It really is rather remarkable. US and European equities are at all time highs, property prices in the world’s major capitals are at all time highs and despite recent volatility and record supply, government debt remains near all time highs. If one assumes these three account for the bulk of the assets of the privileged few (and indeed, pension funds), then there has been an unprecedented amount of wealth created since the global financial crisis. And yet fine wine seems to be adrift. This of course is not entirely correct. Top end Burgundy, Rhone, Champagne and Super Tuscans are all at, or near, all time highs. It is Bordeaux where the problem lies. Bordeaux is suffering a severe hangover. There are many reasons for this – en primeur pricing at the top of the list – but there comes a point when perceived value returns and with it, renewed interest. The question of course is what is value? The answer does not lie with the trade (and certainly not with the chateaux). The answer lies with the end user – the drinker – the collector. And while the end user knows money has been lost in Bordeaux of late, does he or she know just how far back the market has pulled? Or indeed just how far forward prices in other regions have been pushed?
Here is a question for them. One bottle of the near perfect Romnanee Conti 1999 or two cases of the near perfect Haut Brion 1990? Where is the value? (tip; try using our charting tool to find the answer).
There is a reason why profit from selling wine as a private individual is not subject to Capital Gains tax: wine is regarded as a wasting asset, that is to say, as it ages, its drinkability, translated as intrinsic value, diminishes.
In contrast, you can take an ounce of gold, melt it down, make twelve rings out of it and you still have an ounce of gold. Its mass does not diminish.
Fine wine is generally traded by the complete dozen, except in the case of various ultra-rare Burgundies (La Romanee Conti, Musigny, certain producers of Montrachet etc.). It follows that these dozens constitute a commodity unit.
It strikes me as a logical that wine only holds onto this intrinsic value as an investment if it is going to be drunk, and remains worth drinking. The contradiction of the long term holding of wine is therefore two fold:
– As time passes, the investor in a case of wine expects substantial return on his investment, but this is tempered by the diminishing epicurean value of the wine. There is a point where any wine’s natural “half-life”, as it were, renders it undrinkable, thus destroying its expected value to nothing.
– In a market like today’s, where prices have become so inflated, but where investors still expect a high return on their wine, those prepared to pay out will, in due course, become an ever diminishing circle of the über-rich.
Thus, in the case of great Bordeaux for example, there is simply too much supply for too small a market. However, ultra-rare Burgundy is market-proof, because there simply is not enough. Christophe Roumier makes what, at most, two barrels of Musigny? That’s 650 bottles for the whole world. However tough the market, there will always be someone eager to snap up such a rarity.
In contrast, the Chinese erstwhile, boom, and now bust, investment goldie, Chateau Lafite Rothschild, makes between 180,000 and 240,000 annually. Or in a bad year, 276 times the production of Roumier. Not quite so rare then, I think you will agree.
Furthermore, if someone breaks open a case of, say 1990 Le Pin, drinks a bottle leaving an incomplete dozen, the value of that “commodity unit” is irreparably diminished. The value is not 11/12th’s of a full case, but substantially less as 11/1’s of 1990 Le Pin. And Le Pin, lest we forget, is infinitely rarer than other Bordeaux wines of “First Growth” quality
Now the real point of what I am trying to say, is that just about everyone in the wine trade, from chateau owners to retailers, has been foolish in putting so much emphasis on wine as an investment vehicle. Sure, it is a commodity that can be traded, and its relative rarity means it will trade at a higher price. But when that price becomes beyond the means of a greater number of potential buyers, and I particularly point to Bordeaux’s traditional middle class, high-ish income, professional base, you have just created a bubble. And that bubble has to burst.
In the wine trade just as in physics, a liquid will seek its lowest level.
Wine must be drunk to retain its value, and to be drunk it has to be affordable. It’s as simple as that, so, Investors beware!