PICTURE: WOSA LIBRARY. VINPRO PRODUCTION PLAN SURVEY The 217 vintage THE FINANCIAL SUSTAINABILITY OF PRIMARY GRAPE PRODUCERS IMPACTED NEGATIVELY BY THE INITIATION OF THE DROUGHT CONDITIONS, WITH POSITIVE SHORT TERM PROSPECT AS WORLD WINE SUPPLY TIGHTEN. ACCORDING TO THE LATEST VINPRO PRODUCTION PLAN SURVEY, PRIMARY WINE GRAPE PRODUCERS ARE STILL UNDER FINANCIAL PRESSURE AS THE DROUGHT SPREADS AND PRODUCTION COST INFLATION GRIPS FIRMLY ON ALREADY DWINDLING MARGINS. BY ANDRIES VAN ZYL & PIETER VAN NIEKERK In 217 the Vinpro Production Plan survey was conducted for the 14th consecutive year in the wine industry. The findings show that although the average producer are still not on sustainable income levels, the most profitable producers are gaining margin in all 1 producing regions, however the unprofitable bottom third are increasing for the third consecutive year, a further increase is expected if the current drought conditions prolong. With tightening global wine supply there is an opportunity for Brand SA to re-position itself in the market, ensuring a much needed structural correction along the wine value chain. 1
INTRODUCTION In 217 Vinpro Agricultural Economics conducted a comprehensive analysis across all 1 wine districts. The project is financially supported by Winetech, the National Agricultural Marketing Council (NAMC), Standard Bank, Absa, Land Bank, FNB and Nedbank, this ensures a free of charge financial management analysis for any primary wine grape producer. The primary objective is to provide an on-farm financial analysis of each participant s farming unit, benchmarking it with the regional average, breaking down the report in: the production structure, cost structure and profitability per enterprise and cultivar. Altogether 249 (an 6% increase year on year) farming units from all 1 wine districts participated in the 217 Production Plan survey. In 217 the sample consisted of 22 55 ha (24% of the total South African area planted to wine grapes in 216), producing 37 22 tons (26% of the total South African crop in 217). The sample consisted of 65% white- and 35% were red wine grapes, of the total 63% was harvested mechanically, a slight decrease year on year (YoY), with the smaller harvest directly impacting towards this trend. The analysis applies to overall grapevine production (bearing, as well as non-bearing hectares) and the cost analysis makes no distinction between cultivars and specific blocks. Regarding income, distinction is made between different wine grape cultivars. The greater majority of participants are diversified and varies with regard to production size. The report represents industry average figures, calculated by determining the weighted average of all participants. The Swartland district is always evaluated separately, as this study group cultivates a large component of its vineyards dry land (without irrigation) and/or with only supplementary irrigation. This requires an alternative production, cost and capital structure. THE 217 HARVEST The South African wine grape harvest was slightly larger following a dry season and consumers can look forward to exceptional wines from the 217 vintage. The total harvest was at 1 434 328 tonnes, 2.1% larger YoY and was initially expected to be smaller. A decrease was expected due to the second consecutive very dry, hot season. However, cooler nights throughout the growing season and the absence of significant heatwaves during harvest time buffered the effect of the drought to some extent, says Francois Viljoen, manager of Vinpro s Viticulture Consultation Service. The Swartland and Paarl regions obtained much larger crops following sharp declines in 216. Robertson s production was close to the record harvest, while Olifants River and Breedekloof increased somewhat following small crops during the previous year. Slightly smaller yields were noted in the Northern Cape, Stellenbosch and Worcester and a much smaller harvest in the Klein Karoo. The total vintage juice and concentrate for non-alcoholic purposes, wine for brandy