Modelling Long-term Commodities: the Development of a Simulation Model for the South African Wine Industry within a Partial Equilibrium Framework Presenters:

Modelling Long-term Commodities: the Development of a Simulation

Model for the South African Wine Industry within a Partial Equilibrium

Framework

Presenters: Michela CuttsSanri Reynolds

Other authors: Ferdi MeyerNick Vink

From Regulated to Competing in the International Arena

The dynamic, recursive partial equilibrium model built to assist the industry by answering “WHAT IF” questions

“What If”

Australian warning on oversupply - Worldbeat

Price and Exchange Rate Changes

Climate change risks devastating South

Africa's wine and fruit industries

MELBOURNE (Reuters) - Australia's drought could cut the 2008

wine grape vintage by more than half.

Data

• Domestic data: South African Wine Industry Council’s information unit, South African Wine Information and Systems (SAWIS).

• International Prices: Compendium of Wine Statistics

• Competing Crops: Abstract of Agricultural Statistics

• Macroeconomic variables: South African Reserve Bank and Statistics South Africa websites

Methodology

• Methodology developed by the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri

• Adapted to suit the nature of a long-term commodity

Wine Grape Supply Block

• Divided into 8 production regions

• South Africa’s top 10 varietals by volume

• Given different slopes, trellising practices etc, vine numbers are used

• Grape production per varietal = vine numbers x yield

Plant vines or alternative fruits/crops based on expected real

gross return

vinesFruits/crops

Fruit/crop sector level model

Choice of varietal -based on weighted sum of expected real gross returns

allows for determination of cross price elasticities with competing crops and different varietals

Farmer’s Decision Making Process

From Grapes to Wine

• Juice (litres) = 0.85 x Grape production (tons)

JuiceNon-alc.

Rebate wine

Distilling wine

Good wine

Wine Demand Block

• Domestic Demand– Estimated for rebate,

distilling wine and good wine

– No quality attributes considered for wine.

– Per capita consumption = f(real wine price, GDP/capita)

• Export Demand– Disaggregated into red

and white wine

– Individual equations estimated for 10 country groupings

– Exp dem = f(exch, lagged exports, SA price, new world wine price)

Linking Grape and Wine

Price equations create the “link” between “grapes” and “wine”– Noble varietals price= f(lagged variety price, real wine price,

and production of the variety)

– Non-Noble varietals price= f(lagged variety price, real rebate and distilling wine price, and production of the variety)

• Wine price=f(producer wine sales, wine production, exchange rate)

• Rebate price = f(wine price, rebate wine production)• Distillate price=f(Rebate price, distillate production)

The Closing Block

• For equilibrium to be reached total demand = total supply

• System is closed using “change in stock”– wine production plus wine imports,

less exports and domestic consumption

• A benchmark of likely trends and levels of prices, production, consumption and trade under a particular set of assumptions

• Does not constitute a forecast

The Baseline – A Possible Outlook

Macroeconomic Assumptions

Sources: Global Insight

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Total population of SA 46.80 47.30 47.45 47.63 47.79 47.96 48.13 48.31 48.51 48.74

SA cents/US $ 636.23 676.72 718.00 762.06 812.46 859.66 901.67 945.74 991.96 1,040.44 SA cents/Euro 791.29 851.57 821.44 784.44 763.09 793.20 819.34 835.95 838.02 828.29

Real GDP per capita 16,069 16,654 17,329 18,179 19,127 20,171 21,305 22,510 23,819 25,270

GDP deflator 137.94 147.39 155.51 161.77 168.24 175.18 182.64 190.57 198.69 206.58

Ave. annual prime rate 10.62 11.16 12.50 12.56 12.62 12.69 12.75 12.81 12.88 12.94 Percentage

People (Millions)

Exchange rate

Rand ( constant 2000)

Index (2000 = 100)

Red Vines

Red Vines in Production

0

10,000

20,000

30,000

40,000

50,000

2002 2004 2006 2008 2010 2012 2014

1000 v

ines

0

1,000

2,000

3,000

4,000

5,000

Ran

ds/t

on

Cabernet Sauvignon MerlotPinotage ShirazReal Cabernet Sauvignon price Real Merlot priceReal Pinotage price Real Shiraz price

White Vines

White Vines in Production

0

5,000

10,000

15,000

20,000

25,000

30,000

2002 2004 2006 2008 2010 2012 2014

1000

vin

es

0

500

1,000

1,500

2,000

2,500

Ran

ds/t

on

Chardonnay Sauvignon Blanc

Real Chardonnay price Real Sauvignon Blanc price

Domestic and Total Demand

Producer Sales and Domestic consumption

0

200

400

600

800

1000

2002 2004 2006 2008 2010 2012 2014

Mil

lio

n l

itre

s

Producer sales Domestic consumption

What if…

…the Rand appreciates relative to the baseline?

• Baseline: Rand depreciates gradually from R7.18/USD in 2007 to R10.40/USD in 2014?

• Scenario: What if Rand stays constant over the baseline at R7.18/USD?

What if… (cont.)

Wine industry overview - % change from baseline

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

2007 2008 2009 2010 2011 2012 2013 2014

% c

ha

ng

e

Total vines Exports Good w ine price

Producer sales Dom. cons

What if … (cont.)

Vines in production - % change from baseline

-5.5%-5.0%-4.5%-4.0%-3.5%-3.0%-2.5%-2.0%-1.5%-1.0%-0.5%0.0%0.5%

2010 2011 2012 2013 2014

% c

ha

ng

e

Colombar Chardonnay Sauv. Blanc Chenin Blanc

Cab. Sauv. Pinotage Shiraz Merlot

What if … (cont.)

Prices (2010) and vines in production (2014) - % change from baseline

-18% -16% -14% -12% -10% -8% -6% -4% -2% 0% 2%

Colombar

Chardonnay

Sauv. Blanc

Chenin Blanc

Cab. Sauv.

Pinotage

Shiraz

Merlot

% change from baseline

Vines 2014 Price 2010

What if … (cont.)

Vines in production per region - % change from baseline

-3.00%

-2.50%

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

2010 2011 2012 2013 2014

Little Karoo Malmesbury Olifants River Orange River

Paarl Robertson Stellenbosch Worcester

Conclusion

• So how do you use these results?

• Evaluate results critically and decide whether you agree

• It teaches us something about the system, market structures and price formation

• How exogenous factors influence the business and policy environment