Cape Town - Agriculture in general and wine production in particular need to change to ensure profitability and long-term sustainability, Standard Bank Group [JSE:SBK] said on Monday.
Pressure on the South African industry was intensifying as vineyards aged and international competition for market share increased, said the bank's director of agricultural banking Willie du Plessis.
The local wine industry had seen incremental growth in production over the past 12 years. However, production in the past year had shown a 5% drop.
"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," he said.
However, a host of local and international factors had 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 were experiencing a production trend towards white wine cultivars. The price of white wines had caught up with a red wine market that was taking strain from global oversupply.
Producers had taken advantage of this trend and shifted focus to white wine production.
That producers are willing to change their wine stock was a good thing, because they were managing risk better through diversifying their cultivar composition and using a balanced crop to mitigate risks.
Changing vines and balancing varietals were ways to ensure biodiversity, Du Plessis said.
"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 adapted to price pressures, the age of local vineyards had reached a point where decisions needed to be made to ensure the long-term sustainability of the industry.
Local producers were currently uprooting more vines than were being planted.
Planting of vines decreased by more than 60% over the past five years. About 82% of all new vines that had been planted had been 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 was not at ideal levels.
It is expensive to replant vineyards - it takes at least four years to bring a new vineyard into full production, and years more to produce a commercially viable wine.
This puts enormous pressure on cash flow and increased the producer's risk.
It also makes adapting to fleeting market demands very difficult.
There were fresh trends related to the ways and the markets in which people consumed wine, and producers need to understand them 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," he said.
Du Plessis said this was crucial as local demand for wines has remained very much the same since 1993.
According to recent research from Vinexpo, China was expected to become the seventh-largest wine consuming country by 2012, with consumption increasing to one billion bottles a year.
"This demand offers real opportunities for South African winemakers," Du Plessis said.