Back to the wine market

We will now leave the car and flower analogies and stick to the wine market.

From the last two posts you can see that if one takes the view that the cost of drinking perfectly mature delicious claret is going to change, then one needs to factor this in to an appraisal of primeur prices.

The neutral position is that this cost will move in line with inflation.  Many would argue that given the major correction the wine market has seen over the last four years the chances of significantly outstripping inflation are very high but let us just develop the argument assuming this neutral position.

Note carefully – we are not talking about the price evolution of one particular wine, we are talking about the evolution of the cost of wine which at the relevant point in time is “mature”.  Today, a perfectly mature example of a particular wine might be its 2003 and in ten years’ time the perfectly mature example might be the 2014.  It is how the price of the 2003 today compares to the price of the 2014 in ten years’ time that we are focused on.  Our neutral assumption is that the latter will differ from the former by around the rate of inflation.

Index linked bond markets (in the UK) are projecting RPI over 10 years at +2.7% per annum and 10 year gilt yields are around 2%.  The negative real yield is down to, amongst other things, quantitive easing.  The point here is that the interest cost of paying up front for primeurs is currently very modest and more than compensated for by expected inflation.

The other cost of holding primeurs to maturity is of course storage.  Storage costs of say £10 per annum equate to 0.5% for a £2,000 case of wine but 5% for a £200 case of wine.  So for top end wines the excess of 0.7% of inflation expectations over interest rates compensates entirely for storage costs under our neutral assumption. (Storage is however more of an issue for cheaper wines).

Some will argue that there is uncertainty over the ultimate quality of a primeur and this needs to be reflected in the price.  There is actually very little uncertainty.  Sure, you will see in-bottle scores differ from barrel scores, but big changes are rare.  And you get plenty of upgrades and downgrades later in a wine’s life anyway so if precise scores matter that much to you then there is always uncertainty.

So let’s just try to state a simple conclusion: under a completely neutral assumption on price evolution it is entirely reasonable for a primeur of a top wine to be priced similarly to a mature vintage.

On that somewhat contentious assertion we will end this post but will be back one more time to complete our look at primeurs.