2017 en primeur conclusions

11.07.18  – Fine Wine Investment –

This is the time of year when market watchers shake their heads in disbelief at some of the en primeur prices released during the campaign just-finished, and people question afresh things like the validity of La Place and the viability of the negociants, but to us at Amphora this is becoming rather a tired old tale.

The argument runs like this: the producers need the negociants to bring their wares to market, and it therefore behoves them to keep prices sensible to allow everyone to have a slice of a functional, lubricated market place. If the negociants aren’t able to shift the stock and can’t finance the resulting holding period they would go bust, which helps no-one.

So, why does it keep happening, and what are the consequences? Moreover, is the system now anachronistic?

To take the last point first, any system which has been in place for 400 years is going to be hard to shift, even if it has evolved since the days when negociants used to do the bottling and labelling as well as the marketing and selling. Believe it or not, although Chateau-bottling began around 100 years ago it was only in the 1970s that it became mandatory.

Most chateaux rightly believe that their priority is the production of as fine a wine as they can manage, and few currently appear keen to swallow the task of distributing it globally as well. Smaller production wines can sell directly to the market, as can mass-produced wines whose focus is distribution rather than high quality, but for the moment it seems that anyone trying to make over 5,000 cases of fine wine per annum sits in a part of the market for whom the negociant is indispensable.

With respect to the second question, it does appear slightly odd that in campaigns like 2017 the producer and negociant are hardly in harmony. A lot of wine has failed to find a buyer, so whose problem is it?

The immediacy of information which transformed the stock exchanges of the world back in the late 1980s and early 1990s has taken somewhat longer to be visited upon the fine wine market, for the simple reason that it comes at a cost, and the market concerned has to be big enough to justify that cost. Until now there is little evidence of many intermediaries making sufficient money out of the fine wine market place for them to want to make this capital outlay.

This is now changing, and although Amphora has been singing this tune for some years, it is interesting to see so much current focus on the following ostensibly obvious point: pricing should follow existing prices for available physical stock, rather than some bogus comparison with the previous year’s offering.

We believe the reason for this tardy acknowledgement is that it was too easy to dismiss the en primeur campaigns of 2011, 2012 and 2013 as both reactive to the mis-pricings of 2009 and 2010, and reflective of poor vintages, relative to those 2 prior years. Market observers though they need look no further for explanation, and were comforted by the improvement from 2014, 2015 and 2016, where greater quality was available at more realistic prices.

Are we now back to square 1? What is clear is that over the last few years the negociant world has not stood still in the face of these financial pressures. Some have merged, and others have been bought by larger entities as far afield as the USA and China, all with pockets sufficiently deep to weather a storm. They saw what happened to smaller houses unable to meet their liabilities and have chosen not to become another former participant in the market. Rumours of the demise of the negociant system are, we believe, premature.

Point 1 though begs a different question. What on earth are chateaux thinking with some of their hallucinatory pricing? Might they be trying to emphasise the value in their own back vintages by offering at such premia?

Ironically what has been happening amongst the negociants is insulating many of them from economic reality. Their logic, possibly, is this: just as clients of Corney and Barrow (sole importer of DRC into the UK) have to take their full allocation in order to get their bottle or 2 of the Romanee-Conti Grand Cru itself, so if the negociants want an allocation in good or great years, they have to accept the funding cost for those vintages which are harder to shift. And if those negociants are owned by people with deeper pockets as advised above, they are in a better position to comply.

We believe this will become an unviable strategy over time, as the negociants become part of larger enterprises less reliant of their relationships with the chateaux, and therefore able to say “non”. For the moment though there are clearly consequences in the broader market of all of this supply which fails to find an immediate home, because it will drip into the market over time preventing some prices from moving ahead. The broader indices, therefore, may face headwinds for a period of time until the stock is absorbed.

Fortunately we are not suggesting anyone invests in the broader indices, indeed at this point it is impossible to do so. What we advocate is buying only wines that represent great relative value, which tend to outperform over time, as the excessive undervaluations unwind. This all happens irrespective of what is happening at headline index level, which obviously captures out and underperformers alike.

We readily accept, however, that whilst what happens at index level is less relevant, it is certainly not irrelevant. Index performances inform banner headlines, which in turn influence behaviour. When people see indices rise they are attracted to the honeypot, and new money drives prices higher. Absent the headlines, the new money is slower to arrive.

In summary, we would all prefer en primeur campaigns to be a success, but a failed campaign need not spread alarm throughout the market, just disappointment at the paucity of bargains and at the reluctance of the producers to acknowledge economic reality. The market is not yet efficient, but as ever we aim to take advantage of these inefficiencies where possible.

Finally it would be remiss not to mention a trip to Bolgheri last week. Bolgheri is a tiny coastal spot about 50 miles south of Pisa whose fame lies remarkably in the fact that it was no good for making high quality wine out of the Sangiovese grapes for which Chianti is renowned, Chianti lying considerably inland between Florence and Siena.

The terroir around Bolgheri is dry and stony so they experimented with “Bordeaux” grapes like Cabernet Sauvignon and Merlot and sure enough three stars were born which over the last 40 years have evolved into the Super Tuscans Masseto, Ornellaia, and Sassicaia. Their vineyards lie either side of Cypress Avenue:

Cypress Avenue
The village itself is microscopic, albeit with an entrance of some note:

Bolgheri

We were only able to taste at Guado al Melo on this occasion but anyone looking for affordable expressions of this locale for drinking purposes might try the Atis which is indeed a fine wine although not investable at this juncture. For investment purposes we will be sticking to Guado’s better known neighbours, of which right now the Masseto 2009, Ornellaia 2013 and Sassicaia 2013 represent the best value.

Please call to trade at the following prices:

Masseto 2009 – £5,000

Ornellaia 2013 – £1,300

Sassicaia 2013 – £1,350.