Investing in Wine

I was asked this week about investing in wine, so I jotted down some thoughts. The question was whether buying wine in the hope that it will appreciate would be worthwhile.

1) Does investing in wine provide good returns?

Between 2005 and 2008, prices for higher-end (i.e., investment-grade) wines increased substantially driven by continued demand from North America as well as China starting to show interest. There was a slump at the end of 2008 as the crisis hit, but soon after that demand from China really picked up and prices continued to increase. The market peaked in the middle of 2011, at which point China’s economy started to show signs of slowing down and its fascination with higher-end Bordeaux showed a few signs of fatigue. This caused prices to come down and then stabilize at the end of last year.

In summary: we all should have bought crap loads of high-end wine a decade ago (or even better yet, two decades ago). For now, the fine wine market seems to be have stabilized and we should probably expect single-digit growth (at best) for the next few years, unless the economy really starts to pick up again.

2) How does investing in wine work for most of the world?

Fine wine investing is mostly centered around Bordeaux. While the wines are still in barrel at the Chateaux, you can buy them as futures (aka “en primeur”) and they will be delivered to you 2 to 3 years later (see for example). The prices for buying wine as futures are generally a bit lower than when they actually hit the shelves 2 to 3 years later, but not always. To illustrate:

  • When I bought 2009 d’Angludet as futures in May 2010, I paid $32.83 per bottle (their initial release price). When I ordered some more in June 2011 (still as futures), the price had gone up to $36.64. By the time they were delivered to me a few months ago and put on store shelves, they were selling for $52.49.
  • In June 2011 I also bought some bottles of 2010 d’Angludet for $44.95 (their initial release price) and that’s where its price is sitting at today still. I highly suspect that when those bottles are delivered to me in a few months and are put on store shelves, they won’t be much more expensive than $44.95, since that’s all the market can bear at the moment.

So ideally, you buy wine as futures, they’re then worth more already by the time they’re delivered to you (2 to 3 years later) and then you store them for a decade or so, at which point they’ve hopefully appreciated even more. At that point you offer your wines to be sold at auction and you cash in on the increase in value.

3) What’s the challenge with doing this in Canada?

First of all, our climate can be somewhat unforgiving. In order to store bottles for a decade or so, you will need a space that has:

  • a constant temperature of around 11 to 14 degrees Celsius;
  • at least 60% humidity (preferably 70%);  and
  • no vibration (so a regular fridge won’t do).

As such, you’ll need to invest in building a cellar or buy a wine cabinet that’s build for cellaring wine.

Secondly, and more importantly, there are no wine auctions in Canada (other than those for charity for which people have donated bottles from their cellar). So there is no place to sell wines here in Canada after you’ve cellared them (at least that I’m aware of). You could ship your wines to an auction in the US or Asia, but then you’re looking at the cost of shipping, which will eat into your return, as well as the fact that wine prices in Canada (even for futures) are genarally higher compared to the rest of the world, so what you might get for your bottles at an auction in the States or overseas could be quite disappointing.

Another challenge that’s not unique to Canada is that there is the possibility that the high-end producers in Bordeaux will be withdrawing from the futures system in the near future. Chatau Latour announced this step last year (2011 was their last vintage that will be offered en primeur), so the question now is whether any others will be following their lead.

In summary, investing in wine is risky (the market fluctuates considerably) and there are some significant complications with the process in Canada. So my advice would be to buy a wine cabinet that holds 100 to 200 bottles, stock it up over the next few years, and then enjoy drinking and re-stocking that unit for many decades to come. Or, in James Suckling‘s words:

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