Understanding the
price trend
Let us start by thinking about how wine prices move. It is going to be easier to talk about a
specific wine but of course everything that follows can be applied to any wine or
basket of wines. Consider the following
table and associated graph where the wines in question are loosely comparable
in quality:
Price of
a good quality ten year old Chateau Margaux as
of the year in question
|
1989 (price in 1989 of the 1979)
|
£ 615
|
% per annum change over period
|
|
1995 (price in 1995 of the 1985)
|
£ 730
|
2.9% pa
|
|
2005 (price in 2005 of the 1995)
|
£ 1,500
|
7.5% pa
|
|
2009 (price in 2009 of the 1999)
|
£ 1,995
|
7.4% pa
|
|
2014 (price in 2014 of the 2004)
|
£ 2,750
|
6.6% pa
|
This is a crucially different graph from one which plots the price
movements of any particular vintage. To
try to make the difference really clear, imagine Margaux was divine at age ten
but turned to worthless vinegar at age eleven.
The graph above would still be perfectly feasible but the price of any
particular vintage of Margaux would always fall to zero. Or to drive the point home, if we plotted the
market price of haddock over the years it would look rather different from a
plot of the value of one particular (gradually rotting) haddock!
The clear upward trend is hardly surprising. We live in an inflationary world and the
price of baked beans, Saville Row suits and haddock has all gone up over time
so we would hardly expect the value placed on a glass of good ten year old Chateau
Margaux to do anything else. The value
of a good ten year old Margaux will move up and down but what is clear is that
the perfectly natural, inflationary, upward general trend which we would fully
expect it to display over time is undeniably present.
This upward trend does not in any way make an investment case
for (or against) fine wine. As we have
seen with the extreme example of the eleven year old vinegar, even if the
purchase of any case of wine is a sure-fire disaster the upward trend in the price
of drinkable examples can still exist.
Trying to make money out of rising haddock prices by buying a haddock
does not work!
A parallel with
index linked bonds
Consider a payment in ten years of £1 scaled up by the
increase in RPI over the period. If we
expect the rate of inflation to be higher over the ten years than current ten
year interest rates we will assign a current value to that payment of more than
£1. This may seem an unlikely situation
(it is one of negative real interest
rates) but it is in fact the situation we find ourselves (in the UK) right now. Of course our approach is in no way limited
to just the current scenario.
One result of this has been a huge rally in the index linked
gilt (“linker”) market. The coupons on a
linker are scaled up by RPI and so are dependent on the prices of various goods
and services pertaining at some point in the future. Prices of linkers imply that the market
predicts the prices of those goods will rise at a rate of about 2.6% per annum. Ignoring the future price appreciation of those
goods (or assuming it was going to be 0%) would result in a gross
underestimation of the value of these bonds.
We mention linkers because there is a close parallel with en
primeur pricing. A linker is something
whose value depends on the price we expect various goods to command in the
future. An en primeur is something whose
value depends on the price we expect one particular good (the mature wine) to
command in the future.
En primeur pricing
One often sees a primeur price compared to the price of an
older vintage in a manner which suggests the two wines are direct alternatives:
they are not. They belong to two
different time eras and will always remain that way. Perhaps if one views the en primeur as a contract
– a piece of paper – then comparisons with mature wines will not seem so
tempting. “Would I rather drink this
bottle of 2004 or eat this piece of paper?” is not a meaningful question.
Indeed any young wine is essentially a contract to own a
mature wine at some point in the future.
It is the likely value of a mature wine at that point in the future which is the only thing that one should
consider when trying to arrive at a fair value for the younger wine. The value of a mature wine today is only
relevant in the sense that it informs our efforts to estimate what a mature
wine of similar quality might command in the future.
When I buy 2014 Margaux, I am buying the right to own a good 10
year old Margaux in 2024. What do I
think a good 10 year Margaux will be worth in 2024? Look back at the graph above. £2,750 would clearly
be a ludicrously low estimate and would deny the existence of any general price
trend – or rather it would say that the long term, entirely reasonable upward
inflationary trend is going to abruptly stop for ten years. It would be like refusing to acknowledge that
the price of goods in the RPI is going to carry on going up and so concluding
that the entire market is stupid and overvaluing index linked bonds.
So what should be our estimate for “Margaux inflation”? Twenty years ago it was running at 2.9% pa
and more recently it has been over 6%.
In the future it may possibly fall more into line with core inflation or
it may remain higher but the point is it exists, it should exist, it makes
common sense for it to exist and it is going to carry on existing!
Please remember that the previous sentence is an entirely
different statement from one saying that Chateau Margaux prices are going up
and it is a going to be a good investment.
The second one may or may not be true but it is not a statement about
Margaux inflation – remember the vinegar!
None of this analysis assumes or denies anything about whether any
particular wine or wines will go up or down in price – this is a crucially
important distinction.
Let us take a conservative estimate for Margaux inflation of
2.5% pa over the next ten years. That
would make our best estimate for the price of good ten year old Margaux in 2024
equal to £3,520. (Statistical note: we
are not saying that this is going to actually be the price of course; this
value is our estimate of the mean of the random distribution of possible 2024
values)
The 2014 Margaux is being offered at £2,350. If we buy that primeur, we will need to fund it
at (or forgo interest of) say 2% per annum and we will need to pay for it to be
stored at say £10 per annum. When it
gets to 2024 we will own a ten year old Margaux at an all-in (future) cost of
£2,945. This is well beneath our conservative
estimate of what price a ten year old Margaux might then command. The primeur is a compelling buy. (Most would say the 2014 is superior to the
2004 which makes it even more compelling).
