Sunday 3 May 2015

The Wine Yield Curve

It is interesting to construct models for the wine market and fit them to market data.  One simple approach is to allow ourselves three parameters with which to determine price - the chateau, the vintage and the critical rating/points.  It is simplest to confine ourselves to the first growths and to come up with a single scaling factor (or multiplier) for each chateau, a single multiplier for each vintage and a non-linear function of the points which provides a quality multiplier for a given score.
 
When we fit this to market the vintage multipliers for 2010 and earlier mainly come out close to 1.  The exceptions are 2000 and 2005 (see later).  For 2011 through 2014 they reduce steadily (down to 0.7 for 2013 and 2014)
 
For 2000 and 2005 the multipliers are well over 1.  In the case of 2005 this is explained by the widely held belief that Robert Parker will significantly upgrade the first growth scores in a reappraisal of the vintage in two months' time.  If this comes to pass, then the prices of the wines will be fully explained by the points alone and a re-fit using the new ratings will result in a vintage multiplier closer to 1.
 
In the case of the 2000 vintage we see elevated demand and relative scarcity pushing prices to a level much higher than one might expect purely on the basis of the points.  This is not simply a matter of age as we do not see this effect in all old and scarce vintages - only ones where the scarcity actually matters.
 
What about the other end of the curve? It is perhaps reasonable that very young wines trade at a much lower price than they will fetch when a little older.  After all, there is still some uncertainty about the quality and how they will evolve.  Moreover the en primeur system means they are very abundant since large quantities are put on the market at one time. 
 
But how much should that "discount" be?  The 2011s are trading on a multiplier of 0.93; the 2012s on 0.84; 2013 and 2014 are on 0.70;  as time passes everything moves up the "curve" - owning young wines is currently (it wasn't a few years ago!) what a financial trader would call a positive carry trade.  The risk is that what you own does not live up to its early promise and at some point gets downgraded. 
 
The 2012s have just been reviewed in bottle and so there is much less uncertainty surrounding those wines.  Assuming no significant re-ratings, over the next couple of years they will outperform by 19% - a chunk of that may of course occur in the next few weeks.  Or buy Mouton 2014 and enjoy a 43% outperformance over the next three years provided it lives up to its barrel rating.  And it would take an enormous downgrade to make purchasing anything else look better in retrospect.
 
Those wine professionals who eschew en primeur as a hard rule did the right thing over the last few years.  But the curve has normalised and they would be wise to reconsider.

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