South Africa Adjusts to Free Market

By Seatla Nkosi

Though unfavorable weather conditions in 1997 in the wine-producing areas of the Western Cape Province capped South Africa’s wine production (it was down a fraction in 1997), it still surpassed 10 million hectoliters for the second consecutive year.

In 1998, the 110,000 hectares under cultivation are expected to produce another 10 million hectoliters when the final tally is complete. Popular varieties include Chenin blanc, Sultana and Colombard. White wine varieties dominate plantings--82 percent; reds, 18 percent.

As South African wine producers plant premium vines, certified wines that document cultivar, production area and year are gaining popularity. Many of these premium varieties are sold only in the export market.

The South African wine market orientation is increasingly skewed toward exports, which rose to 1.5 million hectoliters in 1997 from 1.2 million hectoliters the year before--even though overall production declined slightly.

Most of these exports were destined for the European Union (EU). South African producers, however, foresee a lackluster future in Europe for their products; stiff international competition is expected to take a toll. To counter the predicted fall-off in demand, South Africa plans to concentrate its market development efforts in the United States, Africa and, as soon as economic conditions improve, in Asian countries.

Subsidies Out, Tariffs In

The South African wine industry is beginning the adjustment to a mixed bag of new free market rules. Through the New Agricultural Products Marketing Act enacted in 1997, the South African government is clearing the way for the transformation of its wine industry to a free market status.

The subsidies are gone, and the absence of a nurturing environment will be tough for growers who are new to the business. But the ensuing competitive edge that the industry attains may ensure a comfortable position in the global marketplace.

Ironically, the removal of government controls on the domestic industry has been accompanied by the protectionist 25-percent tariff placed on wine imports, which neutralizes some of the country’s free market aspirations.

The tariff comes at a time when there is a shortage in domestic wine supplies--particularly for reds. It not only makes imports less competitive, but penalizes domestic producers who blend bulk imports with domestic varieties.

At the same time that the South African wine industry has the enviable dilemma of not being able to produce enough wine for domestic demand, the emergence of a new middle class that likes wine with dinner is adding to the shortage. And the shortage may become even more acute for the consumer. The removal of government restrictions on the number of trade outlets and expanded market development efforts by the industry have opened further new avenues for the sale of wines.

Under the new government regulations, producers are free to market their products where they want. An amendment to the Wine and Spirits Act eliminated all the agricultural marketing boards, along with their different marketing schemes.

This led to the privatization of the Cooperative Winegrowers Association of South Africa (KWV), once the government agent for marketing. The KWV controlled 60-70 percent of wine exports, and is still expected to collect most of the wine for export. (On the domestic side, the South African Liquor Board of the Department of Trade and Industry controls wine marketing.)

The South African wine industry will be facing the new millennium with a pleasant managerial quandary–to increase production enough to meet the demands of a growing domestic market while pursuing the trends of the international marketplace.

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The author is an agricultural specialist in the FAS Office of Agricultural Affairs in Pretoria, South Africa. Tel.: (2712) 342-1891; Fax: (2712) 342-2264.

Last modified: Thursday, October 14, 2004 PM