and distilling wine included is expected to amount to 1 112 million litres, calculated at an average recovery of 775 litres per ton of grapes. THE COST OF WINE GRAPE PRODUCTION The annual financial capacity needed in preparation for the 217 vintage comprised of cash items and provision for renewal, excluding all tax, interest and entrepeneurial obligations. In comparison to the 216 the industry average total production cost (excluding dry land vineyards Swartland) increased by 7% to R47 513/ha YoY. As the biggest trend driving unsustainable income the last decade, primary grape producers absorbed a doubling of production cost, for the period from 28 to 217. CASH EXPENDITURE Cash expenditure is specified as direct cost, labour, mechanisation, fixed improvements and general expenses. Total cash expenditure had an above inflation increase to R36 554/ha in the 217 production year. The increase is driven mainly by the direct costs fertilisers, pesticides and herbicides, with a 13% increase year on year. This can be attributed to the weakening of the rand during this period, due to the fact that many of the direct inputs for vine cultivation are imported. Secondly the 9% year on year increase in administration cost, is concerning as primary producers have limited influence in these cost items. In many instances high capital outlays are needed to negate a cost saving component. The cost component differs among the 1 production regions areas due to terroir and production practice differences. Precision cost management, with a balance between consumer demand and input requirement for each block, aligned with product quality, remains critical in cycles of above-inflationary increases in costs. Once again wine grape production cost inflation was higher than the average South African economy inflation. PROVISION FOR RENEWAL Annual production cost is not only limited to cash expenditure; capital items are also depleted over time, with the renewal of such items deemed critical to ensure long term sustainable production. By calculating relevant replacement values of tractors, tools, other means of production, vineyards and buildings, a realistic and practical non cash flow provision is indicated. By using the principle provision for renewal, a larger amount is recovered than in the case of depreciation. To a certain extent this addresses the problem of linear depreciation in value for tax purposes. When calculating provision for renewal, capital items are written off over different periods at renewal value: Fixed improvements (excluding the main dwelling) 6 years Vineyards and other long term crops 2 years Moveable assets/production means 7-15 years 2
95% MECHANICALLY HARVESTED 81% 78% 74% 69% 63% 58% % 4% 23% 18% FIGURE 1. Tonnes harvested mechanically per district. TOTAL PRODUCTION COST Rand / ha 5 45 4 35 3 25 2 15 1 5 23 578 6 876 16 72 28 585 26 58 7 937 7 541 19 39 2 648 32 417 3 581 8 65 8 139 22 442 23 812 35 739 9 8 26 659 38 674 9 439 29 235 41 635 9 691 31 944 44 39 1 344 34 47 47 513 1 959 36 554 28 29 21 211 212 213 214 215 216 217 Cash Expenditure Provision for Renewal Total Production Cost FIGURE 2. Total industry average production cost. 3 DIRECT COST 2 795 Rand / ha 2 5 2 1 5 1 5 2 428 2 388 2 23 2 576 1 758 1 839 2 273 1 655 1 639 1 56 1 981 2 61 1 831 1 257 1 57 1 327 1 382 1 172 1 12 788 929 957 925 424 549 544 592 548 589 28 29 21 211 212 213 214 215 216 217 Fertiliser Pest & Disease Control Herbicide Control FIGURE 3. Movement of direct cost industry average. 3
