The cost of wine grape production
Annual total production costexcluding tax, interest and entrepreneurial remunerationconsists of two components, namely cash expenditure and provision for replacement. The industry average total production cost increased by 6% from 2011 to R32 439 per ha in 2012.
Cash expenditure is categorised as direct cost, labour, mechanisation, Cash expenditure is categorised as direct cost, labour, mechanisation, fixed improvements and general expenses. Total cash expenditure shows a 6% increase from 2011 to R23 834/ha in the 2012 production year. The increase is mainly due to a slightly bigger 2012 crop, as well as exceptionally high increases in the cost of electricity and fuel.
Most of the other cost components increased more or less in line with inflation. The following four graphs illustrate the movement in respect of approximately 80% of the annual expenditure over the past nine years:
The composition of cash expenditure since 2004 remained largely unchanged, with labour still representing the biggest component – 40% in the 2012 production year. Mechanisation, direct cost, general expenses and fixed improvements represent 20%, 19%, 17% and 4% respectively of cash expenditure. Although differences occur from year-to-year, the trend is nevertheless that all components have become more expensive relative to each other.
Provision for replacement
The production process uses not only that which is purchased annually in order to produce a crop, machinery and implements are also required. Over a period of time tractors, machinery and other means of production are “consumed”. Even vineyards and buildings deteriorate and have to be replaced. The “deterioration” and “consumption” of such items are part and parcel of the costs of the production process. Taking into account the fact that the purchase value of an item has to be replaced in the course of its lifetime, as well as the fluctuating nature of inflation, sufficient provision has to be made for replacement. By using the principle ‘provision for replacement’, a bigger amount is recovered than in the case of ‘depreciation’. To a certain extent this addresses the problem of rectilinear depreciation in value and ensures that the running concern is maintained. When calculating provision for replacement, items are written off against replacement value over various periods: Buildings 60 years Vineyards 20 years Moveable assets / means of production 7 -15 years Total provision for replacement amounted to R8 606/ha in the 2012 production yearan increase of 6% compared with 2011.
The average farm size for the study groups currently comprises 86 ha planted to wine grapes (other branches of agriculture are not taken into account here). The average productionbearing and non-bearing hectaresamounted to 16.98 tons/ha for the 2012 production year.
The impact of increased yield on the breakeven price of total production cost in rand per ton is considerable. Although total production cost increased by 6% per ha since 2011, the breakeven point in terms of rand per ton decreased from R2 028/ton to R1 910/ton. In other words, the first R1 910 that the producer receives for a ton of grapes from the 2012 harvest, should be used for total production costno entrepreneurial remuneration, interest or tax has been taken into account. This decrease can be ascribed mainly to the bigger 2012 crop for the entire industry. Note that certain districts had a smaller crop, resulting in a negative impact on their break-even price.
Average production varies tremendously among the various districts, while the total production cost in rand per ha does not differ significantly. The above-mentioned differences in production cause the break-even price in respect of total production cost per ton to differ immensely among the various districts. The age composition of participants’ vineyards has definitely deteriorated since 2004. More than 15% of the surface planted to grapevines is older than 20 years and 12% of the grapevines in the sample are three years old and younger. The deterioration in the age composition can be clearly observed since 2004an obvious indication that producers are neglecting their capital maintenance in an effort to survive financially.
The profitability, in other words Net Farming Income (NFI), is calculated as total income (R/ton x Ton/ha) minus total production cost. The latter consists of cash expenditure and provision for replacement, but excludes entrepreneurial remuneration, interest obligations and tax. Total income is based on the proven, or anticipated, income from a specific harvest and the time value of money is not taken into account. The impact of a bigger or smaller crop can be calculated with greater accuracy, but while producers receive their income at different stages, it is practically impossible to calculate the time value. “Remember, however, that cost is also incurred over a period of time.”
Although the total income per hectarewhich is determined by price and productionshows slight increases since 2005, enormous increases in costs caused the NFI to deteriorate dramatically between 2004 and 2012. As a guideline for economically sustainable production, the average income and NFI for the 2012 production year should in fact have realised R51 000 and R18 600 per hectare respectively. Over the past eight years, the average income was consistently lower than the target income guidelines. Producers still find themselves caught in a “cost price squeeze” and in some instances in recent years income has been lower than the cost of producing grapes. Many producers are forced to remove replacement of grapevines and capital structure from their cash flow budgetwhich means they are farming on Gross Margin (GM) and not on NFI.
The industry average total production cost increased by 6% to R32 439 per ha between 2011 and 2012. The increase is largely due to a slightly bigger 2012 crop, as well as exceptionally high increases in the cost of electricity and fuel. Most of the other cost components increased more or less in line with inflation. Although the total income per hectarewhich is determined by price and productionshows slight increases since 2005, enormous increases in cost caused the NFI to deteriorate dramatically between 2004 and 2012. Producers still find themselves caught in a “cost price squeeze” and in some instances in recent years income has been lower than the cost of producing grapes