In 2019, the Vinpro Production Plan Survey was conducted for the 16th consecutive year in the wine industry. Findings show that although the average producer is still not generating a sustainable income, the industry is improving year on year after a long downward cycle. Although the minimum recommended net farm income for sustainable wine grape cultivation – at R34 000/ha – is still well above the current industry average, this finding is encouraging and shows that the wheels have begun turning.
Increases in farm gate prices have contributed to improved profitability for the average producer, but many producers are still experiencing financial pressure throughout the industry. Many districts have been suffering from the drought and/or transmission effects thereof for the last two and even more years, and many producers’ cash flow have subsequently been under pressure. Furthermore, in real terms, grape price adjustments have lagged over the last fifteen years and has only recently started recovering. As better prices take time to manifest in better cash flow, so too prices will need to increase for some time to materially influence planting decisions. As vineyards continue to age with associated lower yields, resulting in a smaller grape crop, opportunities will transpire for the conclusion of long-term supply contracts, which can be mutually beneficial.
During 2019, Vinpro’s Agricultural Economic Services division conducted a comprehensive analysis across all 10 wine districts. The project is financially supported by Winetech, the National Agricultural Marketing Council (NAMC), Absa, Capital Harvest, FNB, Nedbank and Standard Bank, which enables the provision of a free of charge financial management analysis for any primary wine grape producer. The primary objective of the project is to provide a whole-farm financial analysis of each participant’s production unit and to benchmark it to its own historical performance that of the study group and the regional average. This report provides feedback on production structure, cost structure and profitability per enterprise, as well as detailed analyses and comparisons of the wine grape enterprise, which includes a new block-level dimension since 2019.
For the 2019 survey, 260 production units participated, representing 22 704 ha (27% of the total South African area planted to wine grapes in 2018) and 329 059 tonnes (26% of the total South African crop in 2019), of which 69% were white and 31% red wine grapes. The representation of red grapes decreased by 6% year on year, mainly due to climatic factors in a number of regions, although vineyard age is becoming an increasingly important factor. Of the total tonnage, 61% was harvested mechanically, representing a statistical increase year on year (Figure 1). The total vintage – juice and concentrate for non-alcoholic purposes, wine for brandy and distilling wine included – amounted to 972 million litres, calculated at an average recovery of 781 litres per tonne of grapes (this 9 litres per tonne increase is also related to the red-white composition).
FIGURE 1. Percentage of tonnage mechanically harvested per district.
The analysis applies to overall grapevine cultivation (bearing, as well as non-bearing hectares) and makes no distinction between cost differences of cultivars or specific blocks. Most participants are diversified and vary in size of their production units and wine grape enterprises. This report represents industry averages, calculated by using weighted averages of participants and applying a region-specific weight (based on SAWIS hectares) to arrive at an industry average figure. The Swartland region is evaluated separately, as this study group cultivates a large component of its vineyards dry land (without irrigation) and/or with only supplemental irrigation. As a result yields, gross income and cash expenditure are more volatile in this region, requiring an alternative production, cost and capital structure.
The Swartland, Klein Karoo and Olifants River regions have been severely affected by drought and/or the transmission effect thereof over the past two and even more years. Physical drought is often followed by a “financial drought”, which manifests in cash flow and spending patterns that are under intense pressure. To alleviate this financial drought for many of the units/areas, sustained rainfall, good- yields and prices will be required over time.
- The 2019 harvest
“It was a challenging year for our wine grape producers and cellars. A decline in the wine grape area and irregular weather conditions contributed to the smaller harvest,” says Francois Viljoen, former manager of Vinpro’s Viticulture Consultation Service. The total crop was 1 225 620 tonnes, about 1.4% smaller than the 2018 harvest. “Although slightly smaller, it is the lowest yield since 2005 when 1 171 632 tonnes were pressed. The 2019 harvesting season consisted of two components – the first part easy, with favourable weather conditions and great grape analyses until the end of February. The second part was challenging, characterised by slow ripening due to cold, rainy weather in March.”
The Northern Cape, Swartland, Paarl and Worcester regions produced larger crops than the previous year, but from a low base after large losses in 2018. Yields in the Breedekloof and Cape South Coast were slightly smaller, consistent with the long-term average. Robertson and Stellenbosch also attained smaller crops, but the Olifants River and Klein Karoo regions were hit hardest by the drought the for the second consecutive year.
