Personal Finance

What makes a wine pricey

Praveen Krishnamurthy | Updated on February 16, 2014 Published on February 16, 2014

Brimming demand Stockpile of fine wines is fast depleting, with more swigs from connoisseurs and fine-dining restaurants. ELYA VATEL/SHUTTERSTOCK.COM

Vintage, chateau, Parker points, there’s plenty of science to pricing a fine wine

If you are an old-world investor, you would know that stocks derive their value from profits and bonds from credit ratings. But did you know that the ruby red liquid that you love to sample can be scientifically valued too? The quality of grapes, vineyard age and yield, harvest year and producer together decide the value of a wine.

How it all started

Many wines may appeal to the palate, but only a few can earn you a bumper harvest in returns. The Bordeaux region of France is the birthplace of most investment-grade wines. The name Bordeaux — au bord de l’eau or ‘by the water’ — offers a clue to why some of the finest wines are from there. The region’s proximity to the Atlantic makes for a gentle climate. The region is far enough North to allow a long, cool, growing season. Long, warm autumns allow the grapes to ripen fully.

But aside from the geographical angle, politics has also played its part in popularising wines from Bordeaux. It was Napoleon the Third who ordered that all the wines from Bordeaux be classified and segregated prior to the Paris exhibition of 1855. The 1855 ranking system became the bedrock of wine pricing thereafter. In all, the rankings conferred special status to 57 chateaus that produced red wines from Bordeaux. Till date, these remain the investment-grade chateaus.

The panel that arrived at the rankings was made up of members from the Bordeaux wine brokers’ association. They came up with a layered wine grading system called cru, which identified the premier ‘first-growth’ wines. Wines considered for this classification were only reds because whites were not as popular in international markets.

Only four chateaus made the grade as ‘first-growth’ wines, with a fifth later being promoted in 1973. The five ‘growths’ are the estates of Chateau Margaux, Chateau Latour, Chateau Lafite-Rothschild, Chateau Haut-Brion and later, Chateau Mouton-Rothschild.

Pricing the wine

There are three main factors that decide the value of a wine — the vintage, harvest and the chateau. Vintage is the year of harvest. The year 2009 was declared the best vintage year in the last decade and 2010 turned out well too. Years 2011 and 2012 were not considered good vintage years due to the prolonged winter in Bordeaux.

The weather leading up to the harvest decides the quality as well as initial price of the wine. Wines are also classified based on their producers, referred to as chateaus. Chateaus in Bordeaux produce only limited stock every year owing to constraints on their terroir (geographical region).

The process of wine-making begins with the harvest cycle in autumn (September) when the grapes are picked from the vines. The juice is stored in barrels, where it stays for the next six-seven months.

In May or June every year, wine merchants and experts from around the world make a pilgrimage to Bordeaux to assess the quality of the harvest, through barrel-tasting sessions, before the wine is bottled.

Their assessment directly influences the list price of the wine. Till date, despite many appeals for a review, it is the 1855 classification that holds sway over wine pricing.

Parker points

If Warren Buffet calls the shots in the stock markets, Robert Parker is the most influential guru of wine valuation.

His wine reports and grades, published in the bimonthly journal The Wine Advocate, hold sway over wine prices. Good grades may cause prices to skyrocket, while middling ones may leave some wines practically without any takers. His power over prices is particularly potent for en primeur wines (newly harvested crops).

Though it is believed that his influence on the Bordeaux market has waned slightly over the past couple of years, he still commands significant clout.

To Parker’s credit, however, his assessment of the vintages in his 35 years of tasting Bordeaux wines has proved quite an accurate indicator of their investment returns.

En primeur pricing

Apart from Parker points, fine wines also derive their value from being in short supply. The premier chateaus produce only a limited quantity of wines every year. For example, Chateau Latour, a premier cru chateau, produces only 15,000 cases of Grand vin de latour.

The cases find eager buyers even before they are bottled through the concept of en primeur, where wines can be pre-booked at a certain price. The wine is still maturing in the barrel and is yet to be bottled.

Buying a wine en primeur can be likened to investing in a start-up before it goes public. In the case of a good quality harvest like 2009, prices could spiral from the pre-booking to the actual sales in the secondary market.

Secondary market

Prices are also driven by the simple economics of demand and supply. Stocks of top chateaus deplete by 40-50 cases a month with both fine-dining restaurants and connoisseurs guzzling them.

Unlike other investments which suffer depreciation, the intrinsic quality of the wine improves with time, increasing its value. Wines of good vintage can last up to 80 years once bottled.

Wine merchants play a significant role in the en primeur stage. Each is allocated a finite number of cases based on estimated output. These are then sold, much like futures contracts on stocks.

Assessing a wine’s performance was once subjective as there were no benchmarks to measure quality. However, in 2001, the Liv-ex index was created as a barometer of fine wine prices. The index reflects 100 of the finest wines, selected for liquidity (no pun intended) and grade, which is reviewed every quarter.

Book your bottle

Buying a wine en primeur is similar to investing in a company before it goes public. Vintage years determine the price at which wines are pre-booked. The year 2009 was mostly regarded as a blockbuster vintage year. The first growth Chateau Lafite Rothschild priced its wine at approximately £13,980 per case or about £1,165 per bottle. However, the 2011 vintage was largely panned by critics owing to an extended winter in Bordeaux. Chateau Lafite Rothschild priced its case at £5,196 per case or £433 per bottle.

The author is Associate Vice-President, Metis Family Office Services. The views are personal.

Published on February 16, 2014

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