Calculating fair value for Bordeaux 2003

by James Miles, of www.liv-ex.com

At the time of writing, we do not know at what price the best wines in Bordeaux 2003 are going to be released. Our merchant customers tell us their order books are very lopsided, with huge orders for the best wines, and rather muted interest in the rest. For the top 25 wines or so, there is going to be a scramble, exacerbated by production being down in 2003. The lucky few who manage to buy wines at the opening prices are likely to make money, providing the Châteaux don't get too greedy. In the melee it is going to be easy to lose sight of what these wines are actually worth. The table below attempts to identify a theoretical fair value for 25 of the top 2003s:

Our fair value calculation looked at valuations for the same 25 wines in the best vintages over the last 20 years or so. Our valuations for each wine are calculated by dividing the price by Robert Parker's points to come up with a price to points ratio (or POP) to establish what one is paying per Parker point. To give each point more relevance, we have shortened Parker's 100 point score to 20, because wines with less than 80 points have little or no investment value (i.e. 95 points = 15 on our scale, calculated as 95-80).

The next step in our fair value analysis is to calculate the average POP for each wine and vintage, and then discount these values back to the present day by the 10 year UK gilt yield. In this case we have used 5%. In essence, what we are trying to do is to take into account that there is an opportunity cost of buying wine that is not going to be drunk for 10 or more years. For example, rather than putting your money into wine today, you could invest it more or less risk free at 5% in government paper, and buy the wines you want when they are fully mature. Indeed, it is only worth buying en primeurs if they are going to outperform alternative places to park your cash.

To come to our fair value, therefore, we have taken Parker's scores for 2003, calculated our adjusted POP to take into account the holding cost, and from these two numbers have calculated a fair value price. As in all markets, wine does not always trade at fair value. The chart below shows how, as a group, the same 25 wines in past vintages are trading relative to fair value. The 2000 vintage, for example, is currently 57% above fair value, whilst 1986, 1995 and 1996 are trading materially below. According to economic theory, prices revert to fair value over the long-term - so if prices overshoot in 2003, look for value in the back vintages, or alternatively stick to government bonds!

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