DRC: First Growth Ratio—Refusing to Revert

The price of wines from the Domaine de la Romanée-Conti are showing no signs of slowing down. Unlike the top wines of Bordeaux, the Burgundian icon didn’t suffer at the end of the Asia-led boom for fine wine from summer 2011 onwards; instead prices continued to move upwards—rapidly. Although the First Growths have been on the move for the last year, DRC has continued to outpace them.

The chart below shows the 10-year relationship between the average prices of the wines in the Liv-ex Fine Wine 50 (the Bordeaux First Growths) and the Domaine Romanée-Conti Index (composed of DRC’s six brands)—dividing one by the other to create a ratio.

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Across markets, over the long term, prices tend to revert to the historical mean. Yet the last time this happened here was over four years ago in June 2013. This led Liv-ex to consider in February 2016 that DRC prices looked overstretched. At the time Liv-ex anticipated an imminent correction, which proved to be briefly correct as the ratio fell slightly in Q1 of 2016. This turned out to be only a minor blip; subsequently the DRC: First Growth ratio has reached a high of 7.16: 1 at the end of July 2017, having risen for the last 16 months. This recent high is 2.1 standard deviations above the mean for the 10-year period, which stands at 4.75:1.

One theory for the price ratio rising is that Chinese buyers’ nascent curiosity in Burgundy led them primarily to the wines of the DRC. When this interest intensified in 2011, DRC’s advance was aided by a cycle which saw investors rotating away from overvalued Bordeaux to undervalued Burgundy. 

Six years on this momentum has not been lost, even during the recent Bordeaux revival. Despite the graph currently showing signs that DRC is overvalued, the DRC index has increased by 43.4% since April 2016, while the Liv-ex Fine Wine 50 has increased 23.2%. 
Perhaps then, this stubbornness to revert to the mean can be attributed to the value placed on scarcity. Liv-ex estimates that the total annual production across the Romanée-Conti vineyards is around 7,000 to 8,000 cases a year, compared to an average production of around 70,000 cases across the grand vins of the First Growths. Subsequently as demand continues to always outpace supply, relative prices are pushed higher. In extreme cases, as with the monopole of Romanée-Conti, higher prices invert the demand curve, as the wine becomes a status symbol, which in turn helps to sustain the price level.

Timing the market is difficult. Even though investors holding both DRC and First Growths have recently experienced the best of both worlds, they might consider a continued rebalancing of their portfolios, and keep a close eye on the development of this ratio.

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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