The price mechanism does not work as well as it could
En Primeur prices are determined via negotiations between chateaux, courtiers and negociants. The wines are often released in several tranches in order to test the market and aid price discovery. The system has two major disadvantages:
- Price discovery is opaque. Negotiations over prices are held behind closed doors. Buyers therefore have little, or no, insight into how any particular price is determined.
- The system is inefficient and often results in prices being set either too high or too low. Negociants often see little alternative to accepting overpriced En Primeur for fear of losing their allocation in the future.
If the price of En Primeur is set too high then producers or their agents may be left with excess stock. If the price is too low then producers are effectively handing a slice of their profits to buyers. For example, our analysis suggests that the 2008 En Primeur campaign was nearly 30% underpriced, handing a windfall of nearly €300 million to the supply chain (assuming En Primeur sales of up to €1 billion in 2009).
Inefficiency and lack of transparency have eroded confidence. The chart below shows that En Primeur activity on Liv-ex remains well below historic levels. A number of Liv-ex members report similar falls in activity in the market overall.
En Primeur sales on Liv-ex as percentage of total sales (by campaign*)