There’s been a massive amount of chatter on wine blogs and in the Twittersphere this week about wine pricing, with particular relevance to Bordeaux. Although this is a subject that seems to be permanently bubbling away just beneath the surface, it has been brought into full view again by the publication of the latest Fine Wine 100 Index figures for December 2011, showing a large and persistent decline across recent months. As the vast majority of wines in the index are Bordeaux (95% are red Bordeaux), the implication for the Bordeaux market is clear. “Is the bubble bursting?“, some have asked.
It’s worth taking a quick peek at the Liv-Ex Fine Wine 100 Index as there a couple of obvious points to be borne in mind when viewing it – see this Liv-Ex blog post to look at the latest plot, and first note that the y-axis doesn’t kick off at zero, but at 175. And second, the x-axis is truncated, running back as far as January 2007. To point out these facts is not a criticism, it is only natural that a plot be ‘sharpened up’ in this manner before publication. But it is important that we be aware of these features, as the plot could be extended down to 100 (which was the starting point) and back for several years, both of which would put the current falls into a very different perspective.
The big news that has been circulating is the published drop of 14.85% for the value of the index compared to January 2011. It’s clear from the plot in the link above that there has been a drop (since July 2011). And with a 3.9% drop in December, and similar decline in the Liv-Ex Fine Wine 50 Index (which focuses purely on the Bordeaux first growths) there’s no sign of an immediate slow up in this slide. Indeed, the fall in this latter index was one of the largest (the fourth largest, to be precise) since it was created in 2000. As an aside, auction sales also slowed during 2011, coming down from a 75% climb in 2010 to a ‘mere’ 14% climb in 2011, as reported by Bloomberg.
Take a look back a year, though, and we can see that the index is still considerably above its January 2010 position, and continuing back in time year-by-year it is also still way above its value in January 2009, January 2008 and January 2007. And let us not forget how the index was fashioned back in January 2004; it kicked off with a value of 100, and so the value of the index in December 2011 – 286.33 – means the portfolio of wines within the index are still trading at 2.8 times their value seven years ago; investors with a long term plan are still very much in the winning.
So this doesn’t look like the bubble is bursting, although I concede (as a drinker, hope?) it might be a ‘slow burst'; it depends on how this decline pans out over the coming year (and through the Bordeaux 2011 release). But although these declines are of great importance to investors, there is a long, long way for the index to fall before prices hit the level at which this news is important to drinkers. Nevertheless, this is still a correction in Bordeaux prices with some – such as Lafite, as reported here in Decanter – falling in value by more than 40%. Of course the biggest climbers are always likely to be the biggest losers, and Lafite 2008 is a case in point. Released at a ‘low’ value which saw it sell at retail in the UK at a price around £1500 it was soon trading at prices more like £13000. Unusually for a wine (because fools like you or I might think the value was related to the quality of the wine, or influential point scores – not entirely true, I’m afraid) the value was greatly bolstered as recently as October 2010 by decoration of the bottle with a Chinese figure 8, again as reported in Decanter. If there is any wine destined for a tumble, surely it is wine that sees rising price fluctuations based on labelling?
Which brings us to China. Why the big fall in prices in recent months? China seems to be important (“d’oh“, you might say). I was particularly taken by this comment, by Sophie Kevany published in Wineyields, on why Bordeaux has had the confidence to put in place such massive price hikes in recent years:
“Although in-depth market studies on Asian and Chinese markets are not apparently behind the 2010 price hikes, many top flight producers will happily tell you they’ve spent the last few summers fending potential Chinese buyers – for both their wines and their chateaux – from their doorsteps. And after that, as one producer said off the record, who needs research?”
Of course if Chinese interest is on the wane, then prices are bound to correct. Despite rampant growth in China their economy is in less than perfect health, with fairly strong inflation as reported by the BBC, with a high of 6.5% in July 2011 (when the index started to slide – not that I am suggesting correlation here), and still running at 4.2% in November 2011 (the most recent available figure). The WineSociete China, who describe themselves as “China’s Leading Organization for Wine Education & Appreciation” (no, it is not a Pancho Campo operation as far as I am aware), report that these changes reflect reduced cash availability and lending by Chinese banks. More illustratively, they also report that the massive rise in wine prices has been mirrored in China by similar climbs in value of everything from property to fine jade pieces to dahongpao tea. There are, however, no reports – that I have found – describing falls in value of these assets.
Of course the super-rich who may well be buying up pricy Bordeaux might not be affected by such issues, but if they turn from Bordeaux to other regions such as Burgundy (as reported in Harpers) or if as has been reported as a possibility on Twitter the Chinese finally wake up and realise what over-inflated prices they are paying (I’m not sure about this one myself – but include it for your consideration) then further correction is inevitable. The 2010 campaign also has a role to play of course, with Justin Gibbs of Liv-Ex describing the pricing of Bordeaux 2010 upon release on BBC Radio 5 two days ago as “the nail in the coffin” of the value of the Bordeaux market. Prices that were bad for drinkers (I bought zilch – those more wealthy than I may have loaded up, but they are now watching the prices fall – ouch!) and bad for investors too (too high for surety of gains, and of course falling value since).
And so it seems we should look in two directions if trying to gauge how the Bordeaux market will far in the coming year. First, to China, to the health of her economy, to wine sales in Hong Kong, and the balance of Burgundy-interest against Bordeaux-interest. And second, to the Bordelais themselves, and the 2011 campaign. I think release prices will (wishful thinking, perhaps?) come down, reflecting the vintage and the market, but if the Chinese are still hammering on the doors of Bordeaux, with “rucksacks of cash” as described by Sophie Kevany, then there is no telling what could happen.