"Why Should I Buy 2005 Bordeaux Futures?"

Why do consumers purchase futures?

Of all the reasons to purchase wine, enjoying a pleasurable bottle with a fine meal is, in our opinion, the most compelling. Of all the wines of the world, Bordeaux has for more than a century been widely perceived as the source of wines of class, depth and aging potential which, when mature, can magically complement and enhance food. The top chateaux, the classified growths or crus classes of the 1855 Classification and, in more recent times, those of St Emilion and Pomerol, have been put away by collectors for many years or even decades. As these wines gain in maturity, they undergo a transformation, gradually evolving from a dark, often dense blackish red color with a purple edge to shades of red, then brick and, finally, pale tawny near the end of their lives. Their aromas change dramatically from intense fruit with oak-induced notes to, eventually, bouquets evoking saddle leather, dried spices, tobacco, and fallen leaves. Shedding their tannic frames, they expand, deepen and lengthen to become rich, smooth and long-lasting on the palate with, sometimes, extraordinary multidimensional aftertastes.The experience of a great Bordeaux in its prime is truly memorable and is the greatest reward available to someone who makes wise purchases of young wines and has the patience and cellar to allow them to develop to their full potential.

Historically, a select number of consumers have collected the famous chateaux as they might fine art or ancient coins, purchasing these wines as 'futures' or, as the French say, en primeur, literally in the 'primary' stage of their lives in the year after harvest, while they are still developing in barrel and up to two years in advance of bottling and delivery to the buyer.

 

As we consider the motives of buyers of Bordeaux futures, they seem to vary by individual. In addition to the sheer pleasure of drinking great wine, investment is a motivation of some collectors, and red Bordeaux is, above all other wines, the focus of those who invest in wine for financial reasons. A select number of properties such as the First Growths, 'Super Seconds', and the most sought after chateaux of Pomerol are considered the 'blue chips' of wine, and careful investment in the most heralded vintages has apparently brought gains to some collectors over time. Yet the evidence is mixed, and some studies indicate that wine, like other collectibles, does not yield the returns of financial assets (see footnote at end of this discussion). Buying wine for investment carries risks, and it is exceedingly difficult for a buyer to know if a certain wine or vintage will appreciate and, if so, how much and over what period of time. As an investment, any wine futures are, by nature, speculative, and no prediction or promise can be made by Millesima or any other responsible merchant as to whether there will be any return on investment, and this document is a simply a discussion of the futures market and is not intended to be financial or investment advice.

 

Even if one pays close attention to influential critics who can affect both opening prices and the subsequent rate of appreciation (and speculation) for wines tasted from barrel, some high scoring wines or vintages may not produce the rate of return expected by the buyer. Moreover, there are often wines that are initially perceived to be priced above their intrinsic quality when compared to other chateaux in the same vintage. Such wines often fail to gain substantially or rapidly in value. Past performance, as stock brokers like to say, is not an indicator of future return, and investing in wine for financial gain is a strategy that should be limited to those who are willing (and can afford) to accept the downside.  A 'failed' wine investment can nevertheless be consumed with pleasure!

 

Taking this point further, fine retail shops and auction houses always have wines that represent bargains to the savvy buyer of wine for consumption who is open to vintages or properties that may not be in vogue. Despite what one might think, there are many high-scoring wines that are relative bargains, simply because undervalued does not mean underrated. Critics frequently hand out top ratings to individual wines in vintages which they do not embrace enthusiastically. At this time, for example, 2001 and 2004 Bordeaux both generally merit more attention than they receive, and Millesima will be offering many wines from both years as they develop further in bottle, and we will do our best to identify wines which may be good values for knowledgeable consumers.

 

While investment is not the motivation of all who buy futures, the desire to save is a very common consideration for almost all futures buyers (and is not the same as investing for financial gain). The expectation, if it can be substantiated, that the wines will be more expensive upon release is certainly seen as a reason to purchase futures.  Of course, how much will be saved will be determined by many factors that are extremely difficult to predict such as the release price for the wine as it passes through the distribution system of shippers, importers, wholesalers and retailers. In many cases, importers take positions very early and prepay for futures, fixing their costs of acquisition, so the pricing for wines not actually sold in advance (or held for retailers) is driven by individual considerations such as their allocations, desired margin, inventory pressures, what they think the market will bear, and so forth.  Buyers must also take into account the cost of money and rate of inflation from the time the deposit is paid until delivery two years or so later as well as the exchange rate, which can be a major variable. The final savings will therefore depend upon macroeconomic conditions, prevailing interest rates, and the tendencies of a particular vintage to gain, hold or, possibly, lose value over the period until release. Unfortunately, there is no forecasting model which takes all these parameters into account! 

Another reason to buy futures is because of very limited supply, but in an era of generous Bordeaux harvests - 2003 is a notable exception - concerns about availability are principally relevant with respect to those chateaux whose vineyard holdings are so small they always produce a scarce amount.  However, it is true that a rush to buy the most glamorous 90+ point wines to come onto the market can quickly deplete stocks of a new vintage at retail for all but the most resourceful buyers willing to search far and wide for the wine they want. In addition, buying wines as futures allows collectors to special order large format bottles like magnums or imperials (click here to view our full list of 2005 futures in half bottles, magnums and imperials).  So both supply and access to special sizes may be justifiable reasons that a collector of Chateau Margaux or Chateau Haut Brion buys these wines as futures. Large formats are otherwise generally limited to auctions, and it could well be that a favorite wine will be both much more expensive and very difficult to find when it is finally bottled and released.

How will 2005 Bordeaux futures perform with respect to savings opportunity, investment potential, and availability? 

