Picture: 123RF/FOOD AND MORE
Picture: 123RF/FOOD AND MORE

While the Covid-19 crisis has delivered an unprecedented blow to the local wine industry, the sector faces a further existential threat: it is stuck between a weak position in global markets and a strengthening global climate regime, which is hindering its market access.

The economic fallout linked to the pandemic response has been well documented, with the industry losing about R500m a week during the initial six-week alcohol ban, which also prevented exports. The current prohibition will further jeopardise the survival of the sector, of which about 80% is characterised by small and medium-sized companies that rely heavily on domestic consumption and are unable to survive on exports alone. This in a sector that accounts for 1.2% of the country’s economy and employs, directly and indirectly, about 300,000 people, predominantly in the Western Cape.

Regarding the overall state of the sector preceding the pandemic and how this will inevitably shape its long-term development, local wines are in a weak position internationally. While SA is the world’s sixth-largest exporter of wine by volume, large volumes have not translated to equivalent export value. The country is only the 12th-largest exporter by value.

In a value chain controlled by large importers and retailers, SA producers have historically struggled for shelf space in European markets. Wine exported from SA is commonly used in blended varieties in Europe, creating a false perception of poor quality. The limited marketing budget of the local industry in this respect is unable to flip the scale in highly competitive markets.

‘Green protectionism’

SA wine exporters have been under increasing pressure from importers and retailers, mainly from the EU and UK, to export in bulk rather than in bottles. Export quotas to the EU for bottled wine have thus been consistently underutilised by the domestic industry. This is highly detrimental for the country, which forfeits the job creation, revenues and reputational benefits associated with exporting bottled products.

This trend has been justified by “green protectionism” from European importers — that is the justification of protectionist measures under the guise of tackling climate change and other environmental goals. The environmental argument appears in this instance to provide an implicit protection to the European packaging industry as well as wine importers, for minimal climate change mitigation benefits. Transportation and distribution only account for about a tenth of the life-cycle emissions of a wine bottle.

The situation is about to get worse for SA exporters. The recently announced EU economic recovery package includes the implementation from 2023 of a border carbon tax for products imported into the EU from jurisdictions with less ambitious climate change regulations than the bloc. SA’s carbon-intensive economy, underpinned by coal-fired electricity, is in this respect highly vulnerable. As it recovers from the prohibition induced by the Covid-19 response, the domestic wine industry is further at risk of losing its already limited market share in the European bottled market.

The industry can do the following to build its resilience:

  • Explore alternative and more sustainable packaging. This ranges from lighter bottles, which can lead to a 30% reduction in greenhouse gas emissions, to alternative wine packaging mediums such as polythene terephthalate (PET) bottles, and Tetra Pak bottles and cans, which are rising in popularity, especially in the US.
  • Work to further increase the overall sustainability of production. The voluntary certification programme in SA, through the Integrated Production of Wine scheme, offers an opportunity for the local industry to reduce its carbon intensity. This is particularly the case for packaging, as a framework for such developments already exists.
  • Work with the department of agriculture, land reform & rural development to address constraints hindering exports to the EU. More resources should be directed to the marketing of SA wines. Export flows to the EU could be better monitored to allow for the reallocation of unused allowances. Trade negotiators should also explore the possibility of retrospective utilisation of unutilised wine quotas.
  • Keep exploring new markets to absorb the potential losses from the European market. Destinations for export growth include the US, China, Japan, Russia and African countries such as Namibia, Botswana, Kenya, Tanzania and Zambia. While these remain secondary markets for SA wines, they have recorded notable growth in the past few years.

Compounding the direct physical impacts of climate change (the amount of land suitable for wine in SA could fall more than a third in the next 20 years), the strengthening of the global climate regime will force the industry to reinvent itself.

As the country looks to building a more sustainable economy after lockdown, the future of the wine industry should not be overlooked, for it is only a taste of what is looming for all sectors. In vino veritas?

• Montmasson-Clair is a senior economist, and Mataba a researcher, at Trade & Industrial Policy Strategies in Pretoria. The report on which this article is based can be found at www.tips.org.za.

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