01 Mar 2012 Sour grapes: tough times for SA’s wine producers

Since the 2009 recession, grape and wine consumers have opted to buy cheaper, leaving producers in a cost-price squeeze with income failing to keep up with rises in production costs, according to a recent study by wine producers’ body, VinPro.

VinPro’s agricultural economists Gert van Wyk and Franco le Roux tracked the industry’s production costs over the period 2004 to 2011. The study illustrated how the financial situation of producers had deteriorated over that time, and what had happened in the rest of the value chain.

The average retail price of wine, excise and cellar costs increased and even exceeded, in some instances, inflation for the period under review, they said.

However, the average price of bulk wines and producer cellar grape prices did not keep up with inflation, assuming negative levels in the case of non-producer cellar grape prices.

Production costs at farm level increased in line with inflation, despite drastic cutbacks in costs by producers.

Some producers cut costs to the bone because of cash flow problems, which could explain why the increase in production costs was less than expected.

As a guideline for economically sustainable production, Vinpro proposed that the average income and net farm income for the 2011 production year should have realised R47782 and R17200 per hectare respectively.

Over the past seven years the average income was consistently lower than the target income guidelines. “Producers are still in a cost-price squeeze and in some instances income has been less than the cost of grape production,” the study found. The data suggested producers had “hardly any bargaining power”.

As a result, the industry is becoming smaller, with bigger players buying out smaller ones. Mr van Wyk and Mr le Roux believe “a slightly smaller industry is likely to be a better industry”.

Currently there are 3596 primary wine producers, compared to 4515 in 1999. Most of these deliver grapes to 54 producer cellars, compared to 69 in 1999.

Source: Business Day

Wine producers stagger under excise duties

Following the announcement of SA’s 2012 Budget, VinPro’s MD, Rico Basson, says South African wine producers will be forced further down on their knees by the latest increases in excise duty announced by the Minister of Finance, particularly the excessive increases for brandy – and the combined effect of these will be a vital blow to many, undoubtedly with accompanying job losses.

Producers have already had to absorb stiff excise increases in recent years, amidst serious financial pressure, and the latest increases of 7.8% on natural wine and 20% on spirits, the latter including the important brandy component, are totally unacceptable. Fortified wine increases by 6% and sparkling wine 8%.

“VinPro has noted with disappointment and concern that – despite continuous discussions with the government – not enough consideration was given to the wine producers’ critical position and pleas. The increase for brandy amounts to more than three times the inflation rate, while the expected producers’ income will move sideways this year,” says Basson.

“In reality, proper control over illegal alcohol distribution in the form of so-called “ales” – which contributes significantly to about R500 million in excise losses – would have resulted in substantially lower increases. This, while the government has for considerable time earned more from excise and VAT from wine products than the total wine grape producers’ income – certainly not a sustainable situation for the government or the industry.”

Vital facts from VinPro:

• Excise duties on wine have risen from R0,89 per litre in 2003, to R2.50 per litre. The wine producers’ revenue is hereby reduced by more than R1 100 per ton.
• Die primary producers already earns only R R2,55 from a bottle of wine that retails at R27 – thus less than 10%.
• After production costs this leaves 38 cent for his living expenses and interest on farm capital.
• The government already earns R5 from the same bottle of wine from excise and VAT and last year earned R3,9 billion, while the producers received R3,6 billion.
• The wine industry is the second largest exporter of agricultural products and its contribution to the Gross Domestic Product is more than R26 billion. It employs more than 279 000 people.