TABLE 1. Production cost of wine grapes per district 217 harvest. Industry average Stellenbosch Paarl Robertson Breedekloof COST STRUCTURE RAND PER HA DIRECT COST SEED 226 144 56 11 FERTILISER 1 4 1 44 3 136 2 354 ORGANIC MATERIAL 6 24 125 1 66 PESTICIDE CONTROL 3 223 2 144 3 468 3 89 HERBICIDE CONTROL 1 124 87 1 242 949 REPAIR AND BINDING MATERIAL 562 316 61 463 Subtotal 6 198 4 875 8 629 8 22 LABOUR SUPERVISION 2 515 1 225 1 955 2 992 PERMANENT LABOUR 11 898 8 713 7 426 9 244 SEASONAL LABOUR AND CONTRACT WORK 5 246 4 289 4 81 1 398 Subtotal 19 659 14 227 13 462 13 634 MECHANISATION FUEL 2 216 1 829 2 332 2 32 REPAIR, PARTS AND MAINTENANCE 3 687 2 39 4 335 2 97 LISENCES AND INSURANCE 624 65 558 778 TRANSPORT HIRED 271 522 79 182 Subtotal 6 797 5 31 8 15 6 25 FIXED IMPROVEMENTS REPAIR AND MAINTENANCE 1 637 523 88 1 217 INSURANCE 386 345 192 374 Subtotal 2 23 867 1 1 59 GENERAL EXPENDITURE ELECTRICITY 2 36 2 57 3 943 3 837 WATER COSTS 912 983 1 46 292 LAND-, PROPERTY- AND MUNICIPAL TAXES 413 474 424 212 ADMINISTRATION 2 898 1 184 1 448 1 214 Subtotal 6 258 4 698 6 862 5 555 TOTAL CASH EXPENDITURE 4 935 29 977 37 968 35 51 PROVISION FOR RENEWAL 1 477 9 438 1 969 1 962 VINEYARDS 5 973 6 111 5 933 6 233 FIXED IMPROVEMENTS 1 165 788 975 992 LOOSE ASSETS OR PRODUCTION MEANS 3 34 2 539 4 61 3 737 TOTAL EXPENDITURE 51 411 39 415 48 937 46 13 AVERAGE AREA PLANTED (HA) 15 11 99 121 AREA IRRIGATED (%) 9% 9% 1% 1% AVERAGE AGE COMPOSITION (%) 3 YEARS AND YOUNGER 6.71 9.45 14.76 11.11 BETWEEN 4 AND 7 YEARS 8.7 14.42 19.16 17.81 BETWEEN 8 AND 15 YEARS 32.65 38.57 34.4 3.71 BETWEEN 16 AND 2 YEARS 27.1 26.37 2.28 2.28 OLDER THAN 2 YEARS 24.38 11.12 11.79 2.8 AVERAGE YIELD (TON PER HA) 8.78 11.7 21.61 2.45 CASH EXPENDITURE (RAND PER TON) 4 662 2 78 1 757 1 714 TOTAL EXPENDITURE (RAND PER TON) 5 856 3 561 2 265 2 25 4
Olifants River Worcester Orange River Klein Karoo Cape South Coast RAND PER HA Durbanville Industry Average Swartland 1 158 62 97 299 449 123 23 2 643 2 896 2 924 2 142 913 1 376 2 116 1 229 69 286 113 36 71 337 44 2 12 2 6 1 649 2 1 4 855 2 679 2 795 2 27 46 1 147 683 363 871 2 38 925 691 229 919 321 294 112 448 461 123 6 71 8 6 5 752 5 355 7 75 6 99 6 757 4 497 1 795 1 992 2 317 73 2 659 826 2 74 1 61 8 361 9 64 1 635 7 64 1 45 12 559 9 321 5 416 1 354 1 677 8 72 422 8 92 7 11 3 686 4 185 11 511 13 273 21 672 8 766 21 66 2 485 15 81 1 662 3 52 2 378 3 33 2 673 4 192 3 51 2 482 1 778 4 12 2 783 2 644 3 532 3 921 3 694 3 34 1 99 1 155 737 1 1 627 1 33 1 64 758 543 471 357 288 119 92 434 1 72 9 14 6 255 7 236 6 951 1 345 8 268 7 14 5 33 436 851 1 23 624 1 27 685 959 683 49 367 33 242 213 232 344 283 926 1 217 1 533 866 1 42 917 1 33 966-3 917 3 68 2 418 2 33 2 749 2 38 3 34 831 2 719 1 75 1 339 2 264 287 1 837 1 178 589 499 291 281 183 329 684 379 144 1 984 1 355 2 27 1 215 4 164 4 44 1 89 78 9 119 7 76 6 244 5 966 7 529 8 964 6 4 2 272 36 767 35 828 42 437 27 94 48 651 45 624 36 554 23 7 12 711 11 587 1 319 11 88 15 2 11 648 1 959 8 678 5 719 6 265 6 214 6 254 6 178 5 733 6 52 5 435 1 318 1 714 678 718 2 858 795 1 116 741 5 674 3 69 3 427 4 115 6 163 5 119 3 791 2 53 49 477 47 414 52 755 38 991 63 85 57 272 47 513 32 378 64 87 22 55 34 119 91 161 1% 1% 1% 1% 89% 6% 96% 4% 9.8 17.3 22.44 19.37 4.17 6.17 11.42 6.51 13.91 19.73 9.89 19.51 3.92 9.59 14.58 7.42 32.4 33.84 26.9 33.9 61.26 34.67 34.34 4.25 23.71 17.6 23.66 19.9 29.96 28.54 23.32 28.25 22.9 11.79 18.32 8.93.7 21.3 16.44 16.37 26.98 21.25 28.73 21.64 8.47 8.96 17.68 7.18 1 363 1 686 1 477 1 289 5 744 5 92 2 67 3 31 1 834 2 231 1 836 1 82 7 538 6 392 2 687 4 59 5
Rand / ha 1 9 8 7 6 5 4 3 2 1 LABOUR COST 9 51 9 321 7 86 6 828 6 76 5 616 5 272 4 92 4 459 4 97 3 686 3 134 3 342 3 219 2 755 2 137 2 132 2 246 2 325 1 719 28 29 21 211 212 213 214 215 216 217 Permanent Labour Seasonal- and Contract Labour FIGURE 4. Movement of labour cost industry average. MECHANISATION COST Rand / ha 4 3 5 3 2 5 2 1 5 1 1 586 1 464 1 842 1 639 1 983 1 533 2 243 1 726 2 136 2 4 2 352 2 358 3 177 2 949 2 594 2 613 2 646 2 592 3 34 2 482 5 28 29 21 211 212 213 214 215 216 217 Repair,Parts & Maintenace Fuel FIGURE 5. Movement of mechanisation cost industry average. GENERAL EXPENDITURE 3 5 3 2 5 2 63 2 287 2 32 2 498 2 796 3 34 Rand / ha 2 1 5 1 119 1 72 1 768 1 176 1 254 1 421 1 427 1 541 1 664 1 89 1 5 652 681 72 846 931 971 926 1 34 1 99 1 178 28 29 21 211 212 213 214 215 216 217 Electricity Water Cost Administration FIGURE 6. Movement of general expenditure industry average. 6
