A dry white season

17 October, 2018 | The drought experienced in certain parts of South Africa has had a profound impact on our wine industry. But reduced production here mirrors a global issue – a growing shortage of wine due mostly to extreme weather patterns. Sanlam Private Wealth Director of Investments Alwyn van der Merwe unpacks the state of play for wine investors.

In May this year in France, a bottle of 1774 Vin Jaune du Jura sold for a record-breaking €103 700 (roughly R1.6 million) at auction, while two others from the same era were snapped up for €76 250 and €73 200 (roughly R1.2 and R1.1 respectively).

As an alternative investment, wine can be unpredictable, but clearly, exceptional wines have stood the test of time. So, while a worldwide wine shortage is catalysing a price hike, it hasn’t dampened investors’ appetite for extra-special vintages. These coveted items may be in short supply, but they clearly provide enormous gratification to those who own or consume them.

In South Africa, the persistent drought has resulted in a 15% drop in total harvest from 2017. Challenging conditions are pushing prices up as farms struggle to stay afloat. In light of this, can wine remain one of the most popular investment choices?

The International Organisation of Vine and Wine (OIV) recently reported that in 2017, global wine production fell to its lowest level in 60 years. Unfavourable climatic conditions are mostly to blame. Earlier in the year, devastating hailstorms ravaged parts of the Bordeaux wine region in southwest France, resulting in several 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. According to Rico Basson, local wine-industry expert and managing director of VinPro, technical adjustments can enable local exporters to reap the benefits of the quality this region has to offer.

The top producers in South Africa 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.

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.

But the punishing drought continues to wreak havoc on our local wine industry. 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.

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 to explore more drought-resistant vines that still produce flavour, acidity and intensity while requiring less water. New clones of Grenache and cultivars such as Assyrtiko, Verdelho, Chenin Blanc, Cabernet Sauvignon and Touriga Nacional are among the latter. 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.

This article originally appeared in Issue 41 of Private Edition.

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