Wine lovers, get ready! The South African Wine Industry Information & Systems (SAWIS) has estimated that the 2022 wine grape crop in South Africa will reach 1,378,737 tonnes. Although it’s slightly smaller (5.5%) than the 2021 crop, it’s still larger than the average crop size of the past five years. The wine production for 2022, including juice and concentrate, wine for brandy, and distilling wine, is expected to reach 1,072.4 million litres, with a recovery of 778 litres per ton of grapes. In this article, we’ll take a closer look at the South African wine industry, its history and its investment potential.
Let’s look at the history of South African wine:
South Africa has a long and rich history of wine production, with wine grapes being cultivated in the country for over 350 years. The first recorded vineyard was established in 1655 by Dutch settlers in the Cape Town area. Today, South Africa is the 9th largest wine producer in the world and is well known for its premium wines, particularly those made from the Shiraz, Chenin Blanc and Pinotage grape varieties. The industry is recovering after a tough period during COVID as seen by the graph below
The wine market has not been without its challenges though. Most wine grape-growing regions saw a smaller crop in 2022, except for the Cape South Coast and Stellenbosch regions. The smaller crop, as depicted in the graph below, can be attributed to a decline in the overall vineyard area due to disease pressure and heatwaves in certain regions, as well as the uprooting of vineyards.
Additionally, input costs have risen sharply in recent months, while consumer spending and wine prices remain low. A 14% increase in farm-level input costs is expected in 2022, driven by a global exponential rise in energy, chemical, and fertiliser prices.
Despite global and local sales volumes recovering to pre-COVID levels, the industry still holds an excess stock of around 200 million litres. As a result, average price increases for grapes and wine are expected to remain below the consumer price index of 5%.
Fine wine is emerging as a stable investment asset globally, including in South Africa, where the asset class remains stable even during turbulent times and has little to no correlation with traditional asset classes. The global wine market size was valued at $417.85 billion in 2020 and is expected to expand at a compound annual growth rate (CAGR) of 6.4% from 2021 to 2028.
Taking a deeper dive, the Liv-ex Fine Wine 100 Index, an industry-leading benchmark for monitoring fine wine prices, shows strong performance in fine wines over the last 5-years. The Liv-ex Fine Wine 100 Index It represents the price movement of 100 of the most sought-after fine wines on the secondary market.
Thinking of getting involved? There are several different ways investors can gain access to wine as an alternative asset:
- Direct investment in wine farms
- Physical ownership of fine bottles of wine
- Investing in unitized wine investment portfolios
Direct investing in wine farms
In 2022, factors such as increased demand for premium and luxury goods, growth in the global wine market, and South Africa’s favourable exchange rate could have a positive impact on the industry. However, investing in wine farms requires a significant amount of capital and requires a deep understanding of the industry, including knowledge of wine production, market trends, and regulatory requirements. It is also important to consider the fact that profit at the farm levels has remained low due to weather, COVID, and the above-mentioned input cost increases.
Physical ownership of fine bottles of wine
Physical wine investments offer the potential for long-term growth as the value of a wine can increase over time. Investment-grade wines are typically traded in 6-bottle cases, with the greatest potential lying between the R2,000-R3,000 per case level. However, it is important to note that storing, managing, and selling wine bottles can be challenging and may need to be outsourced to a company / person with the relevant experience and knowledge of the industry
Investing in unitized wine investment portfolios
Unitized wine investment portfolios, such as those offered by Wine Cellar, are a more accessible option for retail investors as they enable investors to gain exposure to the wine industry through a collection of investment wine within a certain category. Each portfolio is professionally managed, offering a more hands-off approach to investing in wine. The VIP is only offered in vintages where there is broad consensus regarding the homogeneity of vintage quality across regions.
Thinking about investing in wine? Should we put together our own portfolio?
