Sound the alarm, folks – we’ve got a crisis-a-brewin’!
According to a newly published report by the OIV on Wednesday, it looks like global wine production dropped -8.6% in 2017 to the lowest level since 1957. That’s 12 years before we even went to the moon, for some context. The culprit was poor growing conditions, more specifically, frost, in the “old world” stalwart regions of Italy, France and Spain. The good news here is that while production has plummeted to 250 hectoliters, global consumption inched up only slightly to 243 hectoliters in 2017 (that’s about 33.25B bottles of production to satisfy 32.3B bottles of consumption). So like, should we be investing in wine then?
It’s hard to say, really, and it also depends on your risk appetite. The best benchmark to monitor price fluctuations in the secondary fine wine market is the Liv-Ex 100. It used to be free, but with success comes a paywall I suppose (check it on BBG if you have one: LIVX100). Anyway, prices have been relatively subdued in 2018, but that comes on the heels of a 31% run-up in the index since YE 2016. So it would appear that a lot of the impact of last year’s small yield is already baked into the market. That doesn’t mean there aren’t opportunities to make money, though.
Wine is becoming an increasingly, well… liquid asset. Aside from becoming the go to data source for wine markets, Liv-Ex also runs a secondary marketplace where participants all around the world buy and sell fine wine. This also consists of trade settlement / logistics operations which manage payment, delivery and storage in the Liv-Ex bonded warehouse. So if you think you’re able to day trade around the wine markets and make a profit, have at it (it obviously isn’t that liquid yet, so keep an eye out for those elusive arbitrage opportunities).
Outside of trading wine on your prop account, there are many private investment vehicles investing in all facets of the wine industry: real estate, rare wines, you name it. A lot of the managers take nuanced approaches that suit investor appetite, too, like equity vs. debt, or region-specific approaches.
So, there are mechanisms to profit in a market with increasing demand and waning supply, but you want to do it the right way in order to limit your downside. You want to play the macro trend here, especially if you’re going to lock up capital in a private vehicle for 5-10 years. Demographics are changing and with it, tastes in wines. Millennials are now drinking more wine than baby boomers, and it shows in not only sales but in varietal and regional preference as well. While Bordeaux, Piedmont and Burgundy are timeless, the younger crowd has really taken an affinity to new world wines out of Chile, California and Washington (no doubt a function of cheaper prices and increasing quality). Were supply imbalances in the global wine market to become a relatively normal occurrence, I fully expect the new world regions to pick up the slack both in production and, perhaps more importantly, agricultural and distribution technology. That’s where the money will be.