Are the dramatic price increases we have seen for Lafite Rothschild throughout 2009 (with most vintages up 40% year to date) now starting to ease?
Above is a graph of the weekly performance of the First Growths since the beginning of October, as measured by the Liv-ex Claret Chip Index. Over the five week period it has been Mouton Rothschild that has been the top performer, recording a price increase of 5.3%. Lafite places third, just behind Latour. Evidence that the market is starting to find a broader base?
History and Development of the Fine Wine Investment Market
By James Miles, Director of Liv-ex Ltd.
Intro
Today, we have been given the task of outlining the history and development of the fine wine investment market. We are going to take a brief look at the history and summarise the vital role that speculation plays in the market place. We will give an overview of the market today and explain how independent wine critics and price transparency have transformed it. We look at both the compelling characteristics that fine wine enjoys as an investment and some structural weaknesses that hold the market back. To conclude we look at some of the lessons that the fine wine investment market might learn from more developed markets.
The role of speculation
To most – quite rightly – wine is not about investment, it is about pleasure and, personally, I sit in the pleasure camp. Indeed, I have met very few people who are only interested in wine from an investment perspective. Nevertheless, investment and speculation in wine have always played an important role.
First, as in all markets, speculation adds to liquidity and is vital to the process of price discovery, helping to moderate imbalances in demand and supply.
Second, it allows growers to finance their crop, which for fine wine is often not ready for drinking for a decade or more. Holding 10 years worth of stock is clearly not a great business model! The prospect of profit motivates merchants, collectors and wine funds to buy fine wine long before it is ready to drink. This in turn allows producers the luxury of making wines with the capacity to age.
For collectors the investment element is also part of the appeal and the profits help many to subsidize an expensive pastime.
A potted history
In a historical context the wine market makes mainstream investment markets, like equities and bonds, look positively nouveau. Wine production dates back some 6,500 years. Bordeaux has been producing wine for two millennia and the UK has been Bordeaux’s largest export market for at least 900 years.
The first reference to a fine wine brand that we would recognise today can be found in the diaries of Samuel Pepys in 1663. At that time, he noted how he “drank a sort of French wine called Ho Bryen that hath a good and most particular taste I never met with”. The great chateaux of Bordeaux – including Haut Brion – still dominate the fine wine investment landscape and account for about 90% of Liv-ex’s turnover.
The wine investment market today looks increasingly mainstream. Private collectors in the UK alone hold more than US$2bn worth of fine wine in bonded warehouses, the Liv-ex membership is currently offering US$1.5bn for sale and professionally managed wine funds have invested some US$300m.
Today’s market
Liv-ex estimates that the fine wine market is worth US$3 billion annually – a figure that has trebled since 2004. Traditionally the market was concentrated in northern Europe, but with globalisation it has spread to the US, Japan, SE Asia and more recently to emerging economies like China and Russia. The Liv-ex membership (which includes merchants in 22 countries) accounts for about 75% of total market turnover between them and reflects the global nature of the marketplace today.
Hong Kong and China have been particularly important markets recently, accounting for 40-60% of the turnover for London’s biggest merchants this year. This is reflected in Hong Kong’s import numbers for still wine, which show imports from the UK alone growing 147% to US$80m in the first seven months of the year. In fact, the UK has overtaken France to become the SAR’s largest supplier.
The auction market, despite dominating the headlines, constitutes only a tenth of this total at US$300m, two-thirds of which is accounted for by the auction-centric US market. Globally it is merchants that dominate.
In Europe, merchants account for 40 times more turnover than auctions (at US$2bn annually compared to US$50m). The two largest merchants in the UK alone traded more fine wine than was sold at auction in 2008. Given the laissez faire nature of Hong Kong, it is merchants that seem likely to dominate the market here too. This is not to detract from the fact that Hong Kong has overtaken London as an auction hub this year, which is a remarkable achievement in such a short time.
How to define fine wine?
To be regarded as a fine wine, a wine must have the potential to both improve in bottle and appreciate in value, and be actively sought after in the secondary market. To satisfy this requirement, a wine must have a long track record (often centuries rather than decades) and have received strong critical acclaim (from Robert Parker in particular).
In practice, this is a narrow group of wines and includes the very top wines of Bordeaux and a smattering of wines from Burgundy, the Rhone, Italy, Champagne and the New World. Most professionally managed investment portfolios, for example, have between 80-90% by value invested in just eight brands – the five First Growths, plus Cheval Blanc, Petrus and Ausone. These brands have accounted for 64% of Liv-ex’s turnover in 2009 (and Lafite Rothschild on the back of Chinese demand for 24%).
