SA bulk red wine prices likely to fall further in 2006
Thursday, 23 February, 2006
Lynn Bolin
SAWIS data reflect sharp 15-41% drops in average bulk red wine prices in 2005, and procurers and traders expect the trend to continue, making more red wine producers unprofitable, reports Lynn Bolin.
After recording a drop of 14.8% in 2004, SAWIS data released on February 8 shows that for 2005 as a whole, the average price of red wine sold in bulk in South Africa fell by 20% to R440.5 per hectoliter (hl) from an average of R547.28/hl in 2004. By contrast, the average price of bulk white wine rose by 3.3%, to R297.57/hl from R287.97/hl in 2004.
Breaking the prices down by variety, Cabernet Franc came off the worst by far, with a fall of 41% for the year to R384.92/hl, followed by Pinot Noir (down 27% to R652.16/hl), Merlot (down 24% to R470.02/hl), Ruby Cabernet (also down 24% to R411.45/hl), Cabernet Sauvignon (down 19% to R557.12/hl), Cinsaut (down 18% to R395.71/hl), Pinotage (down 16% to R430.96/hl), and Shiraz (down 15% to R539.11/hl).
White wines, meanwhile, all posted increases in their average prices for the year, with the exception of Semillon, which fell by a marginal 1% to R332.64/hl. Riesling saw the largest gains, up 11% to R313.12/hl, while Sauvignon Blanc, Colombar and Chenin Blanc all rose by 5%, to R522.11/hl, R277.70/hl, and R304.43/hl, respectively. The average price of bulk Chardonnay was largely flat with an increase of 1.2% over 2004 levels to R494.22/hl.
Red wine supply has outstripped demand in the local and international markets for the second consecutive year, sparked by new plantings coming on stream, large overseas production, the strong rand (which has encouraged producers to sell their wine in South Africa, as well as bulk imports), generally weak local demand and stiff competition overseas.
White wines, by contrast, have experienced rising popularity thanks to improving quality—particularly in Chenin Blanc—and the international trendiness of Sauvignon Blanc. The uprooting of old white vines and limited new plantings have aided the market.
Some of South Africa’s largest grape and wine procurers are forecasting a continuation of these pricing trends in 2006. They point to indications of a smaller 2006 white wine crop, a similar-sized 2006 red wine crop, continuing rand strength and ongoing global oversupply as factors behind their projections.
Chris Albertyn, chief grape and wine buyer for KWV, observes that ‘a lot’ of red wine stock remains uncontracted from the 2005 crop, particularly Cabernet Sauvignon, Shiraz and Merlot. This certainly bodes ill for 2006 prices. ‘The local industry is not used to seeing large unsold red stocks, particularly this time of year. Red wine prices are under severe pressure and will definitely be lower in 2006,’ he predicts.
His comments are backed up by SAWIS data on stocks to end-October 2005, which highlighted an increase in uncontracted bulk red wine stocks for the 2005 vintage to 32.4 million litres, from 28.4 million liters at the same time in 2004 and only 12.4 million litres in 2003. If added to uncontracted reds from previous vintages at 7.5 million litres (up from 6.4m litres in 2004) then uncontracted reds stood at 39.9m litres versus 34.8m litres a year earlier—a 14.6% increase.
By contrast, uncontracted white bulk wine of the 2005 vintage stood at only 2.2m litres, down substantially from 15.3m litres in 2004. In fact, there was no uncontracted Chenin Blanc or Sauvignon Blanc from previous vintages as at the end of October 2005. ‘Sauvignon Blanc of specific styles and quality is in short supply and there looks to be a general shortage of Chenin,’ commented Albertyn. ‘Prices should definitely rise further in 2006 for these two varieties, especially because the 2006 Sauvignon Blanc crop is down in certain areas.’
Ansgar Flaatten, head of WineTrader, one of the largest bulk wine brokers in the local industry, who deals with wholesale market prices on a daily basis, also forecasts a further decline in red wine prices and more price hikes for whites early in 2006. However, he believes both categories are likely to experience price stabilisation towards the middle or end of the year.
‘It is definitely a buyers’ market for reds and a sellers’ market for whites right now,’ he noted. ‘There is even talk of the emergence of contracts where white wine buyers must take up a litre of red wine for every litre of white they purchase.’ Still, he expects more white wine to come on the market mid-year, thus relieving upward price pressures. ‘Like other commodities it is a cyclical industry, and I believe we are approaching the bottom of the cycle,’ says Flaatten optimistically.
Winecorp’s Neville Carew reports that his company is also expecting the prices of bulk reds to deteriorate further, accompanied by more improvement in whites. ‘Indications are that the 2006 white wine crop is looking smaller than 2005, so once again Chenin, Sauvignon Blanc and Chardonnay of good quality will be difficult to find in higher volumes,’ he says. ‘The red crop, though, looks to be the same size as in 2005, which doesn’t help since there is still a worldwide oversupply. Although South Africa’s wine exports are rising, they are not growing fast enough to absorb this excess supply, and local demand isn’t helping, either.
‘So bulk red wine prices are likely to be depressed further in 2006,’ Carew predicts.
He feels the rand would need to weaken to around 6.60 per US dollar, 11.80 to the UK pound and about 8.00 against the euro to help move export volumes faster. ‘At the current rand exchange rate, South African producers are struggling to meet the promotional price discounts offered by international retailers, so these are being taken up by Chile, Argentina and others,’ adds Carew. ‘It’s starting to become uneconomical for a number of our farmers to produce grapes, as some can’t get the tonnage per hectare required for it to be profitable.’
Distell’s head of grape and wine supply, Ernst le Roux, concurs with Carew, reporting that some farmers with red yields of between 10-12 tons/ha in the Stellenbosch, Paarl and Wellington areas are already struggling to be profitable given the low prices being paid for standard-quality red grapes. He calculates they would need double this production—20-25 tons/ha, to be profitable. For top quality reds, however, farmers can still get away with yields of 8-10 tons/ha, he believes, as price pressure is not as great at the high end of the market.
Le Roux is even more pessimistic than his colleagues, however, in that he believes the downward trend in red wine prices is likely to continue for the next two to three years, given global supply forecasts. However, he does not expect the rate of decline to be as rapid going forward. ‘We will start to see those farmers will low production per hectare take out their vines, since it will not be profitable, so acreage will decline and supply will drop eventually, helping underpin prices. More and more suppliers will become unprofitable but the market should begin to turnaround within the next three years,’ he says.
As for white wine prices, he also forecasts further rises in 2006, in line with those seen in 2005, particularly for higher-priced, higher quality wines as demand continues to outstrip supply. ‘With short supply, we will see a decline in the amount going towards distilling, brandy and grape concentrate,’ predicts le Roux. ‘Like last year, we will be importing wine spirit and grape concentrate.’