The Future of Futures
Until now, the en primeur market for South African wine has remained undeveloped. However, there’s an increasing body of opinion that the practice of early purchase for later profit is about to take hold. Rob Morris investigates.
Wine Asset Managers is an international London-based firm whose mandate is the achieving of “long-term double digit annual returns for its shareholders through investment in fine wine”. They are one of a host of firms now on global exchanges with derivative-based funds in fine wine.
Burgundy and Bordeaux futures are now weighted components in listed funds on Wall Street and the FTSE because the base commodity goes the distance, showing some of the most attractive and consistent returns across any asset class. Live-ex 100 is an index of “auction prices of the world’s 100 most investable wines”. The matrix weights 93% of its regional components in Bordeaux (reds and whites) with a balance comprising Burgundy, Rhône, Champagne and Italian. Growth is tracking at 37% annually because there's inherent value in teh commodity - the kind of credibility more SA producers wish they had. The new run began with Bordeaux’s 2000 vintage and is unlikely to bottomout anytime soon.
In local industry circles, however, there has until now been doubt, if not outright disbelief, that this country could support an en primeur market. Why the misgivings? While such a way of doing business is all very well in theory, the prospect of the seller achieving real profit thanks to capital appreciation is the tricky part – essentially because not enough people are truly convinced about the longevity of SA wines.
En primeur involves buying wine before bottling, where one concludes the transaction in advance of receiving the wine. This is where discounting offers real value, your cash upfront in return for some concession on price. Once bottled, the buyer has the choice to keep the wine in guaranteed storage or have it delivered – essentially a futures contract whereby the buyer will purchase the wine for a specific price to sell at a later date, by which time the market price on release has escalated, earning the buyer a profit. Or so the theory goes…
What wine futures are not is buying in advance of production, to secure allocation at the same price it would sell for on entering the market anyway. For this reason, en primeur is a term bandied about with casual disregard for its intrinsics. In researching the wine producer market in 2007, our questionnaire to producers included an en primeur tick box. The list of those attesting to the "service" is worringly naive, including such low-profile wineries as Zanddrift Vineyards, Mellasat and Annexkloof. Cashflow is the obvious motivation behind their (deliberate?) mis-understanding of the term.
For the producer’s take, Kanonkop’s Johan Krige tried the en primeur market decades back.
“Our first en primeur vintage was the 1986 and the last 1992. The major problem was one of logistics as we sold futures directly to the public. Kanonkop is foremost a wine producer – not a seller of futures. That’s the business of négociants. I am not sure South Africa has the right structures in place to market and sell en primeur although [financial services group] PSG could surprise us!”
It’s no secret that Krige had stores of vintages buyers didn’t claim in the end, wine he couldn’t liquidate as these weren’t technically the property of the winery either. If en primeur selling is going to work in SA, a centralised, guaranteed storage location is crucial to the mix, a bond facility like in the UK where VAT and duties do not apply to contents “in bond” until moved, and where ownership is transferred with or without physical exchange of the product.
Previously a derivatives trader on the London Exchange, Cyber Cellar CEO Fiona Phillips is bullish on the prospects of a local derivatives market for SA wine. “Thelema and Rust en Vrede for example are prepared to quote pre-release prices, but I wouldn’t say that it’s a real en primeur market at all yet as it’s difficult to get producers to commit to prices and there really isn’t a sufficiently liquid secondary market to eventually realise returns, but I have no doubt it will come.”
Looking to Overseas Markets is Crucial
The pool of local spec buyers is virtually non-existent. Crucial to any success will be international demand when and if our futures market gets up and running. That will come from a “better global understanding of South African wines” reckons Phillips, as well as a self-awareness of our own proposition to the international investor. “With the exchange rates where they are at present and where they’re tracking, a futures market is coming sooner than we might have thought,” she predicts.
De Toren proprietor Emil den Dulk feels similarly positive. He’s already in negociations. “We are entering into a bigger en primeur programme with a financial institution that will market futures on our wines, this year.” Warwick’s Mike Ratcliffe rounds the re-sale empasse by creating his own secondary market. It’s not technically futures selling but Warwick’s wine club can afford to purchase back vintages of the Trilogy at 500-600% of the wholesale release price that they initially offered buyers, provided appropriate cellaring. The wine club then offers its members these older vintages at margins to everyone’s liking. If not en primeur selling in its pure sense, it provides some indication of demand for older vintages.
“We have been pre-allocating for years without actually pre-selling. Pre-selling is a model that works for a winery that has greater demand than supply. Warwick is completely allocated on release. We are currently developing an ‘en primeur’ off ering for our wine club which will debut prior to the release of the Trilogy 2006 in July,” comments Ratcliffe.
In the lead-up to the futures offering on Crucible Shiraz 2006, the flagship wine from Darling winery Cloof, press coverage announced that this producer was intending listing on the Chicago Futures Exchange. “It was meant tongue-in-cheek. The journo who broke the story obviously had no concept of what that would entail!” relates the estate’s marketing director, Oscar Foulkes.
In reality, what Foulkes offered was more humble but still innovative: buyers who took six bottles of the farm’s second label, Cloof’s Very Sexy Shiraz 2006, would be entitled to one future on the Crucible Shiraz 2006, allowing for a purchase in advance of release at R295 per bottle with the intention being that the Crucible 2006 would enter the market on release at R400. Provided one could find a secondary market, the returns speak for themselves.
“Eventually we had futures being traded at R100 each,” recalls Foulkes. “People were trading the option on the wine, not the wine itself.” This is how en primeur selling and futures trading can work provided individual niche markets are created and serviced by the producers themselves.
It’s an irony that Klein Constantia’s side-interest, Anwilka is an en primeur offering in the true sense of the term (on the back of its now-famous punt from influential US critic Robert Parker) while the farm’s cult dessert wine Vin de Constance is not. European négociants are clambering for a piece of Anwilka action, the collaborative effort between Bruno Prats, formerly of St-Estèphe second growth Cos d’Estournel, Hubert de Boüard of St-Emilion premier grand cru Angelus and KC’s Lowell Jooste. “Négociants subscribe for delivery in June or July of the previous year’s vintage with distribution channels very similar to those of First Growth Bordeaux. Over 90% of our production is exported and allocated in this way,” says Jooste. There are no en primeur options on Vin de Constance as yet, despite having become one of this country’s fastest appreciating wine offerings and being made in miniscule quantities.
Jacques Vandewalle heads up Bergkelder’s Vinoteque – for years as close as this country has come to a “bond” facility although only Distell products may bed here. “The fact is that the Vinoteque used to offer en primeur wines until a few years ago. We`ll probably offer pre-release wines in the future, but not for the moment – a major reason being the relative low growth of fine wine prices due mostly to an oversupply in the market.”
Bergkelder’s research indicates “only a very small percentage of our Vinoteque members buy wines on any of our offers purely for financial returns from re-sale”. The flip-side to realising monetary gains, whether through en primeur buying or not, is that the rewards on drinking your investment can be as tantalising as the profits.
Ultimately en primeur buying relies on a market’s maturity and confidence in the commodity’s quality track record. Demand is ensured by scarcity; returns, on the resilience of the product. Neither are givens on even the Cape’s best wine. A case of “putting your money where your mouth is” if you think differently.
