In Wine Market, a Bubble Still Bursting

A tasting of wines from Margaux. Unlike some older Bordeaux, these are not too expensive for any sane person to drink.

Photographer: Elin McCoy/Bloomberg

A tasting of wines from Margaux. Unlike some older Bordeaux, these are not too expensive for any sane person to drink.

In the current issue of Bloomberg Pursuits, Bloomberg wine writer Elin McCoy writes about Domaine de la Romanee-Conti, the ne plus ultra of fine Burgundy. The latest release of DRC’s flagship wine, the 2009 vintage, sells for $15,000 a bottle, older bottles for as much as $2,000 an ounce.

Still, as McCoy points out, DRC has been outperforming other wines at auction, largely because of the Burgundy craze among Chinese collectors. All of this raises a question that goes beyond DRC: Do the prices for top wines bespeak a bubble?

Take a look at the chart below, which shows the Liv-ex Fine Wine 100 Index of prices for 100 frequently traded high-end wines back to July, 2000. You’ll see that for five years it stayed flat, rising 265 percent through the middle of 2011 before slipping down. Over the last few months the wine market seems to have resumed its ascent.

 

Source: Liv-ex data, via Bloomberg terminal

The Liv-ex Fine Wine 100 Index peaked in 2011. There’s still room for it to go down further.

Does that mean that it’s now reached its natural level, or that the bubble is still filled with air? The hard thing about bubbles is that there’s no decisive answer to whether you’re in a bubble until after it’s over. In periods of high prices, there’s generally no shortage of folks ready to say that prices have just reached a permanent new plateau. So it is with wine. The growth of the global ultra-rich is one reason prices could have gone up.

That said, I’m skeptical that the number of folks actually drinking wine at $1,000 a sip has exploded. Yes, there’s a new Chinese market, but it seems to be driven largely by people who are more interested in the investment value of their cellar than the liquid in their glass. McCoy has covered that vividly. At the end of 2011, she wrote about Chinese banks funding wine purchases. Let’s assume that the impulse to open a nice wine with dinner dissipates when you’ve financed your cellar with borrowed money.

Wine prices are now already about 20 percent below their peak. It’s tempting to assume that now that having leveled off they’re set to rise again. Don’t count on it. Rarely is the first sharp descent the true end of a bubble. On this subject, it’s hard to beat the conclusion of McCoy’s 2011 story, so I won’t even try. She wrote then, “My nickname for the Chinese wine investment market? Duchang. It means ‘casino.’” That was right near the very top of the market. There’s still plenty of room to keep falling.

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