Opinionista Michael Fridjhon 17 May 2016

The Economics of Wine Production: Short-term gains risk a long-term wasteland

Theft is addictive, not only because the adrenaline high which apparently accompanies the performance of the act parallels the endorphin addiction of the long distance runner, but because the proceeds of crime swiftly migrate from bonus income to part of the essential budget.

The Joburg Metro Cop who never planned on a career of bribe-taking swiftly includes the revenue in his monthly budget, and in time finds he can’t make ends meet without it. The city council’s white collar employee who has control of the rubber stamp for passing building plans does not treat (for very long) the contents of the brown envelopes which accompany the paperwork as an unexpected windfall to be invested in some discretionary purchase.

In fact, as you make your way up the food chain – all the way to the president and his extended family – you will discover that those in receipt of difficult-to-declare bonuses have long ago incorporated the income into their lifestyle. Imported cars, private school fees, extra homes, mistresses – the expensive habits of the rich and famous become the essential accoutrements of their way of life and are no longer optional, or easily abandoned. There are monthly instalments, fixed commitments, long-term obligations: scaling back from these – as anyone who has suddenly been retrenched from a high-paying job will attest – is no simple matter. New arrangements cannot be entered into overnight – it’s just easier to stay on the take.

This is why the ANC will never be able to rid South Africa of the deeply entrenched culture of corruption, of institutionalised theft: initially it built the perks into the packages. It turned a blind eye to the “entrepreneurial” culture of its deployees because the benefits came with the position. There’s no point in being precious about a few corrupt cops when the dons at the high table have been supping deep.

It is of course possible to argue that what happens in South Africa is not unique. There are plenty of comparable examples involving high up officials – even world leaders – from Europe, Asia and America. The connection between Dick Cheney, Halliburton and the US entry into the Iraq war may be fractionally more opaque than the link between Schabir Shaik and the South African arms deal, but the connection is there for all to see. It’s equally true that institutionalised theft is not limited to government officials. You don’t have to be certifiably paranoid about the American banking system to link the sub prime crisis of 2008 with smart men in grey suits and preppy braces taking from the poor to give to the rich.

Capitalism lends itself to this kind of deal-making, though this doesn’t make it any better or worse than any other system: Putin’s cronies have done very well out of his privatisation of state assets. What distinguishes the so-called free trade environment is the institutionalised bullying that it engenders. Fewer than half a dozen companies control 80% of urban retail space in South Africa. They set the pricing and their tenants toe the line. Their bigger and more valuable clients – so-called anchor tenants like the big grocers for example – get a different deal from specialist stores, and this preferential system is explained away logically: they are tenants who have more clout, who buy space in bulk, who deliver the kind of foot traffic that can make or break a shopping centre. Of course it’s only reasonable to treat them differently from a delicatessen or bookshop. Shakespeare understood this dynamic. In Pericles he offers the following dialogue between two fishermen: the first says, “Master, I marvel how the fish live in the sea”, and the other replies, “Why, as men do a-land. The great ones eat up the little ones.”

The proceeds of unequal deal-making are as addictive as other forms of corruption. If competition law compelled landlords to charge anchor tenants the same rentals per square metre as the more specialist stores in shopping centres, you would suddenly find a big hole in the grocers’ profits. If the Financial Services Board ruled that the banks could not charge service fees on inactive accounts or those with positive net balances, clients would simply be bullied into higher costs elsewhere. It’s a last-choice option for the bank to thin out inefficiency or purge itself of unproductive employees, just as the state cannot give up its addiction to taxes, and the civil service cannot impose productivity criteria on its functionaries.

In the South African wine industry there are just over 3,000 fruit growers and bout 600 wineries, the majority of which process the fruit from their own vineyards. This means that there are probably no more than 300 buyers of grapes – in other words, one purchaser for every 10 growers. There are certainly no more than 30 distributors – one for every 10 commercial wineries. It’s also a safe guess that no more than 10 retailers (chains and multiples) account for 80% of all retail wine sales.

