State of the SA Wine Industry: Nedbank VINPRO Information Day Rico Basson

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2 State of the SA Wine Industry: 2018 Nedbank VINPRO Information Day Rico Basson

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4 The wine world has become even more complex 1. Climate change, EU policy and the Big 3 2. Renewed focus on sustainability and health 3. Integrity, authenticity & traceability critical 4. Regulatory environment remain tough 5. Trade blocks provide protection 6. Global wine supply chain has shrunk players need to be faster and more agile.

5 Policy certainty needed in South Africa! difficult to conduct normal business in an abnormal policy environment Expropriation without compensation Land Holdings Bill Draft Liquor Amendment Bill New AgriBEE scorecard Excise Taxation Water Infrastructure renewal & policy Lack of Natural Disaster support Trade facilitation e.g. BRICS Lack of funding for transformation National Minimum Wage Improved business confidence is the cheapest form of economic stimulus - Larry Summers, American economist & former Chief Economist of the World Bank

6 WISE State of the Industry Performance at end 2017of 8 key targets 1. Producer ROI: CPI + 5% 2. Market and value-chain driven 3. Local wine sales: 450 million litres 4. Bulk:Packaged export 40:60 5. Markets USA:China:Africa (7%:7%:10%) 6. Ethical Accredited Volume 100% 7. Black-owned land & water 20% 8. Wine Tourism R 15 bn

7 #1 Return on Investment Baseline: 2015 = 2% Target: 2025 = CPIX plus 5% Actual: 2017 = <1% 2017 Structural income adjustment of 25% to 30% needed! Direct Farm gate revenue loss due to drought > R700m 37% 2% 14% 47% Source: VinPro production plan survey of 248 representing 25% of total SA production

8 R / ha Industry production cost Above inflation with stagnant wine price R R Production cost doubled in last 10 years Minimum wage will increase with 17% on 1 May 2018 R % R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R * Cash expenditure Provision for renewal Total production cost

9 Something has to give Area Planted (ha) Main reasons: Low ROI Age of vines Diversification Climate & water Political uncertainty Decline in # producers SOURCE: SAWIS Projection 2022 Total hectare: ± 85,000 ha Production: ± 1,300 mill ton Nett volume reduction: 120 m litre

10 #2 Production to Market driven Baseline: Target: Actual: 2015 = 80,000 ton surplus 2025 = Equilibrium 2017 = Short supply with projected stock:sales ratio the lowest in 15 years

11 Structural change in global supply and demand Implications: 1. Low end takes a hit 2. Margins squeezed 3. Export markets prioritized 4. Asset light models feel pinched 5. Silver lining tight supply move price Global wine production, consumption, industrial use and ending inventories, EUR/ Litre Source: Rabobank & OIV

12 Projected SA industry supply & demand position for 2018? Optimal stock level assumptions: White wine - 3 months Red wine - 5 months (producer cellars), 12 months (private cellars) 2018 crop estimate significantly down! 2019 crop back to average past 5 years? Impact for 2018 (and beyond)? Assuming we are at optimal stock levels and taking account of production decrease in 2018, then the projected nett shortfall on existing total sales of 945 million litre (export and local) is: Questions: 9% or 90 million litre Which market will reduce local or export? What about imports? Can we deplete stock levels below minimum? Who will be the highest bidder?

13 Rand/Litre Rand/Litre Wine Prices Projected to Increase Fig. 109, Page Real Prices (2010) Nominal Prices Drinking wine - white Drinking wine - red Wine for brandy Distilling Wine + grape juice *Projection done in mid 2017 & does not take full supply impact of drought into account

14 #3 Local Wine Sales Baseline: 2015 = 350 million litre Target: 2025 = 450 million litre Actual: 2017 = 406 million litre (2,8%) = R13,2 billion (8,6%)

