BORDEAUX PRICE CRISIS: Lifting the bid

While certain consumers are paying record prices at auction for the most covetable clarets, fine wine shares continue to drop. Nicholas Faith considers the current climate

Crisis – what crisis? At its first major sale this season on 20 September Christie’s registered its highest ever price for a case of wine, when 12 bottles of 1961 Hermitage La Chapelle was sold for £124,000 – nearly one and a half times as much as a case of 1947 Cheval Blanc. This was no accident, for the price of the most fashionable clarets, both at Christie’s and the previous day at Sotheby’s, remained at the ludicrous levels they had hit earlier in the year. The buyers of the wines are not, as David Elswood of Christie’s put it diplomatically, “price sensitive”. Moreover, they are spread worldwide. One small upmarket Bordeaux merchant is selling to no fewer than 55 countries, including such newcomers as the Ukraine and Kazakhstan and, he says, “they want to drink the stuff” – one Russian billionaire bought some half bottles of  Lafite to drink in his private jet. For them, as one Bordeaux merchant puts it “these wines are part of the apparatus of luxury living”.

The purchasers of the outstanding wines from the Sotheby’s sale tell their own story. Typically, none of them came from the United States – a phenomenon that predated  the decline in the value of the dollar. As Lindsay Hamilton of Farr Vintners puts it, “the US has not been really relevant for us since 9/11”  – a great relief when the biggest effect of the financial upheaval will be felt in the United States. Four of the “Sotheby’s ten” came from the UK – though some were undoubtedly among the ultra-rich living in London. Three were coyly described as “Asian private”, two  as “South American trade” and one as “South American private”, for both Brazil and Mexico are apparently home to thirsty billionaires.

Ludicrous prices
While noting that the Liv-ex index is now showing its first falls for a couple of years, managing director James Miles spells out the well-known reasons: “There are too many rich people, lower yields in great growths, resulting in considerably less wine… Moreover it’s early days so far as former Communist countries are concerned.” He could have added, a far lower proportion of a crop is going into the “grand vin”– a proportion which reached its low point in 1997 at Lafite when a mere 27% of the total was marketed as Lafite tout court – though its second wine, Carruades de Lafite, has been caught up in the fashion for the estate which in recent years has outstripped even Pétrus.

It took the combination of a great vintage from Bordeaux – which still dominates the trade with well over 80% of the volume – and stock markets which were perky, to say the least, to set off the latest boom. It removed all the traces left by the Asian financial crisis of the late 1990s – itself proof of the importance, which, of course, has grown since then, of Far Eastern buyers – followed by the bursting of the dotcom bubble.

“It was smouldering,” says Elswood, “until June 2006 when the 2005s came onto the market and that lit the bonfire” – together with yet another effort to present wine as a legitimate element in an investment portfolio. The appearance of a book on the subject was, to me, a sure bear sign.  

The ludicrous recent prices are grossly misleading because they apply to only a handful of wines, but they have had a trickle-down effect in forcing less wealthy buyers to move down market, relatively speaking anyway. And, as always, the market in fine wine cannot be considered separately from the world’s economic situation, as reflected by that of the buyers of fine wines, today, above all, in the financial community. So one good sign, for the top of the market anyway, is the fact that the Far East is likely to be far less affected by any slowdown than Europe or, above all, the United States – indeed the Beijing Olympics next year could add to the demand.

Individual buyers

Sensibly, none of the the experts I consulted would stick their necks out. In the early 1970s when Bordeaux was hit by the worst storm ever the whole system, dominated by a handful of merchants on the Quai des Chartrons, collapsed. The Bordeaux market virtually shut down for a year – even the Moueix family did not sell a single bottle of wine for six months. The bust was deepened by the way that major companies – like Nestlé, Seagram, Bass and Gilbey’s – had been buying thousands of cases which they promptly dumped when the market went sour, leaving an overhang which lasted for years.

Today, apart from the relatively unimportant wine funds, the buyers are almost entirely individuals, and from far more countries than ever before. Moreover, London, a far wider and better-financed market with merchants like Farr as well as the auction houses, has largely replaced Bordeaux, where most of the merchants do not have the capital to hold any considerable quantity of stocks.

Parker power
These newcomers are, of course, guided by Robert Parker, who has given confidence to new buyers the world over. Indeed his marks have replaced the 1855 classification as a guide. The classification did not include wines from the Right Bank, now the most expensive of the lot – largely because the quantities are so small. In addition, by the 1990s prices of wines, which were theoretically similar, varied enormously. To take an extreme example, the 1990 vintage from Lynch-Bages fetched three times the price of those from its neighbour Lynch-Moussas, also a fifth growth.

But Parker is not all-powerful. Liv-ex finds that his opinions largely coincide with those of the hundreds of merchants it surveys at the time of the en primeur tastings.

When Parker’s opinion differs from that of other experts he cannot impose his values – the price of his perpetual favourite Pavie does not correspond with the market’s idea of its worth, while virtually all the “garage wines” from Bordeaux, like Quinault l’Enclos and Valandraud – dismissed by Stephen Mould of Sotheby’s

as “yesterday’s scene” – are no longer anyone else’s favourites. The ultra-rich are likely to be a  stabilising factor in the market, albeit only for a handful of great wines from great vintages like 1989, 1990 or, above all, 1982. Whereas a case of Mouton Rothschild 1982 will go for over £10,000, the equivalent price for the 1983 vintage is a sixth of that amount. So what will remain is an ever-deepening gulf below the first growths and a few “garage” wines, like Ausone, Lafleur and Le Pin, whose value is based on terroir and quality not on fashion.

Bear market
But it would be silly to pretend that the market in fine wine can be considered separately from the situation of the “usual suspects” – particularly in the financial community – who actually buy the stuff. Already, says Miles, “prices are falling by around 5% to 10%, as some merchants are realising their cash profits” – though the level of the Liv-ex index is still 43% up over 2007 as a whole.

But here goes with my opinion, for what it’s worth. I think we are at the beginning of a long bear market, to be measured in years not months.

But I believe that the decline will not be dramatic. It will, however, leave ample opportunities for followers of wine rather than fashion. This involves looking at unfashionable but excellent vintages, above all the 2001 and “lesser” classed growths and top bourgeois wines, which have to an extent been caught up in the wave set off by more fashionable ones but which are almost certainly going to drift further in their wake during a bear market.

But what could trigger a more sudden decline is what Donald Rumsfeld would call an “unknown unknown”. It comes from the supply side in the form of the stocks held by individual châteaux – the Bordeaux merchants are no longer the  force they were in that respect and have managed to pass on their stocks of the 2005s.

Let’s get fizzy
The worries do not concern the first growths, which are in the hands of owners rich enough not to have to sell wine for years. By contrast the owners of the majority of lesser estates are normally used to carrying a single vintage. They haven’t sold the majority of their over-priced 2006 vintage and the 2007, which is never going to be a classic, will come on the market when there is every likelihood of a “buyers’ strike” next spring in an echo of what happened after the over-priced 1997s when the Asian financial crisis hit the market.

It will not be until an outstanding vintage arrives in two or three years when the world’s economic outlook is far cheerier than it is today that the market will recover its bounce.

Liv-ex ends its latest market report by saying, “Champagne looks a good bet in turbulent times” – a reflection of the famous remark made by the French ambassador to the US at an international financial conference in Washington in the dark days of 1930: “between the crisis and the catastrophe there is always time for a glass of Champagne”.

© db November 2007