Steady as we go towards 2024

by | Jan 18, 2016 | Business and Marketing, News

A calculated peek into the future suggests a cautious, albeit steady, outlook, after a turbulent decade.

An outlook of agricultural production, consumption, prices and trade in South Africa for the period 2015 to 2024 was presented in the 2015 report of the Bureau for Food and Agricultural Policy (BFAP). This information is based on assumptions about a range of economic, technological, environmental, political, institutional and social factors. Given the extreme volatility of markets, the baseline projections should be interpreted as one possible scenario. The baseline, therefore, serves as a benchmark against which alternative shocks can be measured and understood.

The South African wine industry has been undergoing substantial changes from the 1990s onwards, following the removal of sanctions, deregulation of agricultural marketing and liberalisation of trade. These policy shifts transformed the industry in a relatively short time and the same forces continue to shape the industry. The outlook, therefore, has to be contextualised within these historic trends, due to their continued relevance, particularly for a long-term crop such as vines.

REACHING THE PRODUCTION PLATEAU

The total number of red vines increased from 32 million in the mid-1990s to 85 million by 2003. The number stabilised at around 125 million by 2007 in response to the reduction in the red to white premium as shown in Figure 5. Total production increased from 1.23 million tonnes in 2003 to an all-time high of 1.52 million tonnes in 2014. The period from 2000 to 2005 accounts for the lion’s share of the increase in red wine production, with the share of red vines planted increasing from 15% to more than 40% (Figure 1).

The production of natural, fortified and sparkling wine expanded by 35% between 2006 and 2014, increasing its share in total production from 70% to 81% (Figure 2). During this period, grape juice and grape juice concentrate posted the greatest decline (52%), while wine for brandy and wine for distilling purposes posted a decline of 35% and 10% respectively. The outlook for total production volumes is cautious, showing an increase of only 1% to 2024. The other categories are expected to continue their decline, with wine for brandy leading the pack at 34%. This outlook is primarily driven by relative prices and the current state of replanting.

FIGURE 1: Relationship – white cultivar vines : red cultivar vines (production and vines planted). FIGURE 2: Historic and projected production volumes of grape products. FIGURE 3: Destinations of South African exports: 2001 - 2014. FIGURE 4: South African wine exports: Share of BRICS and African countries. FIGURE 5: Historic and projected real (2000) wine prices.

Most vines are currently between eight and 15 years old, with the percentage share of vines older than 16 years increasing from 26.2% of the total in 2008 to 32.5% by 2014 (Sawis, 2015). The trend of ageing vines is expected to continue due to the growing number of vines that will reach their replacement age, following the accelerated planting since 2000. Taking the current state of profitability levels into account, non-niche vines cannot be replaced; hence producers are faced with the decision to switch to alternative crops or try and extend the life of fruit-bearing vines as much as possible.

This trend is most prevalent in the colder production areas, given the lower production volumes. The trend’s short-term impact should not be overestimated, providing that most production takes place in warmer areas, such as the Breedekloof, Olifants River and Orange River valleys. This scenario could, however, play out over the long term in these regions as well if current price trends continue (VinPro, 2015).

BUILDING ON A VALUE PROPOSITION

Wine export volumes continued to grow from 238.46 million litres in 2003 to a record 525.58 million litres in 2013. Due to the below-average European harvest, export volumes attained in 2013 were exceptional, particularly into the southern European markets. Europe continues to serve as the most important export destination, with the United Kingdom leading the pack, but being superseded by the combined volumes to Germany and Netherlands in recent years (Figure 3).

Volumes to the North American (USA and Canada) market have increased since 2006, but less spectacularly than exports to the BRIC countries and Africa. In 2014, Russia received 74% of BRIC exports, while the three main African trading partners – Angola (21%), Kenya (14%) and Nigeria (13%) – imported the greatest share of South African exports into the region (Figure 4).

The future for exports remains positive, given the continued value proposition of South African wines in Europe, the relative strength of the US dollar and the possibility of continued export growth into African markets. This will drive the projected increase in wine production at the expense of other categories. This outlook is subject to a number of uncertainties.

STUBBORNLY STAGNANT PRICES

The premium prices obtained for red wine drove the substantial increase in red vines planted, but this premium has declined in response to increased volumes (Figure 5). Real red wine prices are projected to show a decrease over the short term, due to relatively high stock levels, but real prices will recover somewhat over the medium term. Real prices for white wine and juices reflect a marginal decline towards 2024, while the real price of wine for brandy remains relatively stable.

*The Bureau for Food and Agricultural Policy (BFAP) has as its main purpose to inform decisionmaking by stakeholders in various industries through the provision of independent research-based policy and market analyses.

(www.bfap.co.za)

This report was published in WineLand on behalf of Sawis (South African Wine Industry Information & Systems).

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