New subject: [wine] Great Discussion! Feakonomics

31 Mar 2009

March 31, 2009
Wine Market Struggles to Adjust in New Era
By DAVID JOLLY
What is a wine worth?
As elite critics and merchants from around the globe descend on the city of Bordeaux this
week to sample the 2008 vintage of the world.s finest wines, that question will dog them.
The ultimate connoisseurs have gathered every spring since the early 1970s for the
tastings, known as the .campagne primeur,. or futures campaign. But never have they done
it in the middle of so deep a recession, after so frothy a market. For that reason, this
week.s tastings are likely to be an unusually sober affair.
Just as the go-go years of Wall Street.s inflated salaries and Main Street.s cheap cash
created a bubble in real estate, stocks and other assets, they produced a wine bubble too.
The en primeur, or wine futures, system works to the advantage of the wine-producing
châaux, providing them with cash for part of their product while it is still in the
barrel; investors and consumers get the chance to buy wine at prices that have the
potential to rise substantially.
Prices for futures had long varied widely according to the quality of the vintage. But
that seemed to change after an exceptional 2005 sent prices spiraling upward. The vintages
of 2006 and 2007 were merely average, but prices did not fall, kept aloft by a surplus of
nouveau riche big spenders.
Now many of the speculators who drove prices to extraordinary levels have disappeared, or
turned from buyers to sellers as they try to raise cash to cover their overleveraged bets.
And the bankers and traders who thought nothing of blowing hundreds of dollars on a bottle
are now worrying about losing their bonuses, if not their jobs.
As a result, some overseas buyers have decided to skip the tastings this year, complaining
that top châaux will not accept that in a market this weak, prices must fall. Some of the
smaller merchants whose livelihoods depend on selling the wine, including some of the
Bordeaux middlemen known as néciants, are said to be at risk of failing.
Stephen J. Browett, director of Farr Vintners, an up-market British wine merchant, said he
would not even be sending a team to Bordeaux this week because he did not expect to be
able to sell the new wine at a profit, unless the wineries are prepared to accept
substantial price cuts.
.I wouldn.t call it a boycott, precisely,. he said, .but unless they give us an indication
that they.re going to put the price down, there.s not much point in us sending our team
down for a week..
Simon Staples, director of fine wine sales at Berry Bros. & Rudd in Hampshire,
England, said the gap between the pricing expectations held by wine merchants and the
châaux over what is expected to be a decent, though not great, vintage was the widest he
had seen in two decades.
The top châaux are hoping to cut prices by 15 percent from the 2007 en primeur to show
good faith, he added, .but cutting the price by 50 percent to 60 percent is the only way
it.s going to work..
The problem has been particularly acute for British wine merchants because the pound has
fallen precipitously against the euro, and British buyers can account for up to a third of
the market. Mr. Staples said the pound had fallen about 15 percent against the euro in the
last 12 months, so .even a 15 percent price cut will only get us back to last year.s
level,. he said.
Prices for the best wines from around the world rose in tandem with the financial bubble,
with both institutional fund managers and home-based Internet traders getting into the
act. The London International Vintners Exchange.s Liv-ex 100 index, which tracks trading
in 100 fine wines, mostly red Bordeaux, nearly tripled in dollar terms between February
2005 and August 2008. The index has lost about 43 percent of its value since then.
Mr. Staples pointed to the example of Châau-Lafite Rothschild, a first-growth Bordeaux,
which soared from £675, or $955, for a 12-bottle case in the 2002 futures to £4,000 a case
for 2005 . which he called .the best vintage I.ve ever tasted.. But despite merely average
years subsequently, the price only fell back to £3,500 in 2006 and £2,800 in 2007. He
estimated it cost the châau .10, or $13, to make a bottle of the wine.
Both Christie.s and Sotheby.s, the auction houses, say sales continue to be strong at
their auctions, which typically feature excellent bottles in their primes.
And people have not cut back on their overall wine consumption, according to Lulie
Halstead, chief executive of the research and consulting firm Wine Intelligence. .But what
we are seeing is that people are trading down a bit in price,. she said, spending less at
restaurants while occasionally splurging more for the wine they serve at home.
Data from Wine Australia, an industry marketing group, supports that analysis. Australian
wine exports declined 5 percent in volume terms in the 12 months through the end of
February, but the value of those exports fell 16 percent, suggesting cheaper wines are
making up more of the mix.
Predictions based on the weather during last year.s growing season suggest that the 2008
Bordeaux will rank as average-to-pretty-good. The châaux are expected to release their
prices for the new vintage by the end of June, based in large part on the buzz from this
week.s reviews. Mr. Staples said that if the top châaux decided the market would not
support their price, they have sufficient cash to simply keep the 2008 vintage off the
market, holding it for as long as 10 years, if necessary, when it would be ready to sell
to retailers and restaurants. He said he was optimistic, though, that negotiations would
succeed.
There is concern, however, for the many smaller Bordeaux producers, who need the liquidity
the futures sales bring. Wine merchants who depend on en primeur sales and the néciants .
who act as middlemen between the châaux and the wider market . could be especially hard
hit. The American wine critic, Robert Parker, noted as much in November, predicting on his
blog that there would be .plenty of casualties..
In an e-mailed message last week, he sounded similarly bearish. .In terms of wine prices,
even the luxury end are soft, but have not fallen as much as real estate, art, and stock,.
Mr. Parker said. .However, buying of top wines has slowed considerably, and what unfolds
over the next six months will push prices lower, I suspect..
David Sokolin, a fine wine dealer in Bridgehampton, New York, notes another potential
pitfall. .If the producers cut prices sufficiently for the 2008 en primeur to move their
product, they could undermine the prices of the 2007 vintage,. he said. That would hurt
merchants and investors holding the back vintage, because their stocks of those wines
would lose value. All of the first-growth, or highest ranked, producers . Châau Lafite
Rothschild, Châau Margaux, Châau Latour, Châau Haut-Brion and Châau Mouton-Rothschild .
declined interview requests, citing the press of business before the start of the
tastings.
But Jean-Guillaume Prats, director of Châau Cos d.Estournel, a Bordeaux second growth,
acknowledged that prices have come down over the past six months. .That.s true of every
fine wine around the world,. he said, .and it.s also true for many luxury items..
Mr. Prats hinted that the producers would seek common ground with merchants. .Speculation
isn.t in anyone.s mind at the moment, in any area,. he added. .It.s good that the market
is going back to fundamentals..
Francis Cruse, director of the Union des Maisons de Bordeaux, the néciants. union, blamed
the madness spurred by the excellent 2005 vintage.
.Prices need to return to the level where people who like to drink good wines can afford
them,. he said.
But Angéque de Lencquesaing, one of the founders of iDealwine, an online auction site in
Paris, said it was hard for producers to accept lower prices. .In England and other
countries people have a view of wine as a financial product that can go up or down in
value,. she said. .In France, wine is sacred..
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*  Dr. James Ellingson,                 jellings(a)me.umn.edu  *
*  University of Minnesota,           mobile : 651/645-0753  *
*  Great Lakes Brewing News, 1569 Laurel Ave., St. Paul, MN  55104   *

[wine] New market wine trouble