Page 1 of 3Since the Dow Jones hit 10, 000 on March 30, 1999 traditional investing has been challenging, to say the least. Stock markets have been volatile, and overall have been disappointing. Over the same period gold and many other commodity markets have been booming. Wine has been no exception, with the media widely reporting rapid price increases. Many wine drinkers/investors ask themselves if they should add wine to their investment portfolio. In this first commentary in a 5 part series on wine investing we look at two recent published research reports on wine which have received much media attention. In subsequent commentaries we will look more closely at when is wine an investment (as opposed to a consumption tool, a hobby or a cost saving technique), and how wine stacks up using criteria to assess so-called alternative investments. Finally, in the two final commentaries we will look at each of the many different ways of spending/investing in wine, assessing their respective risks, returns and peculiarities.
Introduction- two tales of wine markets
Wine is an alcoholic beverage, made of fermented fruit juice, usually from grapes. Grape wine is produced by fermenting crushed grapes using various types of yeast. Yeast consumes the sugars in the grapes and converts them into alcohol. Different varieties of grapes and strains of yeasts produce different types of wine. Wine has a rich history dating back thousands of years, with the earliest known production occurring around 8,000 years ago on the territory of modern-day Georgia. See Wikipedia .
In recent years wine price increases have received much publicity:
Three cases of Lafite Rothschild from the 2000 vintage sold for HK$266,200 ($34,300) each at Sotheby’s in Hong Kong this month, about three times the $11,749 for 12 bottles of the same wine at a New York auction at the height of the financial crisis in October 2008, just after Lehman Brothers Holdings Inc. filed for bankruptcy. Bloomberg
- The future sale prices were boosted by scores of more than 90 for the vintage from the critic Robert Parker. Chateau Latour 2010 was released at 780 euros ($1,106) a bottle, a 30 percent increase on the also highly rated 2009 vintage. Chateau Ausone was pitched at 1,120 euros a bottle, 17 percent higher than last year. The 108 euros being charged for bottles of Carruades de Lafite -- the second wine of Chateau Lafite -- was a 59 percent increase. Bloomberg
This sounds very positive for those considering investing in wine. But at the same time there have been reports of excessive wine production, cutthroat competition, risks of trade wars and declining wine prices:
Glug, glug, glut- Globalisation of the world wine business may lead to a wine glut. If things go badly, that could trigger a trade war. The Economist
- Worldwide grape-glut putting downward pressure on prices; luxury wines only 3% of sales- Borodofsky Dalton Roeder Vineyard 2003 US Wine Industry PDF doc.2016.
- It's a picture postcard of La Belle France: sun-drenched stone houses perched on a hillside, a soaring Gothic church spire, ripening vineyards. Quinsac, population 1,866, is nestled in the heart of Bordeaux, only a few miles from famed winemaking centers such as Château Latour and Château d'Yquem, whose prized red and white wines fetch $200 or more a bottle. But even if September provides a bumper harvest, Quinsac's winegrowers won't be celebrating. Almost all their grapes will be turned into low-end Bordeaux that sells for less than $5 a bottle in France. Over the past three years, the price of many of their grapes has plummeted by 40%. In Quinsac, where Romans first planted vines and a poem inscribed on a fountain salutes "our wine that soothes the mind," vines are being pulled out to make way for a housing development. BusinessWeek.
- Foster’s Group Ltd. (FGL), Australia’s biggest brewer, said shareholders approved the spinoff of its Treasury Wine Estates unit into a separate company with almost 100 percent of votes backing the proposal. About 0.3 percent of votes were opposed to the spinoff, Melbourne-based Foster’s said in a statement today. The plan, which still needs court approval, required 75 percent of the votes to succeed. Foster’s is giving up on the world’s second-largest wine business after a decade-long expansion marred by more than A$2.5 billion ($2.7 billion) of writedowns as competition, a glut of grapes and a stronger Australian dollar hurt profitability.Bloomberg .
- The wine lake refers to the continuing supply surplus of wine (supply glut) produced in the European Union. A major contributor to that glut is the Languedoc-Roussillon, which produces over one-third of the grapes grown in France. In 2007 it was reported that for the previous several vintages, European countries had been producing 1.7 billion more bottles of wine than they sell. Hundreds of millions of bottles of wine are turned into industrial alcohol every year, a practice that is sometimes described as "emergency distillation". Wikipedia
So where does the truth lie? To attract and reassure investors, the financial services and wine industries have carved out Bordeaux and a small number of other so-called fine wines from what is called the two-tier wine market (see Kumar 2006
or PDF doc.2018), with the hope of convincing investors that this small portion of the overall wine market is worthy of their money. There have been a number of past studies on fine wines and investing; see James Miles 2003 Live-Ex wine market PDF
doc.2017; Fogarty 2007 Wine as an investment PDF doc.2010; and Sanning Schafer Sarratt 2007 Alternative investments- the case for wine PDF
We will look in this commentary at the two most recent studies; for another review of these 2 studies, see CXOAdvisoryGroup 2011
or as a PDF doc.2072.