When we tasted the extraordinary 2005 barrel samples in April '06, our first thought was only of the experience that awaits those who cellar these wines until they reach their peak!

 

As to the question of savings, which relates to the appreciation 2005's are likely to experience from 2006 to delivery in 2008, we could again speculate that the price leaders may not increase significantly, but others may move up owing to the perception that they are underpriced in the context of the vintage. Furthermore, buyers unwilling to pay the price of the First Growths are understandably shifting their attention to more affordable chateaux which have made outstanding (if not their best) wine, and the distribution chain will in all likelihood respond by increasing prices as far as the various tiers believe the market will tolerate. Based on our own barrel tastings, we believe the quality of the 2005 vintage extends from the top to the bottom of the Bordeaux hierarchy, and there are very impressive wines among the crus bourgeois and the lower ranks of the classified growths. How much a buyer will save on any one wine again depends on myriad factors, but bourgeois wines, as excellent as many are in this vintage, do not tend as a rule to yield the same degree of savings as the crus classes.

 

As far as return on investment is concerned, we must start with record premiere tranche prices wines when the wines were first offered in Spring '06. These prices in many cases far exceeded the estimates of even knowledgeable Bordeaux traders, and this aspect of 2005 has received a great deal of attention and criticism. It is difficult to imagine that prices for Margaux, Latour, Lafite, Mouton, Haut Brion and Ausone will move up quickly given their opening levels.  However, when we consider, first, that the quantity of top Bordeaux is finite while worldwide demand will undoubtedly grow as new moneyed classes (in Brazil, China or India) seek out the status and glamour of Bordeaux; and, second, that the quality of 2005 is not merely exceptional but, very possibly, one of a kind, we would be inclined to believe that, despite record opening prices, conditions exist that are favorable to long term gains. We might add that 2005 may join the elite company of 1961 and 1982, the two vintages which have produced among the best returns to collectors who purchased these vintages when they were young. That said, we should not forget the risks of investing for financial gain, and the 'wild cards' that can affect the future like a worldwide depression, natural calamity or devastating war. But let's return to happier thoughts.

 

Last, with respect to availability, it is once more difficult to state unequivocally what the market will be like in two years when the 2005's are released. Surely, some of the most sought after chateaux will be in limited supply while others will still be obtainable. We come back again to the singular stature of this vintage, and the observation from experience that vintage reputation almost always drives demand, leading us to believe that supply could well be restricted once the wines are bottled.

 

While we are focused primarily on the record prices of many 2005's, perhaps we should turn the question around and consider that many of the older vintages still available that now look undervalued in relation to the new benchmark set by the 2005 vintage. The immediate impact of 2005 prices has been to stimulate trading and appreciation of earlier vintages, particularly the First Growths, and 2005 may well engender a broader increase in prices for earlier years and wines of merit. Translation: There are great buys for lovers of Bordeaux from previous years (click here for our current offerings from 2003, 2001, 2000).

 

While 2005 prices are indeed high for certain chateaux, there are nonetheless many others which appear less expensive than the quality of the 2005 vintage and the wines themselves would warrant. Buyers should take a close look at chateaux such as the following which have been rated very highly by critics but do not have the price tag to match:

 

Chateau Beychevelle, St Julien

Château Lagrange, St Julien

Château Talbot, St Julien

 

Château d'Armailhac, Pauillac

Château Clerc Milon, Pauillac

Château Duhart-Milon-Rothschild, Pauillac

 

Château d'Issan, Margaux

Château Prieure-Lichine, Margaux

 

Château Lafon-Rochet, St Estephe

Château La Lagune, Haut Medoc

 

Clos Rene, Pomerol 

In addition, there is a 'buzz' in the international trade regarding Château Pontet-Canet of Pauillac, which was voted as the number one 'value' wine of the 2005 vintage (in the UK's Fine Wine Exchange poll of 128 of the world's largest buyers of fine wine). Millesima is offering this wine in three sizes as well as the Stars of Pauillac Collection.

 

In the end, it is up to you, our customer, to decide if you wish to purchase Bordeaux futures after weighing all the elements discussed above, your own circumstances and the Terms & Conditions of Sale. You must exercise your own judgment, and we cannot and do not make any claims, predictions or promises with respect to investment opportunity, potential savings or availability insofar as 2005 Bordeaux futures are concerned. What we can say with certainty is that Millesima will remain committed to offering you an extensive range of fine Bordeaux as both futures and in-stock merchandise, allowing you complete freedom to choose how you wish to buy. We can assure you that, regardless of your buying preference, there will be plenty of wines at all price levels!

 

If you would like to discuss our 2005 futures or any other wines we offer, I would be happy to hear from you and assist in any way I can.

 

 

Roger C Bohmrich, MW                                      info@millesima.com

                  Managing Partner, Millesima USA LLC                  1-877-MILLUSA

 

NB. Much has been written concerning the investment aspect of wine, either by journalists or economists. We suggest reading "The Rate of Return on Investment in Wine" (Economic Inquiry, Vol.39, No. 3, July 2001, 337-350) by Benjamin J. Burton. Associate of Lehman Brothers, and Joyce P. Jacobsen, Professor of Economics at Wesleyan University. This article could be read together with other views by W.S. Krasker ("The Rate of Return to Storing Wine," The Journal of Political Economy, 1979), E. Jaeger ("To Save or Savor: The Rate of Return to Storing Wine", The Journal of Political Economy, 1981), or the more recent book of M. Kumar ("Wine Investment for Portfolio Diversification", 2005).  Millesima does not endorse any of these views, and we are providing these references so that our customers can be as informed as possible and come to their own conclusions.