Industry body Vinpro says South African wine grape producers’ financial viability is improving, after a long downward cycle; however, there is still a long way towards sustainability.
Vinpro conducted its Production Plan Survey among 260 wine grape producers, finding that 28% of respondents made a profit last year, compared with 15% of participating wine grape producers that made a profit in 2015.
The industry’s average return on investment also increased in the last five years from less than 1% in 2015 to 4.83% in the 2019 harvest year.
Vinpro found that the average South African wine grape producer earned a net farming income of R20 617/ha last year, which was 37% higher than in 2018.
Although the average production costs, which include cash expenditure and provision for replacement, were 7% higher than in 2018 at R51 821/ha, the gross farming income increased by 14% to R72 439/ha last year.
Vinpro agricultural economist Pierre-André Rabie says that, although these figures are encouraging, it is important to note that nearly a third of wine grape producers are still not profitable.
He explains that wine grape producers can most probably cover cash expenditure, but are unable to provide for replacement of capital items and entrepreneurial remuneration – as evidenced by an ageing area under vines and limited new plantings.
The set net farming income for sustainable wine grape farming of R34 000/ha is substantially higher than the current industry average.
“Producers in the majority of the regions received higher prices for their grapes; however, when taking real price inflation over time into consideration, producers will have to continue to receive good prices for some time before vineyard replacement could really start.
“Total plantings will probably decrease by a further 5 000 ha to 7 000 ha before the area under vines starts stabilising,” Rabie notes.
He further laments that the wine industry is cyclical and that the wheel is turning; in some areas just faster than others.
“It is encouraging that higher prices have helped improve the profitability of the average producer and although there were really great achievers in most regions, we also saw producers across the industry who continue to experience financial pressure.”
The Little Karoo, Swartland and Olifants River regions were hit hard by the drought and/or the after-effects of the drought in the past two or more years.
“A financial drought always follows a physical drought, and many businesses will need good rainfall, decent yields and time to recover. We see, for example, that the effects of the 2018 price hikes only started manifesting last year, and spending patterns, which are affected by cash-flow, will also adapt to this over time,” Rabie says.