Bordeaux starts to look a bit bubbly

Buyers and cellars

Aug 21st 2008
From The Economist print edition

Bordeaux starts to look a bit bubbly

A WRINKLED nose from Robert Parker, a masterly American wine critic, used to be enough to send wine prices down deeper than the Bordeaux cellars where he does his tasting. The popular grape-based alcoholic drink is developing as an asset class, and investors have started to trade derivative products in the form of en primeur, a type of wine future. But a new breed of rich investors and wine drinkers in China, India and Russia have sent en primeur prices so high that not even Mr Parker’s nose can bring them back down.

En primeur is the French term for wine before it is bottled. Speculators are allowed to buy a portion of the stuff in the hope that the wine proves to be a hit with the retail and investment market two or three years later. Every spring a group of investors, wholesalers and wine critics descend on a few established Bordeaux wine producers to taste the fermented grape juice. The system has been employed for years by producers as a way to complement their main source of income. They can earn money while their top wines wait to be bottled and sold. These days, all eyes are on Mr Parker, who sniffs and sips and then awards the wine a score out of 100, which the buyers and sellers in the market use to establish a price. Better wines get higher scores and are more expensive.

But the most recent round of en primeur trading has set a precedent. The vintage was not good but the prices remained high. Mr Parker awarded a relatively low 90-93 points for the 2007 Chateau Lafite-Rothschild en primeur, but cases still went for £2,500 ($4,900). Three years earlier he gave a similar score to Chateau Lafite, and the cases only sold for £950.

Money has flooded into the wine-investment market, routed through some former City traders who have set up wine funds. The Liv-ex 100 Index, which charts bottled-wine prices, has shrugged off the credit crunch and outperformed global stockmarkets. The index is up 9.5% over the past 12 months, though it dipped a bit in July. Meanwhile, the tax on imported wine in Hong Kong was scrapped in March, after dropping from 80% to 40% last year, further boosting Asian demand.

Some suspect that the new consumers sometimes care more about the brand than the quality. (Lafite, for example, is particularly popular in China because of its status.) They also claim that Bordeaux risks alienating its core group of European and American investors and drinkers with high en primeur prices. The old traditions are beginning to change. Some négociants, the wine wholesalers that link the chateaux to the traders, have boycotted this year’s vintage because of high prices. This is a bold move. Refusing to buy up this year’s wine will mean they forfeit access to next year’s vintage. The old-schoolers now find themselves wishing for both a run of bad vintages and a downturn in the emerging economies. Only then, they say, will sobriety return.