Apples and Pears - aligning the time frames

This post outlines a common error in en primeur analysis but it is really just another presentation of our core argument.

If we take a 2014 EP price and then compound it by say 8 years of interest (or cost of carry) and add in the storage cost over the period, then what we arrive at is the future cost in 2023 of owning a wine which is 8 years old.   If we now want to appraise the fairness of the EP price it would be entirely wrong to compare that future price with the price today of an eight year old wine – i.e. the current price of the 2006.

These are the things we know:

·         The 2014 EP price

·         The future cost of owning an 8 year old wine (a simple function of the EP price, interest rates and storage costs)

·         The price today of an 8 year old wine

What we do NOT know is the price that an eight year old wine actually will command in 2023 – that could be absolutely anything.  Just like the amount of rainfall we will have in 2023 it is something we can only talk about in a probabilistic sense: i.e. there is a distribution of potential results with the high and low ones assigned small probabilities and ones in the middle viewed as most likely.

The big question is this: around what value is that distribution "centred"? – or more precisely what is its mean?  It is to the mean of that distribution that we can compare our calculated future cost.  To assume a mean of today's 2006 price would be a peculiar assumption and one that would need to be justified – it is not a neutral position.  If you had to make your best guess on the price of a new Range Rover in 2023 would it really be the same price as a new one is today?  Our own assumption of applying some core inflation rate is also an assumption but surely a much more neutral one.  Remember we are absolutely not saying prices definitely are going to rise with inflation – we are just selecting a sensible mean value around which the distribution of possible future possible values is centred.

This approach results in a much more positive view on the levels of 2014 release prices than the one which was repeatedly expressed in articles during the campaign.  For now the consumer seems to be following the more gloomy advice.  The consumer is wary – the memory of the last few campaigns is not a pleasant one and fond memories of how things used to be in the good old days also linger on.  But we believe a more benign view of the prices will emerge – indeed there are signs that it is happening already.  It is important that it does because this is how EP will, and must, look in the future.  The reasons why are for the next post.

Postscript:  here is a quick example:

Leoville Las Cases 2014 price: £ 920

Leoville Las Cases 2006 (comparable quality) price: £ 1,000

Average (or mean) of the random distribution of possible prices for an eight-year-old Las Cases in 2023:  £1,171 (using only 2% inflation – actually less than current market implied rates)

Future cost of owning an eight-year-old Las Cases: £1,138 (six years storage as first two are in barrel)

Conclusion: very reasonable, even attractive, price