Vintage offer: Trading in wine futures

A European stock exchange says its planned futures market in premium red Bordeaux wines is the first of its kind

In this story: Bragging rights Bargaining position RELATED STORIES, SITES

By Douglas Herbert, CNN.com Europe writer

LONDON, England (CNN) -- European investors may soon find their portfolios growing noticeably darker with age.

Euronext, a pan-European stock exchange created in late September by the merger of the Paris, Brussels and Amsterdam bourses, is poised to launch a futures market in premium red Bordeaux wines.

Euronext says its foray into Bordeaux futures -- set to begin in early 2001 -- is the first of its kind ever undertaken by a major stock market.

Futures trading lets participants buy or sell a commodity -- say, metals, pork bellies, lumber or oil -- at an agreed-upon price, for delivery at a specified later date, usually in an attempt to hedge risks against price fluctuations.

REFERENCE  Bordeaux facts •  The French region boasts some of the most famed wine-producing districts, including St. Emilion, Pomerol, Médoc and Graves, and is home to the coveted Cabernet Sauvignon grape. •  The market for Bordeaux wines has been around since the region was part of England in the 12th century, when Henry II ruled Aquitaine. •  Bordeaux has faced pressure from competitors within France and beyond, especially in Australia, South Africa and California. •  Following relatively disappointing market performance the past three years, some vintners predict 2000 will be a banner year for Bordeaux. •  Nonetheless, price volatility remains high, fluctuating by around 25 percent in the market for premium reds.

Such contracts appear to have a ready niche in a wine market known for its volatility, where consumer tastes can change on a whim from rosé to Cotes du Rhone, and inclement weather can put the kibosh on a promising vintage overnight.

Bordeaux vineyard owners say the futures market will give them extra leverage against price swings of the kind triggered by the Asian financial crisis of 1998, when the market for fine French wines took a pummelling.

Companies currently trading on the electronically based exchange have a combined net worth of almost 2.6 trillion euros ($2.18 trillion). The exchange already trades futures contracts in comestibles such as rapeseed oil, corn, pork, potatoes and eggs.

Until now, however, wine connoisseurs looking to add a bit of extra body to their portfolios have had to rely on informal networks of vintners when they wanted to buy or sell cases of "grands crus" -- loosely translated as "high-quality growths."

These free-lance traders typically determine how much wine of a certain chateau or ranking are sold on the open market -- and, more important, at what price.

By most accounts, the vast majority of these traders are honest brokers who subscribe to strict rules of wine etiquette. But a small minority of rogue traders who bank on duplicity have injected an element of uncertainty into the market.

Euronext plans to limit contracts to a special selection of premium red Bordeaux wines, or "grands vins," chosen on the basis of strict criteria. There will be 141 labels in the initial contracts, subdivided into five official quality classes.

Vineyard owners say the new market will give them extra leverage against price swings

With 57 "appellations," or "controlled names," spread among 9,000 wine-producing chateaux, oenologists -- those who study wine-making as a science -- believe the Bordeaux region of southwest France claims rightful bragging rights to the world's finest vineyards.

Bordeaux wines account for only 1.5 percent of the world's total area in vineyards. But they carry greater clout than territory alone might suggest, representing 10 percent of the worldwide wine market. Three-quarters of Bordeaux bottles are destined for export.

Wines vying for admission onto the Euronext market must meet a series of stringent criteria aimed at keeping the cork on second-tier candidates. They must be produced in Bordeaux on properties of more than 15 hectares. Owners also must be able to show established price trends covering a five-year period prior to the contract.

Antoinette Darpy, a Paris-based spokeswoman for Euronext, said 70 percent of all fine Bordeaux wines, representing a total market value of 3 billion French francs ($380 million), are Euronext-worthy.

Candidate wines are traded as "vins primeurs" -- industry jargon for the arrangement under which contracts open in July of the year following a harvest and close in November two years later. That is the date at which contracts expire and the wine bought two years earlier is taken for delivery.

Only 2 percent of contract traders physically receive delivery of their wines, Darpy said. Most often, futures orders are sold to other customers upon closure of the contracts -- before the original customers ever had a chance to see their cases of wine.

Jean-Guillaume Prats, owner of the Château Cos D'Estournel and a participant in the Euronext futures market, sees the forthcoming market as a prod to greater innovation in the world's pre-eminent wine region.

"It's going to strengthen the negotiating position of Bordeaux," Prats said.

Others sound a cautious note, however.

Jonathan Stephens, of the UK-based Farr Vintners, said it is difficult to predict how well the Bordeaux futures market will function in practice.

He suggested that subjecting the wine trade to the rigours of an open market might play into the hands of wine owners with large stocks of fine vintages, to the detriment of those with lesser-quality wines.

"The sexy wines will either sell out immediately or trade up to levels that are much higher," Stephens said. He cautioned that the opposite trend might occur with less-sought-after wines, posing the potential for price polarities.

Stephens also suggested there is something a bit unseemly about treating wine like any other commodity.

"We think it's something that requires a much more personal touch."

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Euronext
Bordeaux Wine Office
Bordeaux.com

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