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Forward thinking isn’t exactly the hallmark of a government protected business, but that’s the suggestion to wine distributors found in Wine Analytics: Fine Wine Pricing and Selection under Weather and Market Uncertainty, a paper put forth by researchers Mert Hakan Hekimoğlu (Lally School of Management, Rensselaer Polytechnic Institute), Burak Kazaz (Whitman School of Management, Syracuse University) and Scott Webster (W.P. Carey School of Business, Arizona State University).
The study addresses a market most American wine distributors eschew: wine futures. The researchers postulate that by entering the futures market, distributors could improve profits as much as 21%. According to researchers, the study was based on “the world’s largest wine distributor that does not invest in wine futures due to lack of knowledge about futures prices and their evolution to bottle prices.”
Put simply, the wine futures market works like this: About eight months after harvest of each vintage, while the new wines are aging, they are offered for pre-sale or auction at a price established by an agreed-on quality of the particular vintage and the producer’s reputation. When the wine is bottled, its futures buyers receive their share and the rest, if any, goes through the regular distribution channel.
Generally, those who invest in wine futures hope to have gotten a better price than the wine’s value after bottling—but there are no guarantees.
For instance, the paper cites what happened with the 2004 Troplong Mondot valued as futures at $62 per bottle. The Bordeaux vintage of 2005 was considered among the best in decades; futures of 2005 Troplong Mondot was valued at $233 per bottle. Consequently, the bottle price of its 2004 wine fell to $54 per bottle, causing those who were holding that vintage bought as futures to potentially lose 13% of their money had they hoped to sell their investment. Futures investors can benefit when a bad vintage follows a good vintage, but such drastic changes in prices that are dependant on weather and market conditions make it difficult and scary for wine distributors to jump in.
The Wine Analytics, et al. researchers claim to have developed a formula to underscore the evolution of futures and bottled wine prices under weather and market uncertainty, along with a formula to track the impact of weather and market fluctuations on the evolution of wine futures and bottled wine prices. Through these formulas, say the researchers, they’ve discovered three things: “weather conditions of the upcoming vintage does not have a statistically significant effect on the evolution of bottle prices;" "improving market conditions during the summer has a positive impact on the evolution of bottle prices" and "the positive coefficient representing the impact of market conditions in the evolution of futures price is greater than the evolution of bottled wine prices.”
By applying the exclusive formula could distributors make wiser investments in futures trades on the London International Vintner’s Exchange (Liv-ex), home of the futures trading market? Pointing out that Liv-ex trading makes wine a truly “liquid” investment, the study suggests that tracking present vintage conditions and trading before last year’s wine is bottled can mitigate losses or create gains.
The study is much more involved than this sampling allows, and the paper admits to some limitations, not the least of which is that it studied only popular Bordeaux wines. Those popular wines are essentially luxury wines and therein may lie a further limitation not addressed by the study.
The U.S. wine industry accounts for almost $38 billion annually, and growth is projected 8.2% over the next few years. While the study implies that the futures market could increase distributor profits by as much as 21%, one other statistic might serve to remind distributors to proceed with caution. After all is said and done, the name of the consumer product game often boils down to “volume sales.” As Jeff Siegel, the Wine Curmudgeon pointed out, about 90% of all wine sold in the U.S. is consumed within hours or days; that market needs regular and constant replenishment. Distributors would have to weigh the benefit of pitting known profits of regularly flowing volume sales against tying up speculative purchasing funds, not to mention the cost of the effort that would go into following the luxury wine futures market.
