Profits in store

Parker predicts 2003 first growth Bordeaux will soar in value over next 10 years

ACTIVITY in August was unusually brisk given that most merchants and their clients take the month off on holiday.  Trade was down 9.2% on July, but up 83% year on year.  Indeed, August has proved to be the third most active month of the year.

The Liv-ex 100 composite fell 0.4% for the month while stock held by the UK’s leading stockholders dropped by 3.1%.  "Americans may scream bloody murder when looking at the future prices for the 2003 first growth Bordeaux – an average of US$4,000 (£2,300) a case – but if my instincts are correct, 10 years from now a great vintage of these first growths will cost over US$10,000 a case… at the minimum.

It is simple: the quantity of these great wines is finite, and the demand for them will become at least 10 times greater," says Robert Parker in Food & Wine Magazine, September 2004.  It is comments such as these that have driven young wines to unprecedented levels in recent en primeur campaigns relative to stock in the back vintages and created a gaping pricing anomaly for the best claret.

We have talked about this on several occasions in the past, but it is surely the key issue for any serious investor in claret.  Some of the most ludicrous examples, being Mouton Rothschild 1986 (a 100 point wine), which trades at roughly £2,600 against the 2000 (a 97 point wine) at £2,400.

This despite a higher score and an additional 14 years of bottle age.  Perhaps sillier still is Lafite 1996 and 2000 (both get 100 points), which trade at £1,800 and £2,700 respectively.

We don’t necessarily disagree with Parker, but if new claret is going to start trading at US$10,000 per case, mature Bordeaux is going to need to be an awful lot more expensive still to justify these prices.

The reality is that the demand supply equation does not start to get attractive until the wines are ready for drinking and young 2000s or 2003s are not going to be ready for 10 to 20 years.  That represents an awful lot of opportunity (and storage) cost.

Indeed, inevitably if one is going to finance the cost of holding claret for 10 or 20 years one requires a substantial discount to mature stock to justify the wait.  This is simply not reflected in the market at the moment.

The chart (top right) shows where each of the major vintages is trading relative to our measure of fair value, which takes into account the price relative to the Parker score and the opportunity cost of holding the wines by discounting them by the current 10 year Gilt yield.

This makes the great vintages of yester-year look grossly undervalued relative to the latest vintages.  So either new vintages are overpriced or, if Parker’s instincts are correct, the best wines from 1982, 1986, 1995 and 1996 are well worth buying.