- The cost of wine grape production
The annual financial capacity needed in preparation for the 2019 vintage comprised of cash expenses and provision for renewal, while excluding all taxes, interest, entrepreneurial remuneration and obligations (Figure 2). Compared to the 2018 season, the total industry average production cost, excluding dryland vines in the Swartland region, increased by 7% to R51 788/ha. This increase is in line with the long-term average inflationary increase of 7.24% per year, but was slightly mitigated in 2019 due to the financial/cash flow position of many producers (especially in drought-stricken areas) who have cut back expenditure on specific items for one or more years.
FIGURE 2. Total industry average production cost.
- Cash expenditure
Cash expenditure is specified as direct cost, labour, general expenses and non-capital related expenditure on mechanisation and fixed improvements. In the 2019 production year an increase of 4.3% to R38 623/ha was observed in total cash expenditure, compared to 2018. Direct costs, including crop protection, herbicide and fertiliser increased by 8% year on year. Expenditure on fertiliser recorded the largest rise with an average increase of 11.4% per year since 2017 (Figure 3), of which organic fertiliser and/or material showed the greatest proportional increase. A biennial perspective is important for context due to 2018’s dry season (application of fertiliser and water availability go hand in hand).
FIGURE 3. Movement of direct cost – industry average.
In response to the drier preceding season, producers intervened in 2019 with, among other things, more expensive inorganic products, chemical correction of soils (in the form of a maintenance application against potential salinity issues due to below-average annual rainfall patterns) and producers applied large volumes of organic matter on the vine row for soil moisture and soil health considerations. Better grape prices and a smaller grape crop further influenced behaviour. In some cases, producers also improved or increased fertiliser application in an attempt to attain greater yields per hectare or to produce enough raw material for their own sales.
Labour cost (the greatest cost contributor to wine grape cultivation) increased by 3.8% year on year (with an increase of 5.9% in seasonal and 2.8% in permanent labour) (Figure 4).
The context of the smaller-than-expected increase is important for the following reasons:
- Wages increase annually and often exceed consumer price inflation;
- Wages are directly related to the number of canopy management actions applied;
- The drought’s effect/transmission includes the loss of vineyards and in some cases also loss of job opportunities on both wine grape enterprise and farm levels; and
- The degree of mechanisation, with a larger percentage of the crop being harvested mechanically year on year, directly affects this cost component.
FIGURE 4. Movement of labour cost – industry average.
Wine grapes are cultivated in a variety of different production regions in South Africa, with variation in topography, climate, cultivation practices and corresponding production and cost structures. The largest regional differences in the cost structure are found in labour, mechanisation and direct costs.
A flattening trend with regards to expenditure on mechanical repairs and an above average increase in fuel can be observed with regards to mechanical costs (Figure 5). The former is partially related to substantially smaller crops year on year in some of the most mechanised wine regions in 2019. The above-average increase in fuel is also related to a disparity in grape prices, with grapes being transported further from several regions to final buyers.
FIGURE 5. Movement of mechanical cost – industry average.
In terms of general expenditure, the most prominent movement is a 9.72% increase in electricity year on year. Although a downward trend in water tax can be observed, this is not the case (some areas did have temporary moratoriums/relief on water taxes); the expression “the most expensive water is no water” has been particularly relevant over the past few seasons. This phenomenon could rather be attributed to the fact that participation in the survey grew by more than 20% in 2019 and that two of the largest districts had a larger dryland/supplementary irrigation component that affected the figure.
It is also encouraging to note that there is a clear increase (20% year on year) in producers’ spending on noncapital expenditures such as fixed improvements. These include much-needed repairs to items such as irrigation infrastructure and in many cases employees’ housing. This may indicate that as producers receive better prices, improved working conditions can also be created (Figure 6). The relative contribution of different cash expenditure items to total cash expenditure over time is shown in Figure 7.
FIGURE 6. Movement of general expenditure and noncapital expenditure on fixed improvements – industry average.
FIGURE 7. Percentage composition of annual cash expenditure – industry average.
