A buyer smells a wine's bouquet during a tasting in Saint Emilion in the Bordeaux region of France. Bloomberg

A buyer smells a wine's bouquet during a tasting in Saint Emilion in the Bordeaux region of France. Bloomberg

One weather vane of luxury spending is the pricing of Bordeaux wines. Every northern spring, the top chateaux present their latest vintages for review, later pricing them for early buyers in the en primeur market. But values are also swung around considerably by the quality of a given vintage.

While the sun shone, the chateaux and their authorised selling agents, known as negociants, profited nicely. By 2010, prices had soared far enough to put off the ultimate buyer: the drinker. En primeur wine prices halved, leaving negociants and other buyers nursing heavy losses on unsold stock.  

With all this liquidity hanging over the market, some of it very high quality, top winemakers refrained from raising prices too far between 2012 and 2014. Mixed reviews from wine critics also deterred them. A better reception for the 2015 vintage lessened this caution, encouraging chateaux to lift prices by a quarter on average in sterling terms, so far. Warm words from wine tasters can only do so much for the top line, though. Producers which once sold 70 per cent of their production into the en primeur market now sell only half that, holding back the rest in an effort to support prices.

With few exceptions, all other wine merchants must buy top wines through negociants. These middlemen can hold stock, taking up any slack in the supply chain and lightening the working capital burden on the producers. Perhaps too much; negociants held nearly a year's worth of inventory in 2014, according to wine exchange Liv-ex, well up on previous years. It estimates their net debt has swelled relative to equity, to 80 per cent. In comparison, UK merchants have net cash and carry a tenth of the inventory.

Bordelaise premier winemakers see blue skies ahead. With low borrowing rates and good profit margins, the chateaux may well feel that time is on their side. Yet the growing financial pressure on negociants suggests that not all can afford such luxury.

Source: Financial Times     Photo: Bloomberg