Critics and transparency
For much of history, wine investment was the preserve of the European aristocracy, who had both the capital and space to bring wines to maturity. In recent decades, greater price transparency and the influence of wine critics has demystified and democratised fine wine, bringing it to the attention of a much larger audience.
This process started with the emergence of independent wine critics over the last few decades, such as Robert Parker, Stephen Tanzer, Jancis Robinson MW and the Wine Spectator. The critics act as independent arbiters of quality, giving consumers the confidence to make purchases without having to taste the wine. With many fine wines now costing hundreds, if not thousands, of dollars per bottle, this is crucial.
Access to pricing information has been similarly revolutionised since the advent of the internet. Price tracking and comparison websites, such as Liv-ex.com, have given everybody access to accurate, up-to-date price information on thousands of fine wines. This has made buying and selling much more transparent, increased confidence and precipitated strong growth.
A compelling investment case
The economic case for investing in wine is compelling: supply is static (increasingly quality conscious producers have even cut production in recent years). Moreover, fine wine cannot be replenished. Every time a bottle of Lafite-Rothschild 1982 is opened, there is one less for the world to enjoy. Add to this rising demand from new markets, like Asia, and the case for rising prices is a powerful one.
As the table in slide 10 shows, Wine has also been a useful tool for portfolio diversification with a history of high returns, low volatility and negligible correlation to mainstream assets. The Liv-ex Fine Wine Investables Index, for example, which tracks the price of notable Bordeaux wines, has achieved a compound annual return of 13% since 1988 – better than equities, gold and property.
But it is no panacea
Fine wine, however, is no investment panacea. Investors should never lose sight of the fact that somebody has to drink the wine if current prices are to be justified or increase. Moreover, one shouldn’t discount both the storage and opportunity costs of holding a commodity that generates no income.
Structural weaknesses in the supply chain and settlement infrastructure also contribute to low liquidity, high transaction costs and slow working capital cycle times. Private collectors face paying away 10-15% to their merchant or as much as 20% at auction. This is not because these middlemen are making super normal profits, but because volumes remain relatively low and the costs of doing business are high.
Central to the problem is the fact that every trade in the fine wine market has to be physically delivered in order to transfer ownership. This is inefficient and costly. The existing supply chain has been designed to handle fast-moving and low value wines. For a product that requires both long-term cellaring and commands prices of up to $50,000 per case, this is clearly not fit for purpose.
The “en primeur” system used by Bordeaux to sell its new vintage each year is also hampered by a high level of systemic risk in the supply chain and a lack of transparency. Both should be addressed.
Some possible solutions
Fine wine could learn a lot from more established markets. A central depository of ownership, for example, similar to that used to record the registered owners of securities in the equities market, would allow for dematerialised trading of fine wine. By transferring title electronically fine wine could be left to age gracefully and a huge element of cost and risk would be removed.
We would also advocate more transparency in the en primeur system. Production figures and volumes offered for sale by the chateaux should be audited and published. Tasting samples should be independently verified, so that consumers can be confident that wines tasted en primeur will be a fair reflection of the bottled wine two years hence. Finally, a mechanism in Bordeaux similar to the central depository system described above would also allow ownership to be transferred prior to receipt of the goods. This would remove the systemic risk inherent in en primeur trading.
Conclusion
To summarise, fine wine has long been a part of a rich man’s portfolio. In the last 20 years, wine critics and price transparency have democratised the market and brought its benefits for both pleasure and investment to a much larger audience. We believe these trends are still in their infancy as new markets open up. Wine investment is no panacea, however, low liquidity and high costs are currently limiting factors. Nevertheless, if we can learn the lessons from more established markets and modernise fine wine’s settlement infrastructure, we would free up huge capacity for additional growth and help the market fulfil its exciting potential.
The Liv-ex 100 Fine Wine Index, the industry's leading benchmark, continued its recent run with a 1.9% increase in October. The value of the index as of 31st October 2009 was 234.25. The index is up 14.3% year to date, and up 9.5% year on year. To bet on the level of the Liv-ex 100 at month end visit Matchbet or to trade futures visit Intrade.
A full analysis of October's trading will appear in the November Market Report, released next week.
In just under two weeks, the Hong Kong Convention Centre (above) will be opening its doors for the second Hong Kong International Wine &
Sprits Fair (4-6th November) – the premier event for
those interested in Asian markets. Liv-ex is taking a stand, so please visit us
at booth 3CE32.
