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Bordeaux 2016—A New Dawn for En Primeur?

  • Anthony Maxwell, Liv-ex Director

  • 01 May 2017 | News & Views

The Benefits of En Primeur
En Primeur in its current form is a relatively new system, but Bordeaux wines have been traded prior to delivery for centuries. This continues to represent a significant opportunity for producers, merchants and buyers. En Primeur can help producers to improve their cash flow and reduce their risk profile, while offering buyers the opportunity to acquire stock at favorable prices. It is the one time each year that all eyes in the trade are on Bordeaux and it remains a highly effective global marketing and distribution mechanism.

Overall, a well-functioning En Primeur market brings considerable benefits to both buyers and sellers. Unfortunately, it is not functioning as well as it could. 

Transparency Presents an Opportunity
One of the most significant changes in the fine wine market in the past decade has been improved price transparency, facilitated by the internet. Now, merchants and their customers can instantly access current and historic prices for fine wines to inform their purchasing decisions. The market has also become increasingly global and accessible, meaning that buyers have easy access to older vintages, and hence more choice.

The Problem with Opacity
While the rest of the market has become increasingly transparent, En Primeur prices continue to be determined—or ‘discovered’—via private negotiations between Chateaux, courtiers and negociants. It is often unclear how prices are set. This has two key disadvantages.

First, buyers have little or no insight into how prices are agreed. This has resulted in criticism of the En Primeur system among buyers, and as this report shows, falling sales. Second, the system runs the risk of mispricing releases. This report uses the term ‘mispriced’ to mean pricing that was inconsistent with prices in the secondary market at that time.

Inefficiency and lack of transparency have eroded confidence. Chart 1 (below) shows that En Primeur activity on Liv-ex remains well below historic levels. A number of Liv-ex members report similar falls in activity in the market overall.

https://robert-parker-content-prod.s3.amazonaws.com/media/image/2017/04/27/7266796d0c3b4463ae74b3a60b2f48e3_Chart1.png
En Primeur sales on Liv-ex as percentage of total sales (by campaign*)

How might En Primeur evolve?
Fine wine shares many of the characteristics of commodities. Different producers and vintages represent different commodities. For example, a ton of copper traded on the London Metal Exchange (LME) is identical to any other ton of copper traded on the LME. This is because the LME maintains strict physical specifications for the copper traded.

Similarly, a case of Lafite-Rothshild 2010 traded on Liv-ex is identical to any other case of Lafite-Rothshild 2010 traded on Liv-ex. This is because Liv-ex’s Standard in Bond (SIB) contract ensures that any wine traded on the platform is in excellent condition, has never left Europe, is stored under bond and can be delivered within 14 days to a Liv-ex warehouse. 

The evolution of pricing in other markets is likely to provide some guidance for En Primeur. In fact, the transition from opaque, negotiation-led prices to transparent, market-based prices is a well-trodden path. For example, the negotiation-led ‘benchmark’ system for annual iron ore prices collapsed in 2010 as an increasingly liquid spot market took its place. Similar changes in other commodity markets such as oil occurred long before.

En Primeur can also be compared to primary share issues in equity markets. Let’s consider a listed company such as Apple that issues new shares. These new shares cannot typically be priced higher than the price of Apple’s existing shares in the secondary market. This is because investors would simply buy Apple shares in the secondary market rather than participate in the new share offering.

This should also be true for En Primeur. After all, why should investors buy riskier En Primeur if they could buy physical back vintages in the secondary market for a lower price? 

Of course, the key issue with the Apple analogy is that new shares in Apple are identical to ‘old’ shares in Apple. Therefore, comparing prices is easy. However, variations in critic score, vintage quality and age mean that each vintage of a particular wine is different. Therefore, comparing prices is not so easy. This is where Liv-ex’s ‘fair value’ methodology can help.

