Financial pressures mount for South Africa’s economically important wine industry

The South African wine industry is currently experiencing significant financial pressure, marked by a cycle of declining vineyard areas, an aging vine profile, and persistently rising production costs. A new report from FTI Consulting sheds light on the current state of the sector.

This financial strain threatens not only a key national asset that enhances South Africa’s global brand but also the industry’s substantial contributions to employment and economic growth. It is essential to consider the industry’s current position and broader economic role when evaluating potential policy adjustments, such as changes to excise tax rates.

The total area dedicated to wine grape vineyards has been steadily decreasing, dropping by approximately 12% over the last decade, from 99,472 hectares in 2014 to 87,848 hectares in 2023. This decline is primarily due to consistent net uprooting, with more than twice as many hectares of vines being uprooted than planted in 2023.

This trend has resulted in a significantly skewed age profile of vines. The proportion of vines older than 20 years has increased from 20% in 2014 to 36% in 2023, far exceeding the recommended maximum of 15% for vines of that age.

These older vines also have lower yields compared to younger vines. The combination of a shrinking vineyard area, an older vine profile, and the adverse effects of climate changes has contributed to smaller wine grape crops and yields.

The wine grape crop in 2023 was the smallest in nearly two decades, and wine production mirrored this long-term downward trend. In 2023, 0.93 billion litres of wine were produced, which was 21% less than the 1.18 billion litres produced in 2014.

Further pressures

Meanwhile, wine producers are also grappling with sharply increasing production costs, which have almost doubled over the past decade and have outpaced both headline inflation (Consumer Price Index) and the Producer Price Index.

The declining yields, cash-flow constraints, and limited price growth have severely impacted profitability. In 2023, only about 8% of producers remained profitable, while the proportion operating at a loss increased to 43%. Net Farm Income, a proxy for profitability, fell by nearly 37% year-on-year to $10,951 per hectare in 2023.

These challenges have led to structural changes, as nearly a third of primary grape producers – an average of 100 per year – exited the market between 2014 and 2023, with smaller producers being the most affected.

Still a crucial part of the economy

Despite these difficulties, the wine industry contributes meaningfully to the South African economy, even overcoming challenges like the prolonged drought from 2015 to 2018 and disruptions from Covid-19. The sector contributes $3.34 billion (0.9%) to the national GDP and supports 270,364 jobs, which is 1.8% of national employment. Furthermore, the industry supports around $1.11 billion in household income.

The industry’s connections to other industries along its value chain generate greater multiplier effects than the average South African industry. The output from the wine industry contributes more than other industries to the national GDP in proportion to the amount spent, and 7.51 jobs are supported throughout the economy (including informal jobs).

“The wine industry is under significant financial pressure, with many farms caught in a self-reinforcing downwards cycle,” notes the FTI Consulting report.

“Nevertheless, the wine industry contributes meaningfully to the national economy, supporting thousands of jobs and the household income to sustain workers’ dependents. Moreover, the wine industry does this more efficiently than the average South African industry.”