- Provision for renewal
Annual production cost is not only limited to cash expenditure. Capital items are also depleted over time, and replacing such items is deemed critical to ensure long-term sustainability. Producers had to complete an intensive asset list with relevant replacement values for all moveables, equipment, other means of production and fixed improvements over the previous 15 years. This information was then used to calculate individual and region-specific average provision for renewal amounts.
For the 2019 survey, this calculation methodology was revisited with the premise of applying the same principle but relieving the administrative burden. By studying the previous 15 years’ surveys, correlations and relationships between cash expenditure and provision for renewal were highlighted. As of 2019, the methodology included correlating provision for renewal as a derivative of cash expenditure. However, it is important to note that there are regional differences and similarities in provision for renewal (of vineyards, permanent improvements and movables) between areas depending on cultivation practices, topography and climate. Some areas were also realigned to themselves and/or other similar areas.
This methodology was consistently applied and by using the principle of “provision for renewal” a larger amount was recovered than in the case of depreciation. To some extent, this addresses the issue of linear depreciation for tax purposes. Total provision for renewal amounted to R13 165/ha in the 2019 production year – an average increase of 5.78% per annum since 2010. This increase is conservative when compared to headline inflation, especially in view of inflationary increases in various inputs, including imported inputs, which usually exceeds the inflation rate.
Vineyards are ageing rapidly. For the first time in 16 years, the sample’s vineyards that are younger than three years comprise less than 10% of the total hectares. In addition, for the first time, more than 20% of the sample’s vineyards are older than 20 years. This is contrary to the general norm that 15% of vines should be three years or younger and the portion older than 20 years should not exceed 15% (Figure 8).
Unsustainable average gross income levels limit producers’ ability to do sufficient capital replacement. Improved grape prices over the past two years have definitely aided producers to keep struggling blocks in production, but some vineyards are simply too old and substantial shortages of some varieties may develop in the next few years. As renewal is postponed, vines, buildings and movables progressively exceed industry standards for acceptable lifespan. Alternatively, resources are allocated to crops that realise a higher net farm income (NFI). The former is evident, when considering that the area planted under vineyards in the South African wine industry aren’t only decreasing, but the overall vineyard is also ageing annually (Figure 8).
FIGURE 8. Age composition – industry average.
- Production, cost and market structure
The average area planted to wine grapes per participant was 91 ha (Figure 9). Size benefits, so-called “economies of scale,” play an increasingly important role in the broader agricultural sector, especially depending on where producers are locked into the value chain. This may differ from enterprise to enterprise and between districts. In many cases increased bargaining power, which is accompanied by greater turnover, is more common than the traditional cost-saving effect on overheads. Larger units, with greater inherent potential for cost savings, are not necessarily more cost effective; therefore, “bigger” is not always “better” from a cost effectiveness point of view. On the contrary, many examples can be found where smaller units are more cost effective than their larger counterparts. The joint outcome between production, cost and marketing therefore remains key.
FIGURE 9. Hectares planted to grapevines per participant (bearing and non-bearing hectares) – industry average.
Of these efficient units, measured in terms of NFI/ha (regardless of size), many are characterised by production efficiencies as can be observed in their cost composition (that differ from the industry average). In the 2019 sample, these units typically spent a larger portion of total cash expenditure on direct costs (22% vs 18%), a larger portion on fixed infrastructure maintenance (5.3% vs 4.1%), a smaller portion on labour (35% vs 41%) and a larger portion of the crop was harvested mechanically (86% vs 61%) compared to the industry average. Being more cost effective does not necessarily translate to spending less, as you can also “save” yourself into a demise. Although the drought – and the aftermath thereof – had a definite impact on the industry’s spending on cash expenditure in 2018 and in some districts in 2019, the top producers did not spend less per hectare. Top producers in effect spent 2.5% more than the industry average on cash expenditure in the 2019 production season, as opposed to -0.3% in 2018 (Figure 10).
One of the distinguishing characteristics of the top producers over the past nine years is that they tend to spend more on direct costs (particularly fertiliser), but moreover that a larger average percentage (~30% vs 21%) of top producers’ total fertilisation programme is organic (Figure 10). “Organic” in this context refers to all forms of fertilisers that are not inorganic fertilisers. Many of those who do better do not merely spend more on fertiliser, they apply fertiliser selectively at block level, according to the vegetative growth indexes of the blocks, which reflects the soil potential. Precision farming principles are thus increasingly applied in the wine industry.
