Let’s try a little thought experiment. Imagine for a moment that I have approached you with an opportunity to invest in a new business idea that I claim will yield you an attractive return on your money. As you investigate further, you will learn that I plan to sell almost all the shares as rapidly as possible.
Am I planning to earn some of the equity back through the success of the business? you reasonably ask.
No, I reply, I have no interest in ever holding any significant stock; instead I prefer to turn my attention to launching a succession of similar ventures – and recruit investors for those.
What kind of return are you likely to get from putting your hard-earned cash into any of these businesses? you ask.
Hmmm, I respond. That depends. Some of them yield a healthy return; others – rather a lot of others – less so.
So, you finally want to know, what incentive is there for you to buy shares now, rather than wait until the business is up and running and demonstrating its viability?
And, to that question, I have little satisfactory response.
As you will have guessed, the point of my little game, is to illustrate the fundamental strangeness of the Bordeaux en primeur - futures - market whose 2016 edition has just begun.
Much has been written about the unreliability of this business, but among the most interesting offerings I have seen is a recent report published by the wine trading exchange Liv-ex for its members. Entitled ‘BORDEAUX 2016: A NEW DAWN FOR EN PRIMEUR?’, it includes detailed comparison of the prices that have been paid for each of a range of chateaux’s wines over the last 11 years en primeur with their - ‘fair value’ - based on their cost on the secondary market over the following decade and Wine Advocate scores.
According to this analysis, taking an average of Liv-ex’s Bordeaux 500 estates, buyers would have been wiser to ignore invitations to buy all but three of these vintages en primeur. People who bought the 2005 paid nearly 30% more for the privilege of coughing up early, while the figure for 2010 was just under 10%.
Of the three vintages that justified purchasing en primeur, two, 2012 and 2014, were less than 8% cheaper than their estimated subsequent fair value. In defence of the system, Buyers of the 2008 actually got a bargain, paying up to 30% less than they would if they’d waited, but there were extraordinary circumstances. First, of course, that vintage hit the market in the financially turbulent days of early 2009 and second, as the report states, “It must be noted that 2008 En Primeur was unusual in that Robert Parker released his scores after wines had been priced. Parker’s scores were higher than the market had been expecting and prices subsequently increased sharply.”
Obviously, there are exceptions to these rules, and the Liv-ex report acknowledges these. The last 11 vintages of Chateaux Lynch Bages, Beychevelle and la Fleur Petrus have been been ‘underpriced’ by an average of nearly 20% en primeur compared with their fair value, while Ausone and Palmer have been 25% to 30% more expensive than is justified by their price on the secondary market.
The existence of the consistently attractively priced wines helps to justify the survival of at least some parts of the en primeur system, despite the annual chorus of voices calling for its demise. But the prospects for springtime in-cask sales of most Bordeaux wines are far from rosy As Liv-ex figures show, the proportion of wine sold on its platform over the year after their en primeur launch, has dropped from 10% for the 2008 vintage to 3% or less in all the vintages since 2011.
Which brings me back to my original thought experiment. If the chateau owners think that cellaring their wines is such a good idea, why don’t they do more of this themselves, releasing subsequent tranches at prices they think appropriate? Cellaring and selling mature wine is hardly revolutionary as a concept for producers, after all: it is regular practice for wineries ranging from Lopez de Heredia in Rioja to some of the big names of the Napa Valley. And now, of course, despite the opprobrium of many of its neighbours and fine wine merchants, since 2012 it has been the modus operandi of Chateau Latour.
Few producers, however, have come up with a model that combines en primeur with a programme of subsequent sales. I’d really like to know why Bordeaux has failed to embrace a strategy that actively encourages early investors to stand alongside the chateau owners over the longer term rather than expecting them to take all nearly 100% of the risk.
Robert Joseph
