A Case of Bordeaux for Your Portfolio?

Now you can sample wine futures contracts

Investors long have traded futures contracts on soybeans, wheat, sugar, and countless other everyday agricultural commodities. Starting on Sept. 14, they can buy futures contracts on a much more alluring product: top-quality French wine. Euronext, the merged Amsterdam, Brussels, and Paris stock exchange, is launching Winefex, the world's first exchange-traded futures contract on Bordeaux premium red wines.

There should be plenty of interest. A dot-com-like frenzy is sweeping the market for top Bordeaux. Prices for the 2000 harvest of the seven elite châteaux more than doubled this year, reaching up to $250 a bottle. And the wine isn't even ready to drink. In two years, when the bottles are dispatched to stores--after importers, distributors, and retailers add their markups--consumers could be paying as much as $1,000 a bottle for marquee names such as Château Margaux. Savor this thought: A bottle of Margaux that now costs $225 before markups went for a mere $22 less than 10 years ago.

The 2000 harvest may be special, but the bull market reflects the broadening of wine lovers to include more and more American and Asian buyers who have a taste for the product and the cash to back up their new passion. Until now, potential wine investors had to buy bottles themselves, stock them, and eventually cash in by selling at a wine auction. It's a complicated and expensive process, with many drawbacks. Unlike stocks and bonds, wine yields no current return. And high costs are involved in holding it for investment: storage, insurance, duties, and shipping. Private sales are difficult because only an expert knows if the wine has been cellared correctly.

As a result, auctions dominate the resale market. Auction houses take their regular commissions of 10% to 35%. Online wine exchanges such as Uvine in London and Larkspur, Calif., run by Christie's former wine chief, Christopher Burr, are cutting these costs by charging as little as 3.5%. Uvine stores its wine in climate-controlled facilities in the Napa Valley and New York and delivers wine through designated licensees.

An informal wine futures market has long existed. Wine shops sell Bordeaux wine primeurs the spring after the harvest. The advantage with these arrangements is that you can choose the specific château's wine. But the markup is high, and you can't easily sell the wine if you just want to cash in on the appreciation of the harvest.

The new futures contracts avoid these hassles. They should also help buyers ensure that they get the wholesale price direct from the château without any markups. "We're trying to put some transparency into what has been quite an opaque market," says Philippe Capdouze, the wine-futures project's initiator and president of Bordeaux wine merchant Ficofi. Best of all, buyers can sell a contract before expiration and need to take possession of any bottles of wine only if they want to drink them.

Under the scheme, investors buy a contract for five cases (60 bottles) for the year's harvest, a representative mix of the top-ranking wines chosen by Winefex. At current prices, that's about $3,250. As with all futures contracts, investors need only put down a portion of the cost--in this case, about $135.

All the wines are from one of the top 130 of Bordeaux's 12,000 châteaux. Bordeaux's best wines initially were classified back in 1855 into five different levels, from first cru classé to fifth cru classé, and the amounts that can be produced are limited. Winefex also includes wines from St. Emilion and the Graves, Bordeaux regions classified more recently. A château that is already classified may expand its acreage only marginally. During the two years of cellaring, the contract can be sold on the futures market. When the wine is bottled and dispatched, the owner of the futures contract must either take delivery of the wine or the value of the contract at that time in cash.

ECONOMIC DISCONNECT. For most commodities, prices are a function of supply: The more wheat you harvest, the lower the price, since people don't hike their bread consumption. But wine is different. A bountiful harvest of high-quality wine can create additional demand, so the normal economics of futures contracts don't apply. And investor speculation can send prices beyond the reach of many wine lovers.

That's why many people in Bordeaux decry the whole idea of wine speculation and fear that the new futures contract will exacerbate this disconnect. "Fine wine shouldn't be treated like pork bellies or coffee," says Jeffrey Davies, an American wine merchant based in Bordeaux.

Of course, buying the new Bordeaux futures contract doesn't guarantee that prices won't fall. But even if you don't earn a profit on your investment, you can drown your sorrows in fine wine.

By William Echikson

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