Running on empty: the rising cost of fuel

by | Nov 30, 2021 | Article, Wineland

Brent crude oil prices were lowest in a decade last year, and the 2020 season’s rand per hectare was 8-11% lower in most regions. That’s despite the large harvest and a longer than average season, which generated more than usual traffic in vineyards and to and from cellars. This situation has changed drastically in 2021 and producers will have no choice but to take above average fuel price hikes on the chin.

Impacts

Paul Makube, Senior Agricultural Economist at FNB Agri-Business, explains rising fuel costs have a direct impact on distribution costs, as these rise immediately following the increase. “Wine production is confined to the Western Cape and consumption locally is through wine tourism and across other parts of the country. However, reaching consumers in far destinations comes at a cost,” he says. “Higher fuels costs erode the consumer’s disposable income and may eventually limit consumption growth.”

“The threat to wine producers comes from mounting cost pressures, which in an environment of limited upside pricing for the product may worsen the financial health of the producers and will be felt across the wine value chain.”

“Increased fuel prices, especially for the highly mechanized, will still have a negative impact on producer finances,” Paul says. “Additionally, the spill-over impact from higher crude oil prices includes increases in costs of its derivatives such as agrochemicals such as pesticides and herbicides.”

Under siege

Daneel Rossouw, functional head of agriculture and relationship channels at Nedbank, says rising fuel costs have a negative impact on profitability throughout the value chain on the input and output side. “The cost of transport of input suppliers as well as transport of wine to markets will increase,” he says. “Production costs at farm level will increase given the fact that fuel accounts for approximately 7% of total production cost. We will also see an indirect impact on prices of other inputs such as fertilizer, crop protection and even planting material.”

“Higher fuel prices will also have a negative impact on consumer spending with less household income available for purchasing non-essential goods,” says Daneel. “Primary wine grape producers are normally price takers and are not really able to pass on the increase in production costs to the consumer by way of higher product prices, as it can result in consumer resistance and lower sales.”

Agricultural production is sensitive to changes in energy prices, either directly through energy consumed or through energy-related inputs such as fertiliser, and there is pressure from all sides. “Increases in all other administrative costs such as water and energy, combined with the impact of minimum wages, currently impact profitability to a large extent. The impact throughout the value chain and on consumer spending will definitely have a significant impact on sustainability of industry.”

Additionally, the higher crude oil prices have raised the cost of shipping globally. Given that SA exports over 50% of its wine production, this will eat into export margins.

Rolling with the punches

That doesn’t mean producers are completely powerless. Daneel points to promising new technologies and more fuel efficient farming equipment to enable better efficiencies and lower energy consumption. “Moving towards precision farming and regenerative agriculture will result in lower energy use over time, although this is not a short term solution,” he says. “Using drone technology as an alternative to conventional farming using tractors and sprayers will reduce fuel usage and can perhaps be introduced on a smaller scale to start with.”

“Business should adopt and develop mechanisation plans, including the latest technology and efficiencies, which can increase output while reducing running costs, including lower fuel consumption,” Daneel says. “Moving towards precision and regenerative agricultural practices will result in lower energy (fuel) use over time, while owning the value chain and shortening the chain as much as possible – especially transport and distribution – can result in either higher product prices or lower input cost depending on where in the value chain the business is situated.”

Besides implementing efficiencies to reduce fuel consumption and reconsidering their farming practices, larger users may also investigate financial instruments such as diesel hedging. “Producers can claim back almost 80% of the associated taxes in fuel prices through the SARS diesel rebate scheme,” says Paul.

“Producers and associated businesses along the value chain, including transporters and distribution, can make use of SAFEX fuel hedging options to assist them with managing the impact of price fluctuations and, in the process, reduce the carry-through effect of increased fuel prices on food inflation,” says Daneel.

According to Nedbank’s economic unit, petrol and diesel prices will remain relatively high throughout 2022, before receding at a more significant pace throughout 2023, adds Daneel.

In the meantime, the 2022 season looks promising. Another good harvest may help soften the pain of the latest round of increases.

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