FIGURE 10. Comparative spending patterns of the “top producers” vs the industry average.
The 2019 production year was characterised by great variation in yields between, but also within, regions. Red varieties in particular had lower yields in certain regions. The average yield for bearing and non-bearing hectares for the study group was 16.11 tonnes/ha, with significant yield losses and drought transfer effects in certain regions (Figure 11).
FIGURE 11. Average yield (bearing and non-bearing hectares) – industry average.
Of the white cultivars, Chenin blanc, Colombar and Sémillon average yields were higher year on year, whilst the yields of Sauvignon blanc, Chardonnay and Viognier were lower (Figure 12). Of the red cultivars, Cabernet Sauvignon, Shiraz, Merlot, Cinsaut and Pinot noir achieved similar below-average yields, while Pinotage and Ruby Cabernet yields where close to their five-year average (Figure 13).
FIGURE 12. Average yield white (bearing and non-bearing hectares) – industry average.
FIGURE 13. Average yield red (bearing and non-bearing hectares) – industry average.
Analyses/measurements with valuable block-level insights were added to the project for the first time since the 2019 survey and provided valuable insights. For this purpose, 6 709 individual wine grape blocks, with their associated yields, expected income and accompanied cost structures were divided per hectare (wine grape enterprise costs were apportioned homogeneously per hectare). Wine grape blocks were then ranked from most to least profitable, with two lines – a red line (cash expenditure) and a green line (total production cost) – that distinguishes blocks. The former line divides blocks that cover or do not cover their day-to-day expenses (cash expenditure), and the latter indicates which blocks finance their own “retirement planning” (cash expenses plus provision for renewal) or not. Not only does this provide an intuitive breakdown, top producers are also easily identified by this distribution, as those whom (amongst others) apply a strict focus on measurement and cultivation practices, at both an enterprise and individual block level to eliminate cross-subsidisation.
The profitability, or NFI, is calculated as gross income (R/tonne x tonne/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 vintage and although a large majority of producers realise their income at different stages, no time value of money is taken into account (Figure 14).
FIGURE 14. Profitability – industry average.
Gross income has increased over the last decade, predominantly driven by yield increases, but increases over the last two years can be attributed to rising grape prices. Similarly, future growth in gross income will largely need to stem from grape price increases. This can be attributed to the vineyard status having reached a structural limitation due to too many years of low profitability leading to older and aged vineyards. Not only does this preclude the likelihood of a noteworthy increase in harvest size, but also a smaller harvest for the foreseeable future (with the exception of a slightly larger harvest in 2020 because of the low base in 2019 due to climate factors).
For the 2019 harvest, gross income amounted to R72 439/ha (the average for bearing and non-bearing vineyards), a 14.2% increase year on year. The gross margin (i.e. the cash flow effect per hectare) was R33 816, representing an annual growth of 10.15% since 2012, albeit such growth has been from a low base. After provision for renewal has been made, an increase of 37.8% in NFI, or R20 617/ha, was achieved. As a guideline for economically viable production, the average income and NFI for the 2019 production year should in fact achieve at least R85 788/ha and R34 000/ha respectively – this is considered a minimum sustainable requirement. Included in this calculation is an amount for entrepreneurial remuneration and opportunity cost (inflation plus 5%).
This calculation does not necessarily reflect the full opportunity cost of alternative crop choices. Although primary producer profitability levels have improved and the majority of primary producers in the South African wine industry are better off than in 2018, profitability levels are not yet where they should be. This statistic can be seen in Figure 15: About 8% more producers are profitable, but at the same time a similar percentage of producers incur losses compared to 2018. However, the effect/transfer effect of the drought cannot be excluded from this observation.
FIGURE 15. Profitability analysis (2015 – 2019) – industry average.
- Break-even and price increases over time
The break-even price is the amount needed to cover total production cost – no entrepreneurial remuneration, interest or tax are taken into account. By the same token, the break-even price is the total production cost divided by the average yield per hectare. Yield increases can thus balance or more than offset increases in total production cost. However, the former becomes increasingly difficult to attain with ageing vineyards and their accompanied diminishing productivity (Figure 16).
