Betting on Bordeaux wine futures
Each spring the wine world descends on southwest France to taste, judge, and set in motion capitalism's most liquid market.
(Fortune) -- It may seem a long way from the slow, bucolic countryside of Bordeaux, France, to the rapid-paced world of high finance, with its exotic derivatives, mortgage-backed securities, and other arcane financial instruments.
But when 5,000 wine experts, wholesalers, and importers descend on the Bordeaux region in the first week of April every year to swirl, sniff, and suck mouthfuls of fermenting grape juice before spitting it out noisily into barrel-sized spittoons, they too are engaged in market making.
That tasting week is when the world passes judgment on the latest vintage and sets in motion one of capitalism's most liquid institutions: the Bordeaux wine futures market. Just like its electronic counterparts in Manhattan or London, this futures market is rife with intrigue, speculation, snap judgments, and, of course, risk.
Most wines around the world go on sale only after they are bottled. But in Bordeaux the process starts far earlier. International demand for the biggest and best-known names is huge, and growing. That's especially true for the five so-called first-growth Bordeaux wines - chateaus Lafite, Mouton Rothschild, Latour, Margaux, and Haut-Brion - but several dozen other labels also are increasingly sought after.
"Everyone wants to be on the market," says Patrick Maroteaux, the owner of Château Branaire-Ducru, who also heads the industry association that organizes tasting week.
Since the quantities of wine made are limited, prices can and do shoot up. After setting a price per bottle, the chateaus sell as much as 90% of that year's product to the market makers in Bordeaux, starting in mid-May.
Some merchants hang onto the futures in the hope of reaping a quick profit once the bottled wine hits the market up to two years later. Others, however, add a commission and sell the futures on to clients around the world, who pay upfront and commit to taking a certain number of cases.
During April tasting week the wine is still maturing in vats and oak barrels. But producers set their prices based on these early orders and gut feelings. Tasters, on the other hand, are betting that their palates can discern whether a mouthful of young wine will mature into a classic, long-lasting, and very expensive Bordeaux along the lines of the 2000 or 2005 vintages - not to mention 1961, 1949, or 1924 - or whether it will turn into at best a pleasant wine but not a particularly memorable or lucrative one (there hasn't been a truly bad year since 1992).
The feedback from April week also helps the two dozen Bordeaux wine merchants who act as market makers figure out how many and which wines will even be included in the futures market for that year.
For a mediocre vintage - and the early judgment on 2007 is that it is "honorable but not exceptional," says Bordeaux broker Max de Lestapis - only about 60 chateaus appear on the futures list. In a stellar year such as 2005, the number can rise to more than 300. (That is still a small fraction of Bordeaux's 9,000 wineries.)
As in every market, there's risk. A mediocre wine may not increase in price at all between its sale en primeur and when it's bottled, meaning that investors get a zero return over two years. That last happened in 1997. But for the most part, prices do rise - sometimes substantially. Mouton Rothschild's 2000 vintage more than doubled on the futures market in just one month, for example, while its 2003 vintage jumped 250% before it was bottled, says commercial director Hervé Berland.
There's a lot of nervousness in Bordeaux this year, for two reasons - 2007 was a difficult year, with cold and wet weather, and producers have cut back sharply on quantity in a bid to maintain quality. At the same time, the economic woes in the U.S. and elsewhere and the sharp drop in the dollar make the task of price-setting particularly tricky.
But even if the wine isn't exceptional and an early investment doesn't bring a massive return, Bordeaux futures do have one undeniable advantage: If worst comes to worst, you can always just drown your sorrows.
Tasting week, which is organized by the Union des Grands Crus de Bordeaux, is only for professionals - more specifically, only those who have been invited by the association. But each May the group also puts on a big tasting event that's open to the public, called "Le Weekend des Grands Amateurs." For more information and to sign up, visit www.wga-ugcb.com.