Thoughts on en primeur

Wine prices have rallied impressively since last year’s financial crisis, but the prognosis for the en primeur campaign remains uncertain.

Joe Marchant, investment analyst at Bordeaux Index wonders whether China will enter the fray.

We suspect that there are few in the trade that won’t look back on 2009 with at least a degree of surprise at the level of business and recovery in wine prices since last year’s financial crisis. The relentless expansion into new markets, however, is more of a revelation and could certainly change the dynamics of the trade for the near future. Some would say no more so than for that most traditional harbinger of market health, the new year’s en primeur campaign.

Not since 2005 have the weather gods conspired to bless established wine regions so munificently. With renewed fine wine market activity and the sharp returns made on the top 2008s, conjecture would suggest a return to the heady days of 2005 pricing.

Looking purely at the demand side, orders for physical wine today are approaching multi-year highs. Where this demand is not matched by an inexhaustible supply (eg Lafite,) prices have rallied very strongly.

Back in 2006 (2005 en primeur), traditional wine-buying economies were gripped with the “feel good’ factor”, an upshot of benign volatility, low inflation and supremely healthy capital and property markets. Discretionary spending on wine was stronger than ever and the US market was particularly buoyant. The dynamic was very much that people wanted to buy and in many cases, the price was an irrelevance. Today, although capital markets have recovered strongly since March, few outside of the financial industry have benefited much from the rally.

Traditional wine markets have changed dramatically. Lower prices and unexpectedly high scores for 2008 Bordeaux could not tempt back the US buyers. Some, in fact, have moved from being “on hiatus” to “extinct” as the dismantling of Diageo’s huge US Bordeaux operation demonstrates. (We’ll overlook the rumours that large portions of their unsold inventory were sold for cents on the dollar.)

In its place the wine industry looks longingly at the newly emerged Chinese buyer. Bordeaux châteaux, in particular, have undertaken an unrelenting campaign of marketing in the region, from establishing local trade expos (one a month for next year on average) to the rumoured appointment of a Chinese artist to design the 2008 Mouton-Rothschild label.

One can see the attraction; the market is flush with cash, displaying an ever-firming love for all things red and vinous and has a strong tradition for favouring physical commodities. Unfortunately therein lies the crux. As any in the trade will tell you, Asian markets and China in particular have never played a considerable role in en primeur and considering the hole left by the absence of the US it would require a paradigm shift in buying habits to underwrite the levels of demand that supported 2005 pricing. Paradigm shift… even saying it makes me nervous!

Other remaining factors include exchange rates and economic conditions. Meanwhile, the city will be back. Finance professionals are looking at bumper bonuses and with currency deflation (USD and GBP at least) a real prospect, one suspects large portions of any cash received will go on real assets. The City of London in particular is an extremely established buyer of en primeur and we expect demand from those quarters to be strong.

En primeur reflects the times. Demand is going to be strong but patchy with pricing more correlated than ever with global economic health. That the prognosis for that unruly patient is so uncertain is reflected by volatility which will be as great for 2009 Bordeaux as for any other asset. As to the hoped-for paradigm shift of demand to the Chinese buyer, we’ll leave the last words to Robert Parker: “The 100 billion dollar question remains: will they buy futures of 2009 Bordeaux? My consultant witch-fortune-teller says ‘not likely’.”

Joe Marchant, 17.12.2009