15 Value and volume growth Volume +6.1% Value +9.3% Volume +2.1% Value +5.3% Volume +2.3% Value % * estimate

16 Possible effect of a 12% increase on the retail selling price R % INCREASE R % VAT (R3.93) 12% VAT (R4.40) 78% All other costs (R24.79) 76% All other costs 9% increase 10% Gross farm income (R3.28) 12% Gross farm income (R4.42) 35 % INCREASE IN FARM GATE INCOME

17 Litres # 4 Bulk: Packaged Ratio Baseline: 2015 = 60:40 Target: 2025 = 40:60 Actual: 2017 = 61: SA NATURAL WINE EXPORTS Bulk: 274 m l ( 3%) = R2,0 bn ( 4%) Packaged: 174 m l ( 5%) = R7,0 bn (-5%) Total: 448 m l ( 5%) = R8,7 bn (-3%) EPA 110 m quota since 1 January 2017 BREXIT active engagement PACKAGED BULK

18 #5 New Markets : (USA, China & Africa) Volume/ Total Volume: Baseline: 2015 = 10% Target: 2025 = 25% Actual: 2017 = 15% 2016 = 11% Value/Total Export Actual: 2017 = 20,2%

19 #6 Ethical Accredited Volume Baseline: 2015 = 20% Target: 2025 = 100% Actual: 2017 = 66% (> 900,000 ton) 2016 = 54% >1400 producers & workers Impact assessment underway to quantify impact results end 2018 Continued support from Department of Agriculture R 1million per annum

20 #7 Transformation: Land &Water Baseline: 2015 = 1,5% Target: 2025 = 20% Actual: 2017 = 2,5% 2016 = 2,0% Key initiatives: Key focus on Black Owned Enterprises L&D online platform implemented - coordinating capacity building Transformation Unit governance, stakeholder consultation & strategic oversight Exploring various funding models e.g. EU15 million Percentage Black Number of projects Vineyard ha Tonnage 100% % to 99,9% % to 50% Total I ndustry Percentage 2,5% 1,9%

21 Strengthening the social core, but Preferential Procurement R2 m Enterprise Development R38 m Transformation levy spend R72 m 20% of levies Skills Development R21 m Corporate Social investment spend in 2017 R 125 m = 172 projects* CASP Funding in 2017 = R12 m 2017 Amended AgriBEE Codes Element Ownership Management Control and Employment Equity Skills Development Enterprise and Supplier Development Socio Economic Development Priority Element Priority Element Priority Element Management Control R4 m Socio economic development R 6 m Budget R150 m * VinPro survey 96 responses out of 2675 contacted

22 #8 Wine Tourism Wine Tourism Baseline: 2015 = R6 bn Target: 2025 = R15 bn SAT Nat. Dept Tourism VinPro Wine Tourism Hub WOSA SAWRF Wesgro Other

23 WISE targets 2015 Reality 1. Producer ROI: 2% 2. Production driven - 80,000 ton surplus 3. Local wine sales: 350 million litres 4. Bulk:Packaged export 60:40 5. Markets USA:China:Africa (3%:2%:5%) 6. Ethical Accredited Volume 20% 7. Black-owned land & water 1.5% 8. Wine Tourism R 6 bn Ideal future state Producer ROI: CPI + 5% 2. Market and value-chain driven 3. Local wine sales: 450 million litres 4. Bulk:Packaged export 40:60 5. Markets USA:China:Africa (7%:7%:10%) 6. Ethical Accredited Volume 100% 7. Black-owned land & water 20% 8. Wine Tourism R 15 bn

24 Wine industry returns are cyclical Typically ~7 10 year cycle 2 1 Demand exceed supply and drives higher retail pricing Supply starts to exceed demand and grape pricing peaks 3 Oversupply worsens as producers are slow to adapt Small producers exit and land is directed to alternate uses 4 Profitability increases as supply returns to balance 5

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26 Thank you Acknowledgement to SAWIS, BER, BFAP, WOSA,VINPRO