Do You Have a Nose for Wine Futures?
I just returned from the Tuscany region of Italy, where I spent some time imbibing and immersing myself in a niche market.
Wine is one “commodity” that has consistently appreciated.
That’s quite a feat compared to the growing number of depressed commodity prices.
In fact, Le Clos recently unveiled a 2009 Balthazar of Château Margaux worth $195,000, making it the world’s most expensive retail bottle of red wine!
Many argue that wine isn’t a commodity due to its varying characteristics, but there’s actually a market in wine futures.
Global prices are rising, too, thanks in part to growing Chinese and Russian appetites for wine.
This haute commodity could keep your glass full to the brim.
Think Outside the Case
Global demand for fine wine has increased so much over the past decade that it now can be a serious investment, instead of just drinking the stuff.
The fine-wine investment market deals with only a tiny proportion (less than 0.1%) of the world’s wine.
The Grand Cru wines of Bordeaux and Burgundy in France have long dominated the scene, but the United States and Australia are also major players. And investment-grade Italian wines are continuously gaining notoriety, including Piedmonts and Super Tuscans.
The highlight of my trip was visiting an impressive wine cellar that stored rare vintages, some from the 1800s. The owner said the price of certain bottles moved daily, just like a commodity futures contract.
Wine futures are the best way to invest in the early stages of the winemaking process. And it can often be the only way to secure wines that are available in limited quantities – sometimes as little as 200 cases a year.
And fortunately, you don’t need a wine cellar to trade.
Heard It Through the Grape Vine
You may have heard that wine futures are reserved for wine wholesalers and distributors, but they’ve become increasingly accessible to the retail market.
Here’s how wine futures work.
A wine future represents a claim on a yearly vintage. Futures trade “En Primeur,” or in youth, meaning after it’s made, but before it’s bottled.
One wine future equals one case of wine – that’s 12 750-milliliter bottles – that will be delivered or collected at a future date.
The initial release price of any wine future typically attracts the most attention and is the lowest price the wine will be sold.
Wines are then released in several stages over a few years, where prices are adjusted up or down according to the success of the previous tranche. You should think of a tranche as a futures contract.
Understanding wine can be involved, so it’s best to focus on one or two regions. Focus on top wines and vintages, heed advice from reputable retailers, and consider top critics’ scores.
The Wine Spectator Auction Index is a useful tool for seeing how the wine market is performing. It’s a composite of average prices for selected benchmark wines sold at commercial auctions.
The Index comprises 32 of the most important wines in today’s auction market, including 16 Bordeaux wines, eight California Cabernet Sauvignon-based wines, two Piedmont wines, three Tuscan wines, and three vintage Ports.
You’ll want to choose wine that’s rare – and thus likely to increase in price.
The easiest method to profit from futures is to purchase them through individual vineyards.
Futures also trade via online wine exchanges and are listed by vintage, vineyard, price, and rating. Membership is required when you apply for trading privileges, and some exchanges only accept industry professionals, but they may still provide price data, merchant prices, auction information, and updated trading data.
Withering on the Vine
As with all investments, nothing is certain. Here’s what to look out for with wine futures.
Bottles are generally professionally stored in a controlled facility until they’re released. But that kind of care comes with storage fees, insurance, and eventually auction premiums, all of which reduce your eventual profit margin. On top of that, there’s also the dreaded capital gains tax.
Wine futures aren’t traded on a regulated exchange, so liquidity and transparency can be lacking.
Wine futures are also less predictable, have a regional focus, and information about that year’s crop is not readily available pre-harvest compared with other agricultural futures. Access to certain futures vintages are only offered in a few locations or states.
Unlike typical futures, where a tiny fraction of the notional value is required upfront, wine futures can require you to deposit 50% or more of the purchase price and complete the payment upon release.
In the end, as with all investments, it pays to have a good understanding of what you’re investing in, even if you’re not a die-hard oenophile.