COMPOSITION OF ANNUAL CASH EXPENDITURE 16% 15% 16% 18% 19% 19% 17% 17% 17% 18% 4% 4% 4% 3% 3% 3% 3% 4% 4% 4% 21% 21% 2% 21% 2% 21% 2% 2% 2% 19% % 42% 42% 41% 41% 4% 4% 41% 42% 42% 41% 17% 18% 19% 18% 17% 18% 18% 18% 18% 18% 28 29 21 211 212 213 214 215 216 217 Direct Cost Labour Mechanisation Fixed Improvements General Expenditure FIGURE 7. Percentage composition of annual cash expenditure industry average. 12 AREA UNDER VINES PER PARTICIPANTS Ha wine grapes 1 8 6 4 77 79 79 84 86 87 92 97 95 91 2 28 29 21 211 212 213 214 215 216 217 FIGURE 8. Hectares planted to grapevines per participant (bearing and non-bearing hectares) industry average. Ton / Ha 2 18 16 14 12 1 8 6 4 2 TON / HA 17,69 16,31 16,46 16,98 17,48 17,56 17,68 15,55 14,73 15,8 28 29 21 211 212 213 214 215 216 217 FIGURE 9. Average yield (bearing and non-bearing hectares) industry average. Total provision for renewal amounted to R1 959/ha in the 217 production year a 6% increase from 216. It is positive to see that participants still have the means to replace capital items, however the ageing vineyard status is concerning, an indication of how rapidly producers are diversifying away from wine grape production towards more profitable agricultural crops. More than 16% of the plantings are older than 2 years and 11% of the grapevines in the survey are three years and younger. The general norm is that 15% of grapevines should be three years and younger and the component older than 2 years should not be more than 15%. PRODUCTION STRUCTURE The average surface planted to wine grapes was 91 ha the other enterprises are not taken into account. Economies of scale have been impacting on many agriculture commodities, depending on where producers 7
AVERAGE YIELDS: WHITE CULTIVARS 25 22.17 2 19.54 Ton / Ha 15 1 14.34 13.28 13.13 12.82 13.68 15.68 5 CHENIN BLANC COLOMBAR SAUVINGNON BLANC CHARDONNAY MUSCAT D ALEXANDRIE SÉMILLON VIOGNIER OTHER WHITE FIGURE 1. Average yield white (bearing and non-bearing hectares) industry average. AVERAGE YIELDS: RED CULTIVARS Ton / Ha 2 18 16 14 12 1 8 6 4 2 12.3 CABERNET SAUVIGNON 17.27 14.7 13.27 14.41 13.34 14.42 11.87 SHIRAZ PINOTAGE MERLOT RUBY CABERNET CINSAUT PINOT NOIR OTHER RED FIGURE 11. Average yield red (bearing and non-bearing hectares) industry average. 25 2 1 79 1 941 BREAK-EVEN PER TON 2 186 2 28 2 42 1 91 2 382 2 527 2 687 3 2 5 2 Ton / ha 15 1 446 1 5 R/ton 1 1 5 5 16,31 15,55 14,73 15,8 16,98 17,5 17,69 17,48 17,56 17,68 28 29 21 211 212 213 214 215 216 217 Yield (Ton/Ha) Production Cost in R/Ton FIGURE 12. Influence of production on break-even of total production cost industry average. are locked into the value chain. This may differ in rationale from business to business and districts. In many cases the increased bargaining power with higher turnover are more common than the traditional cost saving effect on overheads. It should be well noted that many larger units actually produce wine grapes more costly than smaller very efficient units. In the 217 production year yields varied greatly among the different regions. The average production for bearing and non-bearing grapevines for the 217 production year was 17.68 ton/ha. CULTIVAR STRUCTURE During the 214 production year a cultivar analysis was also conducted to indicate the production variance between the most planted white and red cultivars. This will assist producers with precision farming in the coming years by showing how the cultivars in their enterprise differ and 8
AGE DISTRIBUTION 12% 13% 14% 13% 15% 14% 15% 14% 16% 16% 14% 13% 13% 14% 15% 16% 18% 2% 22% 23% % 37% 39% 42% 42% 41% 41% 39% 39% 36% 34% 24% 22% 21% 19% 17% 17% 16% 16% 15% 15% 13% 12% 11% 11% 12% 12% 12% 11% 11% 11% 28 29 21 211 212 213 214 215 216 217 Under 3 years (%) 4-7 years (%) 8-15 years (%) 16-2 years (%) Older than 2 years (%) FIGURE 13. Age composition industry average. PROFITABILITY ANALYSIS 24% 4% 3% 3% 2% 6% 4% 37% 2% 3% % 55% 57% 49% 45% 47% 16% 12% 15% 12% 14% 213 214 215 216 217 Profitable (> R27 NFI) Low profit (R1 - R27 NFI) Breakeven (R - R1 NFI) Loss making FIGURE 14. Profitability analysis (213-217) industry average. PROFITABILITY R / ha 6 5 4 3 2 1 29 479 12 777 5 91 32 851 13 812 6 271 32 281 11 633 3 696 35 943 13 5 5 36 41 23 17 189 8 583 44 171 17 512 8 432 47 456 18 221 8 781 49 18 17 164 7 473 51 92 17 45 6 72 54 158 17 64 6 644 28 29 21 211 212 213 214 215 216 217 Gross Income (R/ha) Gross margin (R/ha) Net farm income (R/ha) FIGURE 15. Profitability industry average. 9
