New approach needed to ensure sustainability of South Africa's wine industry
29 November 2010

Agriculture - and wine production in particular - has reached a point at which change is not just desirable, it's essential to profitability and long term sustainability. South African wine production has dropped 5% drop over the past year.

This is despite an incremental growth in production over the last 12 years. Pressure on the industry is intensifying as vineyards age and international competition for market share increases.

Willie Du Plessis, Director of Agricultural Banking at Standard Bank Group in South Africa, says: "The local wine industry is not only an important contributor to the agricultural sector as a whole but is also an industry that lends itself to national prestige and has a very important tourism focus. It is a treasure that needs to be jealously guarded and nurtured.

"However, a host of local and international factors have forced producers to re-examine their business models, cultivars and markets. Producers should be acutely aware of making decisions based on current events without an eye on the future."

South African producers are experiencing a production trend towards white wine cultivars; this as the price of white wines catch up to a red wine market that is taking strain from global over supply. Producers have taken advantage of this trend and shifted focus to white wine productions.

"Producers being willing to change their wine stock is a good thing, because they are managing risk better through diversifying their cultivar composition and using a balanced crop to mitigate the risks associated with different varietals. Changing vines and balancing varietals are ways to ensure biodiversity.

"However, leaning heavily towards the whites raises the issue of the price squeeze versus the cost squeeze. From Standard Bank's perspective, ensuring income is more important than an exclusive focus on costs. As producers have adapted to price pressures, the age of local vineyards has reached a point where urgent decisions need to be made to ensure the long term sustainability of the industry," says Mr Du Plessis.

Local producers are currently uprooting more vines than what are being planted. Planting of vines decreased by more than 60% over the past five years. Of all new vines planted, 82% are white cultivars. As a consequence of new planting dynamics and the "ageing" of local vineyards, South Africa's present vineyard age distribution for both white and red is not at ideal levels.

Mr Du Plessis adds: "It is expensive to replant vineyards and it takes at least four years to bring a new vineyard into full production, and years after that to produce a commercially viable wine. This puts enormous pressure on cash flow and increases the producer's risk. It also makes adapting to fleeting market demands very difficult. There are fresh trends related to the ways and the markets in which people consume, and producers need to understand them in order to be able to retain existing markets or capture new ones.

The answer lies in entering new markets with your existing products, so that you continue to generate income while you replant your vineyards. By expanding your markets, you also give yourself a buffer against market shifts - because if you're in enough markets, at least some of them will buy whatever you offer. This is particularly crucial in light of the fact that local demand for wines has remained at very similar levels since 1993."

According to recent research from Vinexpo, China is expected to become the seventh largest wine consuming country by 2012 with consumption increasing to 1-billion bottles a year. This demand offers real opportunities for South African wine makers.

Granted, this is a fairly new market for South African producers, but in 2009 South Africa exported about 390-million litres of wine, of which only 4-million litres was destined for China. Looking at growth forecasts the opportunities could be endless if South African producers, cellars and exporters are able to exploit this opportunity and build the South African brand in China.

"While there is no question that sustainability in modern terms must include an emphasis on the environment, South Africa's wine industry is a particularly good example of the ways in which our agricultural sector needs also to adapt to new business and market dynamics," says Mr Du Plessis.

Financial institutions are also aware of renewed market pressures. The need for financial innovation to support sustainability has become important. These innovations manifest themselves in the ways in which financial institutions are prepared to support primary agriculture as well as up and downstream activities. These include offering a two or three-year capital moratorium, which gives producers time to mature new vineyards and start producing wines before they have to repay the capital on a loan.

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