SO-CALLED WINE FUTURES ARE NOT FUTURES (AND SHOULD GENERALLY BE AVOIDED BY CONSUMERS)

Courtesy: John Guccione

by Andrew Chalk

There is likely not a wine enthusiast in existence who has not heard of wine futures, especially with regard to Bordeaux. There are also few subjects in the wine world that have more inaccurate information about them.

In the case of wine futures the usual, often implicit, claim is that you can make money buying wine futures. “It’s like buying at wholesale” might be said. It is also the most misleading claim as you can also lose money. From the mid 1980’s until the great recession of 2008 wine futures buyers made money. Since the great recession they have frequently lost on average.

Perhaps the one reason you can’t knock down for buying wine futures is to guarantee you get a particular wine. In such circumstances the price is secondary to delivery.

Before buying wine futures it is important to know how the system works. In a nutshell, there are basically two dates.

On date one you choose a wine that will be available at retail in (about) two years and buy it as a ‘future’. You pay the full price now. Since you lose the interest you would have made on that money had you invested it elsewhere the price of the future should be less than you expect the retail price of the wine to be on release. You buy the future from a seller of wine futures. These are typically wine retail stores.

On date two, the date when the wine is delivered for retail sale, you take delivery of the wine you paid for.

That nutshell elides several details, most importantly two types of risk.

First, wine futures are not actually futures. In a futures contract you do not pay the full price up front. In fact, in a pure textbook futures contract you don’t pay anything up front. In real world futures contracts you put down a small amount of ‘earnest money’ known as Initial Margin. Wine futures would be more accurately named wine forward contracts.

Second, any consumer is going to trade futures on an exchange such as the Chicago Mercantile Exchange (one of the biggest futures exchanges in the world) rather than an over-the-counter contract such as is used for so-called wine futures. There is a very compelling reason for this called counterparty risk. That is the name of the risk that the seller of wine futures does not deliver the wine. This happened on a wide scale in the 2008 Great recession when sellers to the final consumer found that further up the chain importers or wholesalers went bankrupt and did not deliver wines already paid for. One responsibility of the exchange is to guarantee contracts by covering counterparty risk itself. In the 123 years since the Chicago Mercantile Exchange was founded (under its original name) not a single trader has lost money due to counterparty risk. By contrast, in 2008, some wine futures sellers (e.g. Sigel’s here local to me in Dallas) made good on customer payments, others famously did not.

Another drawback of so-called wine futures is that once you have bought them, you can’t sell them. There is essentially no secondary market. Compare that with the position of the American farmer who hedges his wheat crop against adverse weather by selling it in the futures market on the Chicago Mercantile Exchange. He can reverse or modify his trade essentially infinitely prior to the delivery date.

The fact that you pay all up front for a wine future and cannot trade it makes the contract more risky than you might anticipate. If you must trade wine futures don’t do it to make a buck, assume you won’t, do it to lock in a wine you want. Also, buy from a local wine store with whom you have an ongoing relationship and who will readily guarantee delivery or money back.