to the Vinpro Production Plan Survey, a financial benchmark among 495 farming units on the season leading up to the 2017 harvest.

Although a slightly larger 2017 wine grape harvest resulted in an increase in gross farming income, it did not keep up with the above-inflation hike in input costs, and many producers still realise a net farming income that is not sustainable in the long run.

Despite dry, hot conditions, the 2017 wine grape crop amounted to 1.4 million tonnes, a 1.4% increase from 2016.

The average gross farming income increased by 6% to R54 158/ha in 2017, while total production costs (cash expenditure and provision for renewal) rose by 7% to an average of R47 513/ha.

Production costs – which include direct cost, labour, mechanisation, fixed improvements and general expenses – have doubled in the past decade.

The average net income amounted to R6 645/ha in 2017, 1% lower than in 2016. However, for wine grape farms to be sustainable, they need to realise a net farming income of at least R27 000/ha.

Although the average producer is still not farming at sustainable income levels and more than a third of the participation farms operate at a loss, the most profitable producers are still gaining margin throughout the respective wine grape producing areas.

Many producers will remember 2017 as a game changer due to the shrinking global wine supply and the pressure of the ongoing drought.

This can be either positive or negative.

With the ageing and decreasing vineyard status, a structural shift is imminent, as local supply adjusts to meet global and local demand.

There is now an opportunity for Brand SA to reposition itself in the market, ensuring a much-needed reinvestment in local supply.

Andries van Zyl is senior agricultural economist at Vinpro.

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