The analysis applies to overall grapevine production (bearing and non-bearing hectares) and the cost analysis makes no distinction between cultivars and specific blocks. The greater majority of participants are diversified and differ with regard to farm size. The report represents industry average figures, calculated by determining the weighted average of all the participants. The Malmesbury district is always evaluated separately and does not form part of the industry average figures because this study group cultivates a large percentage of dryland vineyards which require an alternative production, cost and capital structure.
The cost of wine grape production
The annual cost incurred to prepare the 2015 crop comprised cash expenditure and provision for replacement, and excluded tax, interest and entrepreneurial remuneration. The industry average total production cost (excluding Malmesbury) has increased by 8% since 2014 to R41 635/ha in 2015.
Cash expenditure is specified as direct cost, labour, mechanisation, fixed improvements and general expenses. Total cash expenditure indicates a 9% increase since 2014 to R31 944/ha in the 2015 production year.
This increase is driven mainly by labour which is exceedingly higher than the other cost elements. This contributed to the increased component of wine grapes which were harvested mechanically, as well as increasing mechanisation of practices such as pruning. High production for the fourth consecutive year also contributed to the increase due to the need for increased inputs, so that wine grapes could be produced profitably for a specific wine style objective. Depending on the amount of mechanisation, the cost composition differs in certain areas, but the total production cost does not differ notably from one area to the next. Stringent cost management, with a balance between wine style objective and input requirement for each block, remains critical in cycles of sub-inflationary increases in income. Agricultural cost inflation was nevertheless clearly higher than the average South African inflation.
Provision for renewal
Production cost is not restricted to cash expenditure, capital items also have to be replaced in due course so as to maintain the business as a running concern and ensure a sustainable business model. Tractors, tools, other means of production, vineyards and buildings deteriorate and have to be renewed, therefore the purchase value of the item has to be recovered over a specific lifetime. By using the principle “provision for renewal” a larger amount is recovered than in the case of depreciation. To a certain extent this addresses the problem of rectilinear depreciation.
When calculating provision for renewal, items are written off at renewal value over different periods:
Buildings: 60 years
Grapevines: 20 years
Moveable assets/means of production: 7 – 15 years
Total provision for renewal in the 2015 harvest year amounted to R9 691/ha – an increase of 3% since 2014.
The average surface planted to grapevines was 97 ha – the other enterprises were not taken into account. Economies of scale play a considerable role in the broader agriculture and this trend is increasingly common, with many producers aiming for scale benefits.
The average production for bearing and non-bearing grapevines for the 2015 production year was 17.48 ton/ha. Over the past 10 years it has been an obvious trend that producers attempt to increase average yields in order to counter the effect of increasing costs, as well as to increase profitability.
During the 2014 harvest a cultivar analysis was also conducted to indicate the production variance between the most planted white and red cultivars. This was continued in 2015 and will assist producers with precision farming over the next few years and show how the cultivars in their business differ and can contribute to greater profitability.
The impact of increased production is significant on the break-even price of the total production cost in rand per ton. The total production cost per hectare, which has increased by 8% since 2014, caused the break-even in terms of rand per ton to increase from R2 186/ton to R2 382/ton in 2015. In other words: The first R2 382 for a ton of grapes received by the producer during the 2015 harvest, should be applied for total production cost. No entrepreneurial remuneration, interest or tax has been taken into account yet.
The average yields differ considerably among the districts, as well as among the various cultivars, while the production cost does not differ to the same extent. This gives rise to large differences in break-even price in terms of total production cost in the respective districts and among the various cultivars.
Due to financial pressure capital maintenance has been neglected in many districts. This is reflected in the decline of the average age composition of grapevines since 2006. It is nevertheless positive to see that certain districts apply replacement diligently and even expand in total plantings. More than 14% of the surface planted to grapevines is older than 20 years and 11% of the grapevines in the sample are three years old and younger. The general norm is that 15% of grapevines should be three years old and younger and the component older than 20 years should not be more than 15%.
The profitability, or 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 renewal, but excludes entrepreneurial remuneration, interest obligations and tax. The total income is calculated for a specific production year and although the majority of producers realise their income at different stages, no time value of money is taken into account.
It is positive to see how total income per hectare has increased over the past year, but above-inflation cost increases have exercised pressure on the NFI. For the 2015 production year the average total income amounted to R49 108/ha – just 3% more than in 2014 – whereas the NFI decreased to R7 473/ha. As a guideline for economically sustainable production, the average income and the NFI for the 2015 harvest year should in fact have realised R64 115 and R22 480/ha respectively.
The average income hampers producers in respect of implementing sufficient capital renewal, with the result that production occurs based on gross margin, not NFI. Consequently producers remain under financial pressure, which compromises long term financial sustainability.
The primary wine grape producer maintained high production in the 2015 season. Cost increases nevertheless kept the NFI below sustainable levels. This has been the cause of increasing mechanisation in the national grapevine plantings. There was also strong emphasis on labour productivity and alignment of production practices. Producers are encouraged to implement stringent cost management and to weigh up the benefits of certain vineyard practices and input against the final yield and payments for the season.
– For more information, email Andries van Zyl at email@example.com and Funzani Sundani at firstname.lastname@example.org.