Wine As An Asset Class

Many people know that wine can not only be an exquisite alcoholic drink but also an investment. French wine cellars, stocked up to the roof, serve not only as storage places but also as investment portfolios. Rare wine of old vintages costs a lot of money. This way, wine has become an asset class. Unfortunately, so-called “old money” like wine, is not as popular today as innovative financial products such as binary options, CFDs, Bitcoin, etc. Wine is also not a traditional asset class, such as stocks, bonds, mutual funds, precious metals, and real estate. Wine investments are illiquid and riskier. Nevertheless, history shows that these risks are well compensated with above-average returns from this asset class: wine index Liv-ex has made investors a return in excess of 250% for the last 10-12 years (which translates into 8-10% compounded annual growth rate (CAGR)), whereas the more popular S&P 500 has not returned more than 50% since 2001. A number of private equity funds invest in wine bottles, although the total capital raised for these funds came short of $300 million in 2011 (about 3% of total capital committed in that year). All this means that wine is an exotic investment, which demands patience and, most of all, time.

However, the story is not so much about the physical form of wine itself. More important is the fact that for a very long time, throughout centuries (especially, in the province of Bordeaux), so-called “wine futures” have existed for specific vintages in the wine-making business. How does a wine future contract work? The contract, in French “En primeur”, works the following way: 12 to 18 months prior to the official release of a vintage and bottling of wine, a buyer has an opportunity to buy a right to purchase a specific quantity of wine bottles. When the wine is 6-8 months old, wine experts open up a few barrels and perform quality testing (French wine is rarely tested by pouring only one sort of grapes into a bottle: usually, a number of types of wine is mixed together in different proportions). After that, an evaluation of the entire vintage is given. When the wine ripens and ends up in bottles it becomes property of buyers of the wine futures. The bottles are then stored in cellars, especially set aside for the wine futures owners. The storage is free of charge.

What is the point of such a deal? First of all, the price of barreled wine can be significantly lower than the price of bottled wine. Secondly, the wine often does not make it to the end market because of extremely high demand in the middle stages of making. This way, owners of the En primeur contract have the opportunity to sell their rare wine at a price many times over their own cost (demand-supply theory). For example, the wine from the 1982 Chateau Latour vintage, purchased as an En primeur contract in 1983 for £250, was worth £9000 in 2007 (average rate of return – 45%). Although the bulk of the return came from the long waiting period, En primeur did play a role in price-setting, especially since the contract has a short life of less than 2 years. This means that the short-term investment in wine futures can be exceedingly profitable for risk-loving wine enthusiasts.

What makes the En primeur contract different from other futures contracts, such as oil, natural gas, and coffee? First of all, supply of this type of futures is limited. Wine-making is a risky business for a number of reasons, including factors relating to weather and climate shifting. One cannot simply “pump” wine like oil and gas. Secondly, each vintage is unique. On the other hand, coffee tastes similarly year over year. The taste of wine, however, is unique to every vintage. Moreover, there are so-called “jubilee vintages” associated with unusual crop years influenced by weather anomalies, which not only affect the quantity of wine produced but also its quality and taste. Thirdly, wine market is more segmented than either the crude oil or the natural gas markets. Even the coffee market is not comparable. There are thousands of types of wine and each vineyard is unique. The most prestigious wineries sell their entire crops instantly, so those who do not own En primeur do not even have a chance to buy the wine in the primary market.

To sum up, one realizes that wine futures are not only profitable as an investment but are also aesthetically appealing. Investors feel special and as part of the small and exclusive group of people who have obtained the right to own fruits of a specific vintage from their favorite chateau. The risks of this asset class are but not limited to illiquidity and possible devaluation. Also, an interested party has to spend a lot of time and effort studying the product and the market.