You don’t need a degree in competition law to work out that the segment with the least clout is the grower collective – the essential component in the whole value chain. They have no collective bargaining arrangements; they are disparate, under-represented, and at the mercy of the owners of production facilities. Their crop has a very limited window of value: the fruit is at optimum ripeness for 24 hours, after which its value drops precipitately. They can only survive by entering into supply contracts, the bulk of which give the buyers vastly more leeway than the sellers. The capitalist system calls this willing-buyer-willing seller, but this doesn’t mean that the outcome this particular set of transactions delivers is the best possible result within the continuum that runs from the farmer to the consumer.

The processors are little better off, though at least once the fruit has been converted into wine it has a significantly extended shelf life. If they are owners of popular brands, they have a route to market, though they must wrestle long and hard with the retailers to extract value for their stock. In short, in this food chain the retailers and the big brand owners dine best, and they are addicted to the “subsidy” they have engineered into the system. The grape growers on the other hand are the bottom feeders and they must make do with whatever crumbs fall from above (even if, in the end, this means that they will die out, bringing down with them the whole grand edifice.)

The average income that the system “allows” the fruit producers is usually less than their true annual cost of production. Frighteningly few of them recover their farming overheads as well as the replacement cost of their vineyards. It’s no surprise that the agricultural side of the industry is shrinking – there are about 25% fewer growers now than 20 years ago.

The attrition has been worst in the quality production areas, many of which are closer to the main centres of the Western Cape. This is partly because most of the arable vineyards are now on slopes (the flat lands having been lost to urban creep), partly because the higher farming costs come with lower yields. By the same token, the most profitable vineyards are closest to ample water and plentiful sunshine: in other words, in flat, arid areas adjacent to irrigation water where the semi-desert conditions also bring the advantage of low disease risk.

Vast swathes of vineyard have been laid out in a way that facilitates mechanical management strategies (and proportionately lower labour costs). High yields more than compensate for the lower fruit prices: R1,500 per ton when you are bringing in 30 tons per hectare looks better on your bottom line than R7,000 per ton and 5 tons per hectare, especially when the latter comes with labour intensive farming.

Those who believe that capitalism is self-regulating and yields the most efficient result will have a difficult time explaining what will ultimately happen to the quality end of the Cape wine industry. Growers in the premium areas won’t be able to afford to replace their vineyards. They will have to live with the systematic invasion of incurable vineyard virus. Over time their yields and quality will drop: if they are lucky they will sell to developers before their banks foreclose on them.

Either way, their land will be irretrievably lost to wine production, an outcome which may meet the logic of optimising its current commercial value, but not perhaps the greatest good for the greatest number. This is a short-term gain for a long-term wasteland. It is the result not of the efficiencies of the system but of its skewing in favour of those who control the purchase price of grapes – rather than the final selling price of wine.

You could make these heritage vineyards viable by paying the growers at least R12k per ton for their fruit. This would increase the wine cost component of the final product by less than R10. Since premium grapes don’t go into jug wine this is unlikely to have any effect on retail sales. Human nature being what it is, however, the gatekeepers keep as much of the margin as they can for themselves, adopting an “after me the flood” approach to the consequences of their pricing policy. Many of the fruit buyers are not wealthy brand owners behaving like candidates seeking a lead role in Bonfire of the Vanities: they are younger, under-capitalised garagistes trying to make their way in the world. Lacking the route to market that comes with big brand distribution, however, they have higher-than-average costs in finding customers and getting their creations to them. No doubt they promise themselves that when their business has grown, they’ll allocate more generous payouts to their grape growers.

This model is predicated on the continued supply of quality fruit from older vineyards. I don’t wish to be alarmist but the attrition has been dramatic and shows no signs of letting up. At present we are losing 1% of the national vineyard annually. Rather more important, we are losing older, lower yielding vines for more productive (but with a lower quality potential) new plantings. In the past 10 years the net vineyard loss has been 5,000 hectares while the total literage produced has actually increased by about 5%. High volume industrial grape farming is replacing the more nuanced, lower yield, quality old vine production. It’s easy to predict where this will end up.

Once a vineyard has been run into the ground, it is gone forever. An extra R5 per bottle for every year of the vineyard’s life was probably all that was needed to save the land from townhouse development (or in the case of one of the most famous wines from the 1990s, a parking lot at a shopping centre). When all we have are vast tracts of vineyards laid out alongside the Orange River, there will be nothing left to remind us that we were once one of the world’s great wine producing nations. DM

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