A number of events are planned for the fair, with the highlight being the Wine Industry
Conference, featuring Liv-ex Director James Miles. The conference is centred on
Hong Kong’s emergence as the “Asian Wine Hub”, with James Miles tackling, “The
history and development of the global fine wine investment market.”
Taking place between 3-5pm on the first day of the fair (4th November), registration in advance is required. Other speakers include leading journalist Michel Bettane and Yvonne Choi Ying-pik, the Permanent Secretary for
Commerce & Economic Development for Hong Kong.
Those interested in the Liv-ex presentation will able to view the full details on this blog in the coming
weeks.
The 2009 fair is boasting 75% more exhibitors than the inaugural event
(420, up from 240) with the total floor space increased by 40% to 11,000 sq m (up
from 7,200 in 2008). The first two days of the fair are for trade members only,
with consumers being welcomed on the third day. Last year’s fair saw 8,700 trade
and 10,100 consumers attend, with both groups expected in greater numbers in 2009.
A truly international event, buyers from 53 countries have already
pre-registered. Liv-ex will also be displaying a selection of data and indices in the Wine Gallery.
With the Bordeaux crop now safely in the fermenting tanks, it seems certain that 2009 will be an exceptional vintage.
Here, Liv-ex is opening up the blog to Gavin Quinney, a
local grower and winemaker, for an insider's view on 2009.
Gavin was not one of the lucky Bordeaux growers this year.
His vineyard at Château Bauduc, where for ten years he’s been making house
wines for Gordon Ramsay and Rick Stein, was hit by two hailstorms in May,
trashing much of the crop. (He did recover, in part, by leasing more vines.)
An experienced taster, Gavin has covered the Primeurs for Wine & Spirit magazine – and latterly,
Harpers Wine & Spirit Trades Review
– since the 2005 vintage.
--
“Exceptional”. That’s the refrain at the leading châteaux in
Bordeaux in 2009. Since mid-June, it has been warm, dry and sunny, and the
glorious weather in the last ten days of September and the first week of
October has allowed the top estates – on both Banks – to pick their Merlot and
Cabernets in perfect condition.
Christian Moueix was very enthusiastic as he completed the
harvest at Pétrus on 1st October.The vintage is “truly exceptional”, he said. “The word this year is
fruit – it’s unbelievable the feeling of the fruit that we have. Ripeness, not
over-ripeness – even if the alcohol level is very high – but everything is so
fruity, even in the lesser blocks. I don’t speak just of Pétrus, of course, but
for all our vineyards in Pomerol. Usually I am rather pessimistic but this year
everything went so perfectly that I could not dream of better weather all along
the year.”
“It’s a little bit too early to talk about the vintage,”
Hubert de Boüard told me ten days later, as he finished the Merlot and started
his Cabernet Franc at Château Angélus, in St-Emilion. “But as a winemaker for
25 years, it’s really exceptional.”
Across the Gironde in Pauillac, Philippe Dhalluin, the
Technical Director for Mouton Rothschild, was equally optimistic as they
harvested their Cabernet Sauvignon from 1st October onwards – just
as they did at Lafite next door. Both estates had picked their Merlot during
the week before. “It’s clearly exceptional – that’s obvious”, he said, “because
of the quality of the grapes, the richness, the purity, the extraordinary
weather – not a drop of rain.”
Fortunately, the protracted dry spells were preceded by a
very wet April and average rainfall in May, which helped replenish the water
levels. The weather since has been superb – not too hot, with just the
occasional smattering of rain. And, unlike the stifling summer heat of 2003,
the nights have been quite cool.
Would the sunshine continue into September and into early
October for the harvest? Yes was the answer, with the only serious rainfall
coming mid-month, and especially over the weekend of 19th
September.The rain then was light in
the Médoc but quite heavy on the Right Bank, especially in Pomerol and parts of
St-Emilion. This, however, benefited some water-stressed vines.
The last ten days of September and first week of October
were extraordinary, with record temperatures in early October, providing ideal
conditions in the final days leading up to and during the harvest.
Until 10th October, I had seen no rot to date on
any red grapes at the important châteaux. Those properties still holding out
for more maturity have run the risk of rot, as it was more humid from 8th
to 12th October although the forecast from the 13th
onwards is fine again – which also bodes well for the sweet whites.
What about the red grapes, and the wines they’ll produce?
