Buying Wine Futures

(Originally published April 2002)

As one sinks deeper and deeper into the pits of wine whoredom, one cannot spend one's money fast enough on this fermented demon's brew. One way to accelerate the spending and process of acquisition is to buy wine via "futures." That is, to buy wine before it is sold on regular retail shelves, many times while the wine is still in barrel and not even bottled. Why would one do such a thing, spend money on wine one will not be able to possess for minimally a year or two to come? Hanes will now provide his own idiosyncratic opinion.

There are really only two basic reasons to ever buy a wine on futures. One, to save money, as futures prices may be lower than the eventual retail release prices. Two, to guarantee access and thus secure a wine that is almost impossible to buy due to scarcity of product or overwhelming popularity. Any futures purchase that does not satisfy one or both or these reasons should not be made.

To the best of Hanes's knowledge, the offering of wines on futures began in Bordeaux, France. Throughout modern history Bordeaux's wines were essentially bought on futures (or "en primeur") from the growers by brokers and négociants who bought the wines while still on the vines or right after they were done fermenting in barrel and then bottled the wines themselves and sold them under the appropriate Château name or perhaps as another brand. Over time the power of the négociants was eroded as the Châteaus themselves took on the process of élevage and the actual bottling of the wine. This made the role of the négociant more of a true middle man with little direct role in the winemaking, simply acting as distributor or broker.

Since the Châteaus now controlled the entire winemaking process they had more control over the prices their product could command. Sure, they still needed the négociants to ship the product to the retail end of the sales channel but they, and not the négociants, set the initial prices. This process gained momentum during the 1960s and 1970s. The benefit to the Châteaus was that they got paid for their highly desired product before it was anywhere near drinkability, the point at which one would common-sensically think one would pay for it. Whereas previously it was the Château or négociant that paid for warehousing the wine until it reached full maturity (in the case of Bordeaux claret possibly many years), now the wine was being offered at a discount to get it through the sales channel to the end customer within a year or two.

In Bordeaux futures are sold in multiple "tranches," or releases. The amount of wine in each tranche varies from Château to Château and vintage to vintage, as it is a strategic gamble by the Château on the wine's desirability and what the market will bear. The price usually increases with each tranche, thus it is beneficial to buy on initial release.

A major force driving the en primeur sales are the barrel tastings held by the Châteaus, whereby négociants, collectors and, most importantly, the wine press can sample the wines. This initial, and sometimes misleading, tasting of the wines before they become close to being a final product guides the purchases which will be made along the sales channel. Many wine writers have years of experience tasting barrel samples and can reasonably claim to be able to predict the worth of the final, bottled wine. Foremost among the forces driving these reviews is Robert M. Parker, Jr., arguably the preeminent wine writer in the world (Hanes humbly nominates Bob here so as to not appear too vain). His pronouncements, such as when he recently called the 2000 Bordeaux vintage "the greatest vintage Bordeaux has ever produced," automatically translate into higher futures prices as his readers and speculators try to get in on the action before the prices spiral even higher. It is fairly evident to anyone who follows the Bordeaux futures scene that hype, speculation and acquisitive lust play equal parts in driving futures prices higher.

But wait, Hanes! If Bordeaux is more or less the "template" for futures and the prices for these futures keep going up, what's their allure? To get back to this we need to get back to the two basic reasons one buys wine on futures -- to save money or gain access.

In a world economy that, contrary to some appearances really isn't doing that badly, buying Bordeaux on futures can make sense, especially in a good or better vintage. Release prices for the last few vintages to be released for retail sale have been on the whole higher than good first or second tranche futures prices. This is because demand for these wines keeps growing as new wine lovers get turned onto the wines and more people treat wine as a commodity instrument similar to pork bellies or such. Bordeaux makes a shitload of wine and even the best of the wines, the Classified Growths, make thousands and thousands of cases each year. They really are not that scarce. But hot demand makes them scarcer and harder to locate. Thus, one runs the risk of not being able to score that desired case of Château Latour or Château Haut-Brion, particularly at a somewhat fair price. If you have the cash on hand, locking in your purchase on the futures market may make a lot of sense.