FIGURE 16. Influence of production on break-even of total production cost – industry average.
For a number of years, this is also how the South African wine industry has managed to offset cost increases amid stagnant income through sub-inflation price adjustments for producers. As the vineyards continue to age, the resilience and ability to absorb cost increases in this way decreases. The industry average break-even point increased by 9.2% to R3 214/tonne for the 2019 production year, compared to 2018. Simply put: The first R3 214 received by the producer for a tonne of grapes during the 2019 harvest should be applied for total production cost (Figure 16).
Average yields differ considerably between districts and cultivars, while the production cost does not vary to the same extent. This gives rise to great differences in production potential and break-even cost between districts, as well as between different cultivars. Similarly, even greater differences in product prices can be observed between cultivars, cellars (business models), as well as between and within districts, posing both challenges and opportunities.
For too long, farm gate prices for grapes did not sufficiently exceed production costs, resulting in a situation where amounts that should have been allocated to renewal were channelled to sustain entrepreneurs and fulfil obligations at the expense of an ageing capital structure and vineyards. At this point, it is valuable to turn our attention to grape prices, not only of the last two years, but also the preceding 13 years, to put the need for a structural price correction in context.
Figure 17 illustrates industry average expected farm gate prices over the last 15 years against an inflation adjusted price. The 2005 production season serves as the base year, the difference between the inflation-adjusted price and the actual price is calculated annually and expressed as a cumulative difference in Rand per tonne over time. Subsequently, a cumulative over- or under-recovery on gross income (annual price difference x average production per year) of R94 263/ha was calculated. In other words, this means that the average producer earned a total of R94 263 per hectare (excluding opportunity costs) less for each hectare of vines already planted in 2005 (and still in production), as would be the case if prices kept abreast with inflation.
FIGURE 17. Expected farm gate prices versus inflation-adjusted prices – industry average.
However, if opportunity cost and time value of money are taken into account, the amount changes to a net present value (NPV) amount of R314 991 per hectare (a real yield assumed). This amount would be sufficient to replace each hectare of aged wine grapes 1.25 times; a much-needed amount for an industry that couldn’t afford its own retirement planning for the last 15 – 20 years.
Although the previous two years’ price adjustments may be painful for the wine consumer and trade, these adjustments and future adjustments are essential to ensure sustainable wine grape production in South Africa. Furthermore, it is critical for all stakeholders to join hands, given the slowdown in economic growth and adjustment in terms of new consumer prices. It also provides the opportunity for strategic partnerships in the value chain: partnerships that can be mutually beneficial, providing value to the consumer and ensuring that there is raw product (grapes) for South African wines of the future.
The wine industry is cyclical in nature and the wheels have indeed begun turning in the 2019 production season – in some regions perhaps faster than others. It is encouraging that better prices have helped to improve the average producer’s profitability and although there are outliers in most regions, there are also producers throughout the industry who are still experiencing financial pressure.
On the back of a slightly larger than expected 2020 wine grape harvest and possibly larger local wine supplies, it is important for all role players to join hands. The South African wine industry harnessed the international wine supply wave of 2017/8 perfectly, but now also have the opportunity to consolidate, enter into and build strategic partnerships. Continuous improvement of the profitability of primary wine grape cultivation is essential and although we have improved year on year, the industry still has some way to go. In the midst of this, ageing of vineyards will continue and the industry is likely to shrink by at least 5 000 – 7 000 hectares before the vineyard status may begin to stabilise.
If sustained year-on-year improvement of the profitability of primary wine grape cultivation can continue for the immediate future, a structural recovery in the industry may be on the horizon. A situation where fortunes can shift in the next few years, boding well for both the South African wine industry and Brand South Africa.
Annual focus groups and site visits regarding specific themes originate from this project. These visits are facilitated specifically for production plan participants with food for thought and discussion on practices, producer plans and ways to improve your own profitability. If you would like to get involved, send an email to firstname.lastname@example.org.
– Please refer to the 2020/2021 Cost Guide, circulated with the May 2020 WineLand, for the district specific production cost table or send an email to email@example.com to request an electronic version. For other inqueries, contact Pierre-André Rabie at firstname.lastname@example.org.