We can approach it the other way round. If our central estimate for the 2024 price of
a good ten year old Margaux is £3,520 then, using the same interest rate and
storage costs, the fair price of the primeur is £2,800. Yes, utterly shocking but the fair price of
the primeur is higher than the current price of a ten year old Margaux. This is simply a result of the underlying
price trend being greater than the current level of interest rates plus storage
costs.
With a primeur price of £2,350, the rate of Margaux inflation
necessary for it to ultimately have been a good purchase is 0.7% per
annum. It has averaged over 6% for the
last 26 years.
Beyond primeurs
None of this analysis is restricted to primeurs – it applies to
any two vintages of the same wine of similar quality. The price of younger wines relative to older
wines will of course vary and depends on interest rates, storage costs and
trend assumptions. In high interest rate
scenarios young wines will be much cheaper; as rates fall they will come closer
in price to mature wines and if rates go so low that they lie under a
reasonable estimate of the future price trend of the wine in question then younger
wines will actually be a bit more expensive than mature ones. Buying very young wines is like buying
long-dated index-linked bonds.
One often reads in wine investment brochures that wine has a
“special dynamic”, that because it improves in quality and complexity and
scarcity as it gets older it therefore has a built-in tendency to rise in value. This is also essentially nonsense. What these people are suggesting is that the
wine market is full of blockheads who have not worked out that young wines
ultimately become old wines. It is
blindingly obvious that if mature wines are valued highly, then young wines
will be also. Intelligent consumers (and
if not, then speculators) will make it so.
Of course the value of wines in general may rise but that has nothing to
do with any special dynamic.
Those same investment advisors talk about older wines currently
looking too cheap or young wines being too expensive, that the market is too
flat and back vintages must rise to make sense of it all. Actually, in the current economic scenario, the
market makes a lot of sense just as it is.
We are not suggesting that there are no under-priced wines – there are many,
and several are 2014 primeurs.
Back to primeurs
What does our analysis imply for en primeur wines in various
price brackets?
Let us now use an even more conservative estimate for
“Bordeaux inflation” of 2.0% and storage costs of £10 per annum. For those wines where the 2006 or 2008 is of
comparable quality the fair discount to those vintages would be as follows:
|
Price of primeur
|
Fair discount to
2006/2008
|
|
£250
|
19 %
|
|
£500
|
10 %
|
|
£1000
|
5 %
|
|
£2,500
|
2 %
|
N.B. if you are the
sort of buyer who takes delivery of your wines upon shipping and stores them
cost-free at home to ultimately drink then the fair discount for all price
brackets is 0%.
There has been
rather too much criticism of wines coming out at “only” 10%-15% under comparable
physical vintages. This criticism is
possibly justified at the cheaper end but in the £500+ bracket that sort of
pricing is very reasonable. A good
example is Leoville Las Cases which at £920 was deemed of questionable value
compared to the 2006 which is available at around £1000. We think it is a very attractively priced
primeur. Moreover, the first growth 2014s
are incredibly attractively priced but thankfully everyone agrees on that.
The future of en primeur
The deep discounts for en primeurs in the past played a major
part in attracting hordes of speculators to the wine market. The speculators can be insiders in the form of
intermediaries who hold significant stock back to enjoy the inevitable
realignment themselves before selling. Therefore,
any belief that a hefty discount approach could ensure a stable future for en
primeur is misguided. It is abundantly
clear that producers will not contemplate a return to the old way of pricing so
it is a non-starter anyway. Yet still
some UK merchants cling to the belief that this is how it should be and even
try to tell Bordeaux that nothing else can work.
Clearly en primeur is in trouble. For it to have any hope of surviving, a
pricing approach must be found which can keep both producers and consumers
happy. That is why a proper evaluation
of what represents a fair price is so vital and why it is so frustrating that much
of the analysis quoted in the press is based (mostly unwittingly) on
ludicrously harsh assumptions.
Many will argue that you have to offer the consumer something
better than merely fair to make them happy.
We agree and en primeur does precisely that for consider the following:
·
There
is a huge advantage in owning a wine from its birth regardless of whether you
ultimately drink it or sell it. This in
itself swings the balance heavily towards EP purchases even if prices are
merely fair.
·
You
can bottle it in any format like – this won’t be important to everyone but
still a small EP positive
·
We
have been very cautious with trend assumptions so our fair values are already
rather conservative
·
The
whole en primeur process is fun. There
is something satisfying in owning a wine still in barrel. The ability to build tomorrow’s cellar today
and look after it yourself is what collectors love about it. Yes, we are beginning to get a bit subjective
but surely we are not the only ones who love en primeur simply for the whole
experience and who require no more than a fair deal to be enthusiastic
supporters
Of course even armed with a true fair value the consumer may still
decide not to buy. As our approach
shows, for many 2014s this means they are passing up the opportunity to own, in
the future, mature examples of their favourite wines at a real cost which is
less than they are happily paying for mature examples today. Who knows – perhaps they plan to give up
drinking!
En primeur 2014 saw a very good Bordeaux vintage released at
prices which in the current market and for that quality level can be safely
viewed as being just about as low as the producers are willing to go. We believe that those prices represented, on
the whole, a good deal for consumers. Our approach to en primeurs means that
there does exist a narrow band in which the price can be acceptable to all
parties. If you use the harsh appraisal
of other commentators there simply is no such band.
The problem with en primeur prices being too high is obvious,
but too low and speculators of all varieties come rushing back. Buyers
need to look forward not backwards and stop expecting a free lunch. En primeur
is a brilliant feature of the Bordeaux market but in terms of price it needs most of all to be one
thing: unremarkable.
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