South Africa’s disconnect

For many of the world’s leading wine writers, South Africa has become one of the most exciting sources of fine wine. Neal Martin, Tim Atkin and Jancis Robinson have been unstinting in their praise of what the Cape delivers – from hand-crafted, innovative interpretations of Chenin Blanc to some of the most striking Bordeaux blends and Chardonnays made outside the major French appellations. It would seem a safe assumption that with South Africa front of mind wherever trade buyers are looking for stand-out and original bottlings, the wine industry itself must be in rude good health.

Little could be further from the truth.

The decline

In the past ten years the number of wineries has declined by roughly 10%. Area under vine continues to shrink at an average rate of over two hectares per day. Every week for the past 20 years one grower, on average, gives up on farming wine grapes: it’s hard not to notice this disconnect between the upbeat reviews and the hard reality on the ground.

There is no single reason for this attrition. The drought of 2016-19 doesn’t account for the fact that this downward trend dates back to the 1990s. Nor is it a function of declining exports: over the same period exports have grown sevenfold. South Africa is one of only a handful of countries which exports more wine than it consumes domestically.

The one certain explanation is the difference between what it costs to grow grapes and the price at which the fruit can be sold, and this is counter-intuitive to anyone who assumes that the normal laws of supply and demand apply. Between 2005 and 2017 the producers’ income index increased from a base of 100 to 180 while production costs rose from 100 to 230. In other words, in South Africa’s relatively high inflationary economy, the value of money halves every 10 years. The increase in the prices paid to producers has been significantly less than the rate of inflation, massively eroding their margins. VinPro, the growers’ association, estimated that in 2015 only 15% of the country’s wine grape growers made a profit, and that their average return on investment that year had fallen below 1%. The response of many of the farmers has been to desert the wine industry (hence the attrition in the size of the national vineyard) and plant other crops.

It’s not easy to figure out why pricing has remained resolutely depressed while demand has risen. One obvious culprit lurks in the structure of the South African wine industry. While there are over 3,000 grape growers, there are only around 500 wineries and of these, nearly half crush less than 100 tons. Growers without their own production facilities are at the mercy of the large cooperative-type wineries, some of which act as conduits for the major wholesalers. The result is a very unequal negotiating space: thousands of growers, and only a handful of fruit processors, all of whom can exploit the fact that ripe grapes deteriorate quickly. The big wineries and the major wholesalers present a united front in any discussions around fruit pricing. Except for growers in the most prestigious appellations, or fruit sellers offering the exotic or the extraordinary, the balance of power rests squarely with the grape buyers.

To complicate things for farmers in once fashionable regions like Stellenbosch, Paarl and Durbanville, many end-users are more interested in varieties than in areas of origin. The result is that, unless the fruit is exceptional, buyers can be completely flexible when it comes to selecting their suppliers. This has favoured those regions where it is possible to produce good commercial wine from higher-yielding vineyards. The past 15 to 20 years has seen a dramatic shift from more premium appellations to those which have ample water and sunlight, as well as flat or gently undulating landscape where long vine rows lend themselves to industrial viticulture and mechanical harvesting.

The consequences

It is impossible to over-estimate the impact of this change in focus. In Stellenbosch – where land is expensive and farming costs are high – typical yields are less than 10 tons per hectare. Along the Orange River far to the north of Cape Town, warm dry weather ensures a largely disease-free growing environment while irrigation water and industrial farming strategies can bump yields to above 30 tons per hectare (and even more, if what is being sought is wine for distillation or fruit for juice concentrate). In Stellenbosch growers consider themselves lucky if they average $600 to $1000 per ton for premium fruit. But with yields hovering around the 6 to 10 ton per hectare mark, at those prices they are lucky to break even on farming cost. They certainly cannot manage a provision for vineyard renewal.

Over the mountain in the Breedekloof, where Chardonnay from virused vineyards can still be sold to make base wine for traditional method sparkling wine, prices average less than $400 but yields are three times higher. In the high-yielding, irrigated regions further north, fruit prices around $200 per ton can still be profitable on harvests of around 30 tons per hectare. These high-volume high-margin fruit sales in the inland areas have served to depress prices in the regions closer to Cape Town, and to undermine the viability of the traditional appellations – which are also the key wine tourism destinations.

The statistics tell the story with incontrovertible clarity: in 1999 there were 104,000ha of wine grapes producing just over 914m litres of wine. In 2017 this had come down to 94,000ha but the yield was fractionally up (despite the drought) to 919m litres. Put another way, in this 18-year period the industry had “lost” 10% of its vineyard area and was actually producing more wine. Clearly the most endangered of all species of grape farmers are those whose vineyards are located in low yielding appellations.

Pierre-Andre Rabie, the agricultural economist at VinPro, the organisation which safeguards the interests of the growers, estimates that at least another 5,000ha will be lost before the process of attrition bottoms out. He is also circumspect about predicting a long-term return to profitability. There’s not enough margin yet to cover the cost of replanting, and as the vineyards age, their yields decline. Unless the market is prepared to pay a meaningful premium for older (but not old) vine fruit, the production loss could erode the recent gains in grape pricing.

Replanting costs (together with loss of income) come to $20,000 per hectare in the premium appellations. If a grower is unable to finance this investment every 20 to 25 years, there is little choice but to walk away from the wine industry. This is why the coastal quality areas, which are also those most important for wine tourism, are the ones suffering the greatest percentage loss of high potential vineyard.

Any way to lift prices?

The solution to the problem would be higher grape prices. The difficulty is that the processors are not under any compulsion to pay more for their fruit as long as the higher-yielding vineyards meet the current demand. This is the situation that will prevail until the market – local and international – demands specific appellations and is willing to pay extra for wines from these designated areas.

What further distinguishes South Africa from other countries which seem to manage better the availability of low-cost fruit and high-priced wine has been the inability of the local industry to build a super-premium wine culture. This is both an historical problem, as well as a reflection of the particular circumstances of the political and economic situation in South Africa. Twenty years ago a bottle of wine priced at R200 ($40) was a great rarity: an industry dominated by large wholesale producers tended to provide consumers with relatively inexpensive wines. As a result, even well-heeled consumers baulked at high prices.

Things haven’t changed: more than 50% of all bottled wine sold in South Africa retails for less than $4. Probably less than 1% of all wine sales take place at over $10 per bottle. If the locals won’t pay more for the country’s top wines, why should the international markets? Of course there are producers who use price as a proxy for quality. There’s no shortage of “special bottlings” which go to market in the $50 to $100 per bottle range, but the uptake is tiny. More importantly, to the extent that there is a secondary market in the country (and it is tiny and fragile) such wines hardly ever achieve their original sales price when offered for re-sale. Accordingly, there isn’t a wine investment culture. Add to this the economic crisis (low/negative growth for more than a decade) as well as continuous and increasing emigration affecting the middle and upper classes and it is clear that there’s nothing to help lift the price point for aspirational wines.

With no reason to pay more – not status, not appellation, not shortage of quality wine – domestic prices have stayed resolutely low. Since the wine industry is entirely self-funded, with no real support from the government, there’s no strong international marketing message to lift average pricing of South Africa’s wine exports. The few cult wines which sell at around $100 per bottle can play no role in lifting the perception of value when literally hundreds of millions of bottles are trading at less than $3. It’s as if the immovable object is deadlocked with the irresistible force. Nothing changes except the size of the Cape wine industry, which carries on shrinking and withering away.