How might En Primeur evolve?

The internet has brought much greater transparency to fine wine prices and to trading in the secondary market. Efficient secondary market pricing for fine wine – or any other financial market – essentially takes into consideration all available information about present and potential future events.

The secondary market in fine wine is not as liquid as other markets such as equities, foreign exchange or commodities. There is also a significant difference between the liquidity of wines such as the First Growths and smaller producers whose wine trades less frequently. However, the secondary market is already a more transparent and efficient mechanism for pricing fine wine than the private negotiations held at En Primeur.

Fine wine shares many of the characteristics of commodities. Different producers and vintages represent different commodities. For example, a tonne of copper traded on the London Metal Exchange (LME) is identical to any other tonne of copper traded on the LME. This is because the LME maintains strict physical specifications for the copper traded.

Similarly, a case of Lafite Rothshild 2010 traded on Liv-ex is identical to any other case of Lafite Rothshild 2010 traded on Liv-ex. This is because Liv-ex’s Standard in Bond (SIB) contract ensures that any wine traded on the platform is in excellent condition, has never left Europe, is stored under bond and can be delivered within 14 days to a Liv-ex warehouse.

The evolution of pricing in other markets is likely to provide some guidance for En Primeur. In fact, the transition from opaque, negotiation-led prices to transparent, market-based prices is a well-trodden path. For example, the negotiation-led ‘benchmark’ system for annual iron ore prices collapsed in 2010 as an increasingly liquid spot market took its place. Similar changes in other commodity markets such as oil occurred long before.

En Primeur can also be compared to primary share issues in equity markets. Let’s consider a listed company such as Apple that issues new shares. These new shares cannot typically be priced higher than the price of Apple’s existing shares in the secondary market. This is because investors would simply buy Apple shares in the secondary market rather than participate in the new share offering.

This should also be true for En Primeur. After all, why should investors buy riskier En Primeur if they could buy physical back vintages in the secondary market for a lower price?

Of course, the key issue with the Apple analogy is that new shares in Apple are identical to ‘old’ shares in Apple. Therefore, comparing prices is easy. However, variations in critic score, vintage quality and age mean that each vintage of a particular wine is different. Therefore, comparing prices is not so easy. This is where Liv-ex’s ‘fair value’ methodology can help.

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Liv-ex’s ‘fair value’ methodology