may contribute to greater profitability. Net profit per block calculations are critical in drought conditions, ensuring the culling of non- and low profitable blocks, producers are advised not to base financial decisions on turnover or just yield, ensure proper financial management principles are used when determining profitability. BREAK-EVEN In most cases agricultural commodities experiencing cycles of over supply are under pressure of cost increases with stagnant income, the majority of grape producers were coping with rising input costs and decreasing grape prices (in real terms) by increasing yields. This ensured that the break-even price did not increase substantually, it even decreased in 212, however with rising costs and stable average yields we have seen a year on year increase of 6% to R2 687/ton. In other words: the first R2 687 for a ton of grapes received by the producer during the 217 harvest, should be applied for total production cost no entrepreneurial remuneration, interest or tax has been taken into account yet. The average yields differ considerably among the districts, as well as among the various cultivars, while the production cost does not differ to the same extent. This gives rise to large differences in break-even price in terms of total production cost in the respective district and among the various cultivars. Over the past 1 years it has been an obvious trend that producers attempt to increase average yields to counter the effect of rising costs, as well as to increase profitability, but the drought will make it very difficult in 218. PROFITABILITY The profitability, in other words net farming income (NFI), is calculated as gross income (R/ton x ton/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 the majority of producers realise their income at different stages over the financial year, depending on their business model, no time value of money is taken into account. It is very positive to see how the gross income per hectare has increased in the last decade, predominantly driven by increasing yields, but in some cases to a less extent by rising grape prices. For the 217 harvest the gross income amounted to R54 158 per hectare (the average for bearing- and nonbearing vineyards in total), a 6% increase year on year. The gross margin, i.e. the cash flow effect per hectare was R17 64, only 3% more than 216, indicating the deminishing effect of rising input costs as the cost-prize squeeze is still hampering the wine grape growers. After provision is made for renewal, a decrease of 1% in NFI of R6 644 per hectare was achieved. As a guideline for economically sustainable production, the average income and NFI for the 217 production year for a 4 hectare unit should in fact have realised R71 67 and R27 28 per hectare respectively, and for a 1 hectare unit R63 75/ha and R19 36/ha. This is seen as a minimum sustainable requirement, included additionally in this calculation is opportunity cost and entrepreneurial remuneration. Unsustainable average gross income limits producers to implement sufficient capital replacement. Consequently grapevines, buildings and moveables are beginning to exceed accepted industry norms lifespans. Alternatively resources are allocated to crops with higher NFI. For more information, contact Andries van Zyl at andries@vinpro.co.za or Pieter van Niekerk at pieter@vinpro.co.za. SUMMARY With global wine supply tightening and the increased pressure of the drought, many producers will remember 217 as a game changer, it may be either positive or negative. With the ageing and decreasing vineyard status, a sure sign of a structural shift is imminent, as local supply adjusts to meet global and local demand. 1