This brings up one of the major points to be made about buying futures, that is, the tying up of capital. One is paying for a product that will not be delivered for a year or two and may be easily available for purchase when eventually ready for release and sent to retail stores. Is it worth losing the liquidity of your capital by making that futures purchase? If you have cash to pay for it and feel that the price will only go up and cost you more down the road the answer is yes. If you have to buy on credit or feel that investing your money elsewhere will return enough gain to outweigh the extra cost of buying on release the answer is no. In many respects buying futures is a very simple exercise in mathematics, factoring in lost liquidity and interest versus potentially huge rises in the price of the wine upon release. The only real variable from an economic standpoint is whether or not one believes the prices will rise or fall from the prices of the futures offering.

Naturally, this ties into the second major point to be made, pertaining to access and availability. If one has the opportunity to buy a wine on futures and fears the lack of availability down the road, and if it is really important to one to own this wine, it may be worth wasting some money through lost liquidity or interest or lower eventual release prices. There are some wines made in miniscule amounts and any opportunity to buy them may be rare and fleeting. Some may be made in greater quantities but may be becoming so popular that they become increasingly scarce. Deciding the importance of this aspect of the wine acquisition process remains quite subjective and dependent on the relative worth of the information one can get.

A couple of personal examples. As noted, the 2000 Bordeaux wines were vastly hyped with every reviewer weighing in that the wines were the bomb, the mack daddy, not to be missed by any rational wine lover. One of the stars of the vintage was supposed to be Château Léoville-Barton, a perennial favorite of Hanes. Futures can be purchased from a variety of retailers throughout the United States and beyond. Hanes usually buys from a local New York City purveyor named Sherry-Lehmann, mostly because (a) their prices are fair and (b) they let you buy by the bottle rather than requiring a full case purchase of a particular wine. Hanes got the list of the first tranche of the 2000 Bordeaux futures and within an hour was on the phone with the fine folks of Sherry-Lehmann. He purchased three bottles of Léoville-Barton for $64.35. Two weeks later he got the list of the second tranche offering and the price for this wine had jumped to over $100! In the latest offering it costs $137.35 per bottle. Chances are high that Hanes's futures investment here was a wise and sagacious move, destined to save him money despite tying up his capital.

Conversely, Hanes bought some 1999 Léoville-Barton on futures through Sherry Lehmann. 1999 is a lesser vintage, without the hype of 2000, and he paid $38.50 per bottle on futures. It has just been released and Hanes has seen it in stores for $37.99. Hanes has obviously lost out on this gamble, not only paying more per bottle but wasting even more money in lost liquidity and potential return on the money spent. Curse the fates!

Any bonehead can by now tell that buying on futures is an educated gamble and that a buyer has to be ready for some wins and some losses. Hanes uses them more as a "hedge" than anything else. If the vintage is good and the economy looking like it won't totally tank anytime soon, he will buy selectively. For example, if he knows he wants a total of four bottles of 2001 Léoville-Barton chances are he will buy two on futures and two on release. With luck, the final averaged cost for all four bottles will still be decent and acceptable, one purchase perhaps balancing out the other.

Seeing the money to be made (who doesn't want to get paid for something you won't deliver on for a few years?), many places outside of Bordeaux have gotten into the futures racket. Lots of wine stores offer wines from the Rhône Valley or Burgundy as futures. Many stores also offer Californian wines as futures and sometimes hold barrel tastings in support of the sales process. Any potential customer can for a fee sign up and taste the wines, deciding for themselves if they think the product will be worth the investment rather than depend on a third party reviewer.

Even further, some Californian wineries that sell their products through mailing lists or tasting rooms have gotten into the act of selling wines as futures. Notably among them are Ridge's futures offering of their Monte Bello Cabernet Sauvignon and Château Montelena's futures offering of their Estate Cabernet Sauvignon. Hanes usually buys Ridge's Monte Bello. For the 2000 Monte Bello, Hanes paid $65 per bottle. Based on the price of recent Monte Bello releases the retail price should be around $125 per bottle. Given this wine's excellent track record and pedigree, the purchase was more or less a no-brainer. One can reasonably expect more Californian wineries to begin futures programs for their wines and Hanes wouldn't be surprised to see wineries around the world eventually dabble in this approach.

Basically, wine futures are a rich person's game because they really only make sense if one has the free capital to invest way before the investment starts to pay "dividends" (burp!). The potential savings can absolutely exist but there are few guarantees. To Hanes, buying on futures only truly makes sense if one is a dedicated wine whore and collector and one must have the wine in question. Don't do it as speculation, do it because you gotta have the juice inside the bottle.