The South African primary wine producer – i.e. the producer who grows grapes for winemaking purposes – earns disconcertingly low interest on capital. This, according to financial analyses that were conducted among 131 such producers in seven districts last year.

According to this survey – entitled Production Plan and conducted by VinPro’s agricultural economists – the average interest earnings of the participants amounted to just 6,89% for the financial year in question, 2003/4. These earnings are relatively low compared to general interest earnings on investments during the year under review.

“What is more, one can assume that the majority of the participants have above-average management skills, farm according to scientific practices and in many instances they are regarded as leading farmers in the various districts,” says VinPro agricultural economist, Gert van Wyk.

“Bearing this in mind, it should and must be accepted that this profit margin would hardly increase if a bigger number of producers in the SA wine industry were to participate.”

Meanwhile, judging from the results of the first Producer Cellar Performance Measurement announced by PricewaterhouseCoopers at the end of last year, it was obvious that, based on the 2003 wine grape harvest, the average nett profit margin of the 54 cellars who participated in the project amounted to less than 2%. According to this report the low profit margin probably indicates that the majority of the cellars in question aim to pay producers the best prices and that the cellar’s own profit is therefore not the primary goal.

Van Wyk emphasises that the primary producer is undoubtedly one of the most important links in the value chain of the wine industry, “because even the most efficient marketing strategy is useless without a sustainable supply of quality raw materials.

“As in all industries, the wine industry and primary producer are also subject to increasing input cost, variable climatological conditions and price fluctuations. Income does not increase at the same rate, however, and in certain instances income has even decreased. These phenomena obviously put producers’ cash flow under serious pressure, thus eroding their profitability. Profit margins allow limited scope to meet foreign capital obligations and one wrong management decision may cause a farming enterprise to go under. It will be difficult to accommodate additional obligations such as possible municipal land tax, increased minimum wages, ongoing increases in fuel prices, water levies, the impact of steep increases in excise duty, etc, and it is undoubtedly clear that ‘smaller’ farming units will be worst affected. The smaller the unit, the more expensive the production and capital structure, with the subsequent negative impact on the profitability of that business.”

Said financial analyses, which enable participating wine grape producers to compare their own business’s results from a production, capital and cost structures and profitability point of view, with the district averages, were calculated by means of study groups in seven wine districts, inter alia. The participants’ average surface planted to wine grapes amounted to 85,21 ha, 92,67% being under permanent or supplementary irrigation. The average age composition of the vineyards was:

  • 3 years and younger 18,86%
  • 4 – 7 years 26,86%
  • 8 -15 years 30,35%
  • 16 – 25 years 20,14%
  • Older than 25 years 3,77%

Taking into account the above-mentioned districts and the fact that producers’ cost comparison is mainly hectare-based, it is of cardinal importance that production and capital structures, as well as the gross and nett incomes, be calculated in conjunction with the profitability per hectare.

The average results, measured and weighted according to the total surface planted to wine grapes in each district, are as follows:

Cost structure:

Total cost comprising three components:

  • Cash expenditure / Annual running costs.
  • Provision for replacement / Capital maintenance.
  • Entrepreneur’s remuneration.
  • Cash expenditure / Annual running costs
  • All cash expenses incurred in the year under review.

Provision for replacement / Capital maintenance
Vineyards, buildings and means of production (“movables”) are ‘used up’ in the course of time and have to be replaced. Taking into account the fact that the purchase value of an item has to be recovered in its life span, as well as the changeable nature of inflation, sufficient provision has to be made for this. By using the principle ‘provision for replacement’, a larger amount is recovered than in the case of ‘depreciation’. To a certain extent this addresses the problem of rectilinear depreciation and ensures that the going concern is maintained.

Provision for replacement writes off items against their replacement value:

  • Buildings 60 years
  • Vineyards 25 years
  • Means of production (movables) 5 – 15 years
  • Entrepreneur’s remuneration

To own and run any business involves a certain amount of risk. Expertise and experience are required to manage the business and while the producer produces, he must also have the means to subsist. In the case of the production plan this is calculated according to a norm, 10% of the turnover (total income), which is generally used in the farming environment.

Average cash expenditure:

R1 085 / ton – Ranges from R568 to R2 504 / ton from one district to another.

Total expenditure:

R1 499 / ton – Ranges from R815 to R3 217 / ton from one district to another.

According to the results of the study, it seems that the portion representing labour cost has declined slightly over the past few years. The fact that mechanised practices, mechanical harvesting in particular, have increased, together with the implementation of minimum wages, etc, are likely explanations. According to a VinPro survey the cost of labour amounted to 46% and 51% of the total cash expenditure in 1999 and 2000 respectively. The reduced cost of labour apparently went hand in hand with increased cost of mechanisation, as well as provision for replacement of means of production.

Seen in the light of the sharp decrease in the price of red wine especially since 2003 (642,56 cents per litre (bulk) to 547,28 cents per litre for 2004 according to Sawis), the more horizontal movement of white wine prices in 2004, as well as the ongoing increase in total cost and other obligations, one wonders how long the producer will be able to absorb these conditions and what he/she should do to survive these difficult times.

The complete production cost and target income per district are available. Contact Gert van Wyk for more information at tel (023) 347-2795.

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