The South African wine industry, represented by the South African Wine & Brandy Company (SAWB) — the body representing the collective interests of wine farmers, workers, large companies, cooperatives, boutique cellars and all others in the industry — has officially asked the government for support in regaining a competitive advantage internationally following nine years of deregulation.
The call for intervention comes as the industry faces extremely difficult market conditions both locally and internationally. After a very tough 2005, the local market for red wine is widely expected to deteriorate further in 2006, leaving some wine farmers with unprofitable operations.
In a recent presentation to the Ministerial Committee on the Impact of Regulation of South African Agriculture, SAWB CEO Dr Johan van Rooyen said extensive government subsidies in some high-volume wine producing countries made it “virtually impossible” for South African producers to compete on price points in global markets, particularly given the strength of the rand over the past three years.
Although the scrapping of the regulations since 1997 had had numerous positive results, including a surge in wine exports that had led to job creation and the upliftment of rural communities, very difficult global conditions currently meant the industry was under significant strain, van Rooyen told the committee. Strong export growth had been key to the industry’s prosperity thus far.
“The past decade looked good. The next one doesn’t, unless the wine industry sustains its competitiveness, and for this, support by government at various levels is now needed.”
A global oversupply of wine, and red wine in particular, has made conditions very competitive. Supermarkets — notably in the United Kingdom and Germany, key
export markets for South Africa — have initiated aggressive price discounts that are only viable for the lowest-cost producers such as Chile and Argentina.
Data from South African Wine Information & Systems (Sawis) shows that South
Africa’s packaged wine exports fell 1,5% by volume in 2005. By value, data on wine exports is not yet available for 2005, although Wines of South Africa CEO Su Birch said she believes the trend will be higher versus 2004.
Such tough offshore competition has meant that some of the wine destined for export has remained in South Africa, which combined with rising local red production has also sparked an oversupply of red wine in the local market and
pushed down prices for farmers.
Exacerbating the problem has been the stagnant local demand for lower- and
medium-priced wines, although high-priced wines have experienced good demand.
Bulk red wine stocks thus continue to build up — Sawis data highlights an increase in uncontracted bulk red wine stocks for the 2005 vintage to 32,4-million litres, from 28,4-million litres in 2004 and only 12,4-million litres in 2003.
Meanwhile, bulk red wine prices have dropped substantially. Sawis data shows that, after recording a drop of 14,8% in 2004, in 2005 the average price of red wine sold in bulk fell by 20%. Some varieties saw declines of as much as 41% last year.
By contrast, the average price of bulk white wine rose by 3,3% in the face of a slight shortage in certain white grape varieties.
The local outlook remains poor for red wine farmers. Some of the industry’s largest grape and wine procurers — including Distell, KWV and Winecorp — told I-Net Bridge they expect red wine prices to continue to fall in 2006 and beyond, albeit at a slower rate. Red wine farmers in the Stellenbosch, Paarl and Wellington regions are already receiving such poor prices for their grapes that, given their low tonnes per hectare produced, they are becoming unprofitable.
“Government support will be required across a broad front to collaborate with the industry in order to deal with policy development, strategic positioning and operational aspects in order to provide stability and create an enabling environment,” Van Rooyen told the ministerial committee.
“The sector is highly integrated into the regional economies of the Western and Northern Cape. Economic swings and external ‘shocks’ are thus directly translated through many linkages to impact directly on the livelihood of many — especially in rural areas.”
As the committee focused on the impact of deregulation and the required support role for the government and its agencies to enable growth and development in the industry, the SAWB recommended several measures, all of which had been fully endorsed by the various industry structures. These were: Continuation of statutory levies; increased research and development support; promotion of “Brand South Africa”; intensification of environmental controls; reduced statutory costs and the introduction of “realistic” taxes and excise duties; establishment of a “hotline” between government and the industry; the set-up of strategic intelligence support systems, including policy and strategy analysis; and the acceleration of legislative reform.
Van Rooyen said market development had also been identified as a high priority area for government’s collaboration and support, including: improved port infrastructure; enhanced laboratory capacity for quicker certification; and supporting new black economic empowerment entrants, among others. – I-Net Bridge