Clearly, alcohol levels are potentially very high, especially for Merlot, which
has higher sugars than the Cabernet Sauvignon as you’d expect.
The potential in the grapes, which are noticeably consistent
in size and true to type, is huge. The flavours are explosive, and with massive
colour, thick skins and powerful but ripe tannins, there’s great excitement
about the quality of fruit.Of course,
careful extraction will be needed and the level of alcohol is the one possible
fly in the ointment. Some Merlot has come in at over 15°, with the norm – for
major estates – being around 14° to 14.8°, and even these numbers could be
conservative. Balance is crucial, yet my impression – on tasting the grapes –
is that the top producers should achieve this. The PH levels are good and the
tannins are very fine. But they’ll be big wines.
Levels of alcohol should be slightly less of a concern for
the many châteaux of the Left Bank, with their Cabernet Sauvignon coming in
from 12.4° to 13.8° – with many blocks much higher than usual. From what I’ve
tasted in Pauillac, St-Julien and Margaux, the Cabernet Sauvignon on the Left
Bank is outstanding. Meanwhile, much of the Cabernet Franc of the Right Bank is
very good – “the best I’ve ever picked”, according to Otto Rettenmaier of La
Tour Figeac, on the borders of St-Emilion and Pomerol.
Yields too are good, but these have been tempered by the
fact that the skins are thick and there’s less juice. (It’s not difficult to
see which side of the equation the producers might focus on when it comes to
discussing prices.)
Only those vineyards which were hit by hail in May have very
low yields, and as far as the very top growths are concerned– most of the
damage was in the stalls, not the royal circle – the hail was limited to
relatively few vineyards in St-Emilion, such as at Château Trottevielle.
As ever, it’s interesting to compare with other vintages,
even if every vintage is unique. A mythical blend of 1982, 1989 and 1990 has
been mentioned, with 1947 being Christian Moueix’s choice. And as Hubert de
Boüard pointed out, the legendary Cheval Blanc 1947 was close to 15° alcohol.
Incidentally, they certainly didn’t have the kit back then.
The news in 2009 could have been the
installation of many new, highly sophisticated ‘optical’ sorting machines on
trial this year, such as at Mouton Rothschild, Léoville Las Cases and Pétrus.
These rejected very little as 99.9% passed through with flying colours. So
whilst these huge bits of equipment were, in my opinion, almost superfluous
this year, it was an uncomplicated, relaxed vintage in which to test them. The
benefit will no doubt come in the years ahead, with slightly less than perfect
grapes.
In summary, 2009 is clearly an extraordinary vintage, and
it’ll be a surprise if any of the leading merchants decide not to come for the
Primeur tastings next Spring. But don’t forget your toothbrush.
--
Gavin Quinney is
filming a series of videos about the ‘Making of Bordeaux 2009’, further details to follow.
Global auction prices are now available on Liv-ex.com as part offull update of the fine wine info pages.
The main changes include:
Auction prices: both actual hammer prices and monthly averages are now displayed.
Improved charting capability: the central chart has been fully upgraded with additional functionality.
Richer data analysis: a greater depth of price and volume data with improved tools for analysis.
Updated layout: the page has been redesigned to better display the wealth of Liv-ex fine wine data.
Auction price data has been collected from major houses in the UK, US, Continental Europe and Hong Kong (representing 19 separate sources). The base currency is GBP, with prices from auctions taking place outside the UK converted at the spot rate on the morning of the auction. Prices include the buyer’s premium but exclude sales tax.
Liv-ex.com is the only place where you can view merchant list prices, auction hammer prices and actual trade-to-trade transactions (Trade and Platinum subscribers only) in one place.
In the latest issue of Stephen Tanzer’s International Wine Cellar,
Josh Raynolds adds his voice to the critics who have already sung the praises of
this iconic Australian wine’s latest incarnation, commenting “Powerful aromas
of cassis, blackberry and bitter cherry are complemented by exotic notes of
smoky peat, pipe tobacco and violet oil…deeply concentrated…with a sexy floral
element…This wine's marriage of depth, spiciness, fruit, meatiness and
minerality is extremely impressive…96pts”. Sep/Oct 09
With Wine Spectator awarding 98pts and Jancis Robinson awarding 19.5pts (the
highest score ever for Grange), just how does the 2004 compare to previous
vintages…?
*Current Liv-ex Best List Price / Score
sources: ST, WS, JR, RP
With Robert Parker yet to pass judgement…perhaps now is the time to consider
this new world behemoth…?
