TALES OF THE VINE

They call economics the dismal science and they are right; it is dismal. Nothing could be more far removed from the enjoyment of wine than economics. Nonetheless, given the huge amounts of money changing hands over wine one cannot escape economics when studying or trying to understand wine.

The intersection of economics and wine occurs when investors buy wine for future resale. The principal objective being to make a profit when the wine has increased in value as it matures. The assumption underlying this kind of speculation is that future demand for a given wine will exceed its future supply. Thus, an investor is really making a bet on three things: (1) the wine will remain fashionable in the future, (2) demand for the wine will not shift to other classes of wine, and (3) the winery will not increase its production of the wine.

Wines for investment must be capable of and benefit from aging a long time as there is no way to know when future market conditions will be favorable for profitable resale. There are few wines that fulfill this requirement; they are chiefly the classified Bordeaux wines of France and a handful of highly sought after boutique wines from Italy, Spain, California and Australia. The original purchase price of these wines will include a premium over the wine’s inherent value because of its utility for investment.

While waiting to sell a wine investor incurs the risk of exchange rate fluctuation, ties their cash up in inventory as there is no ready source of financing for wine speculation, incurs capital gains taxes and the cost of storing and insuring the wine. Investors also receive no income during the holding period, unlike rents from real estate, and they know that any appreciation will be constrained by the buyer’s reluctance to pay a premium when there is uncertainty if the wine will turn out to be spoiled by a faulty cork. Even when successful in finding a buyer the seller must still pay a commission to an auction house for arranging the sale.

From the point of view of an economist, the most favorable time to purchase wine on speculation is when there is an oversupply in the local market during a period of deflationary recession and when the local currency is trading unfavorably to the investor’s funds remitted from abroad. For example, an American investor buying wine in Japan a few years ago when the Yen was cheap and the Japanese economy was in recession. The ideal time to sell is when there is a scarcity of wine during the first four to five years of a period of sustained global economic expansion. Historically, these cycles occur on a regular basis but over long and unpredictable intervals of two to four decades.

Being a luxury item, the price of wine and the interval between market cycles is driven largely by the state of the global economy and to a lesser extent the attractiveness of alternative investments. The supply of grapes in response to demand for wine and government policies that create incentives to plant grapes, and the demand by collectors, restaurants and hotels for older vintages of wine also plays a role. The wine investor is completely at the mercy of these unpredictable and interacting economic factors.

There are alternative investment vehicles wine investors can consider to alleviate some of the risks of direct purchase of wine. For example, investing in institutional financial products of brokerages in the underlying vineyard land or even buying a vineyard, winery or wine distributorship outright. Of course, this requires a significant investment and commitment, which is something most people are unable or unwilling to carry out. Hence the appeal of buying the bottled wine, itself.

It is true that one can sometimes make a lot of money investing in wine. But it is also true that investing in wine is more speculative and costly than most people think. Like odds making for sports betting, buying wine for resale is pretty much an insider’s game. Unless wine is your profession the safest form of wine investment is probably the enjoyment of immediate consumption. That is to say, buying wine for your own drinking pleasure.

Buying wine to drink instead of for resale is also the best way to ensure your wine never goes past its prime. And buying for personal consumption still affords a gratis option to sell at a profit later should the opportunity arise. If you like a wine and know it will cost more later just buy a case or two and enjoy a bottle every now and then, like watching a child as the wines grows up creating many fond memories along the way.

My advice is if you want to gamble, go to Macao for the weekend. Forget about investing in wines and just buy wines you enjoy. A consumer who cannot sell his wine can always drink it when the wine is a personal favorite. Then, all you have to worry about is the possibility of failure of your wine cellar’s air conditioner while you are away in Dubai or wherever it is that you make your real money. The joy of wine makes this risk much easier to live with the than the dismal uncertainty of economics and reminds us why we got into wine in the first place - for the here and now.

Cheers.