Liv-ex’s ‘Fair Value’ Methodology—Limitations
Liv-ex’s ‘fair value’ methodology is intended to be simple and transparent. It uses information from the secondary market to help identify a fair price for a wine, given its score. The model does not account for differences in ‘vintage premiums’ over and above that already captured by differences in score. A 96-point wine in an exceptional vintage may warrant a premium to the price of an identical 96-point wine in an average vintage.

Similarly, the model does not account for differences in age. Some of the bias is mitigated by limiting the regression models to the past 11 vintages. Also, age is simply substituted for score in regression models where age is more significant in explaining variations in price. 

The regression models do not have to be based on either age or score. Both age and score could be incorporated into the regression model as independent variables. However, as before, we prefer to keep the model as simple as possible.

The regression model only considers scores from The Wine Advocate. It uses the most recent score for each wine from either Robert Parker or Neal Martin.

En Primeur Has Often Been Mispriced
‘Fair value’ can measure the extent of any mispricing at En Primeur historically. The term ‘mispricing’ is used to mean pricing that was inconsistent with prices in the secondary market at that time. To be clear, En Primeur is not necessarily ‘mispriced’ just because prices subsequently fell and investors lost money. That is simply the risk that investors accept for an expected return. 

Chart 4 (below) shows how historic releases have been priced relative to wine already in the market using ‘fair value’ methodology. For example, it shows that the 2005s were released over 30% above their ‘fair value’ at the time. 

It is interesting that 2010 En Primeur may not have been as overpriced as is commonly thought. Although it was released above the trend line, it was at least an exceptional vintage. That prices for the 2010s went on to drop significantly is unlikely to be due to any mispricing at En Primeur. Rather, it should be viewed in the context of price declines across the entire fine wine market.

https://robert-parker-content-prod.s3.amazonaws.com/media/image/2017/04/27/935ad433c3c44c129c692efbfcd8f809_chart4.png
En Primeur release price vs ten previous vintages at time of release (Bordeaux 500)*

The model can also show how individual Chateau have priced their releases historically. Chart 5 (below) shows which Chateaux have historically overpriced or underpriced their releases the most, relative to other vintages from the same chateau available in the secondary market. For example, it suggests that Palmer releases have been around 30% above their ‘fair value’ on average. On the other hand, Beychevelle has been underpriced by around 20% on average 
Chart 5.

https://robert-parker-content-prod.s3.amazonaws.com/media/image/2017/04/27/e88f799c84524baa9b2070c59ebaaa81_chart5.png
Bordeaux Chateaux: most overvalued and undervalued on average on release

Conclusion
The En Primeur market has the opportunity to embrace a step-change in transparency and efficiency brought about by the internet. This would add considerable value to buyers and sellers, just as it has across other markets.

The secondary market is already the most efficient pricing mechanism for fine wine, particularly for wines which enjoy the greatest liquidity. Liv-ex’s ‘fair value’ methodology harnesses the power of the secondary market to help price En Primeur. 

The trade and their clients can use ‘fair value’ to help identify wines that offer the greatest value En Primeur and to avoid those that offer the least. In recent years, En Primeur has been mispriced relative to prices in the secondary market, sometimes by as much as 30%. Therefore the decision to buy En Primeur can have a significant impact on both margins and returns. 

High expectations for the vintage, a recovery in fine wine prices and the opportunity to increase transparency and efficiency bode particularly well for En Primeur in 2016. The opportunity for a successful campaign is there—for those ready to take it.

Readers should take note that the views of this author represent those of a company with an interest in the wine trade. Liv-ex operates the global marketplace for fine wine. It offers trading, data and settlement services to professional buyers and sellers of fine wine. Private collectors can view Liv-ex prices and value their portfolios using Cellar Watch and find regular market analysis on the blog. The opinions of Liv-Ex are their own and do not represent those of Robert Parker Wine Advocate or Wine Journal. Liv-Ex contribute articles to Wine Journal that we feel are of market relevance to readers, but we do not specifically endorse this company.

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