SA’s ongoing drought: what does it mean for wine investors?

Last month, a 1774 bottle of Jura Wine sold for a record-breaking R1.51 billion in France, proving that although a worldwide wine shortage is catalysing a price hike, it’s not dampening investors’ appetite for extra-special vintages. Globally – and in South Africa where the persistent drought has caused a 15% year-on-year drop in the 2018 harvest – challenging conditions are pushing prices up as farms struggle to stay afloat. Sanlam Private Wealth Director of Investments Alwyn van der Merwe looks at the implications for investors.

According to the Knight Frank 2018 Wealth Report, wine is now the second most popular purchase for investment purposes after art. While wine has moved from first to second place, it remains a popular investment choice. As alternative investments, however, both wine and art can be described as unpredictable, so why are they so big? “Exceptional wines and art pieces have stood the test of time. Not only are these coveted items in short supply, they also provide enormous gratification to those who own or consume them,” says van der Merwe.

The question is, given the myriad challenges facing the production of wine around the world, is the trend likely to continue?

Production under pressure

The International Organisation of Vine and Wine (OIV) reported recently that in 2017, global wine production fell to its lowest level in 60 years. Unfavourable climatic conditions including heat waves and frosts are mostly to blame. Just last month, devastating hailstorms ravaged parts of the Bordeaux wine region in south-western France, resulting in some winemakers losing 100% of their harvest. 

Europe’s bleak production figures present a compelling opportunity for South Africa to secure sound export agreements in terms of volume and value. “Technical adjustments can enable local exporters to reap the benefits of the quality this region has to offer,” says Rico Basson, Managing Director of Vinpro.

The top producers in South Africa are in a good position to capitalise on this shortage.  “A number of producers have demonstrated that they can compete against the best in the world and have scooped multiple awards on the global stage. Our wines are positioned as a product that provides the consumer with a taste of both the old and the new world,” says van der Merwe.    

As top quality wines leave our shores it would be logical to assume that shorter supply of premium product ultimately leads to higher prices. Investors might well be rewarded for buying and keeping premium South African wines, says van der Merwe.

As the eighth largest wine producer globally, South Africa produces around 4% of the world’s wine. The industry contributes R36 billion to the country’s gross domestic product (GDP) and employs nearly 290 000 people. South Africa’s rich and diverse wine farms also play a valuable role in the travel and tourism industry – current figures indicate that 99% of Cape Town-based holiday itineraries include a trip to the winelands.

Producers need to adapt

The problem is that the punishing drought is wreaking havoc in our local wine industry – and there is no respite in sight. The Vinpro Production Plan Survey found that over a third of the 495 farms it surveyed are operating at a loss. According to Vinpro, all wine regions except Breedekloof reported a smaller wine grape crop for the 2018 harvest season. The Olifants River region, home to a number of acclaimed boutique wine farms such as Sadie Family WinesCederberg and Stellar Winery, have been hardest hit.

As producers face the need to adapt to changing climatic conditions, research is already underway to evaluate the financial viability of various vineyard blocks and also, explore more drought-resistant vines that produce more flavour, acidity and intensity while requiring less water. New clones of Grenache and cultivars such as Assyrtiko, Verdelho, Chenin Blanc, Vermentino, Aglianico, Cabernet Sauvignon and Touriga Nacional are among these.

Next season’s potential harvest is dependent on many factors, including the size of the current year’s crop, post-harvest irrigation, reserve levels collected during winter and the season leading up to the next harvest.

“Like any other investment, supply and demand will ultimately determine the value of the asset. While the potential worldwide shortage of quality wine could result in some investors acting irrationally and pushing prices aggressively, the discerning wine collector can still find great wines with extraordinary future potential without overpaying for them,” says van der Merwe.

He adds, “Just as with any investment, one needs to understand the macro environment but never allow emotions, fear or greed to drive the investment decision.”