Birthday Post

We have been delighted to see several responses to our blogs since the Drinks Business reproduced “Getting it Right” on their website.  If our approach has been misunderstood we can only blame ourselves that our numerous posts have not been clear enough to make what is really a very simple truth more accessible.  We have some serious Birthday celebrations to be getting on with today so this will be the briefest of clarifications.

 

·         Our blogs were prompted by en primeur but the approach is just a method for analysing the whole wine price curve.

 

·         Timing vs Analysis:  we are presenting an analysis of a snapshot of the market that we have at one moment.  But here is the crux:  one’s view on certain market dynamics in the short, medium and long term, is a major factor in appraising the reasonableness of the entire static picture.  This fact is stated in the very first sentence of “Getting it Right” and it is the point of the whole discussion.  Dynamic timing and static analysis are inextricably linked, not alternatives to one another

 

·         The current prices of older vintages is the single most vital input to the calculation of fair value for younger wines.  To suggest that our approach is irrespective of the current market for older vintages would therefore be bizarre.

 

·         If the whole wine market looks consistent with a particular assumption on wine inflation then of course we expect (in the strict mathematical sense of expected value or mean) the net return (after storage costs) of every wine in the market to be just the same as interest rates (say 2% pa) – that is the very definition of fairly priced under risk neutrality. We can assume inflation will be +10% pa.  If the snapshot of the market is in line with that assumption then the expected net return for every wine is 2% not 10%.  We can assume that inflation will be -10%.  If the current market is in line with that assumption then the expected return for every wine is again +2% not -10%.  If we start with a static picture consistent with our inflation assumption, then it does not matter whether that inflation assumption is big or small or positive or negative, the expected net return from all wines is of course just 2%.

 

·         Contrast the above true statement with the entirely false one that we have some inherent belief that the 2014s will be subject to healthy price inflation.  We have painstakingly defined what we mean by wine inflation and so it should be clear that the preceding sentence does not even make any sense.  We simply cannot talk about inflation of this or that wine or this or that vintage because those things are constantly changing.  If we own a one year old wine then in a year’s time we own a two year old wine.  The movement in price over the year is not our inflation/deflation.  We would need to look at the price of a one year old wine at the end of the period to observe the inflation/deflation.  The idea that inflation could apply to any goods you might buy is the exact opposite of the truth – it applies to virtually no goods you can buy!  I cannot buy a wine which is one year old today and will also be one year old next year.   There is virtually nothing I can buy which is the same thing in the future as it is today.  One obvious exception is gold.

 

·         So what do we mean by “in line with that inflation assumption”.  The answer is the shape of the price curve.  An inflation view is not a view on future price action it is a view on the snapshot, the static picture, the shape of the curve.  Zero inflation or deflation assumptions are consistent with steep price curves.  Modest inflation is consistent with flatter curves and really high inflation assumptions are consistent with negative curves.  (Modest and high here are relative terms – relative to interest rates).  When we look at the entire market (including primeurs) we see a very complicated picture of course but what we see is a general pattern of price curves consistent with a mildly positive inflation outlook.  That seems reasonable.  There are of course some outliers and for those wines we can take the appropriate action.

 

We very much doubt this is the end of it but it is great that a debate is taking place.