Is SA ready for a new era in wine trade?

Back in the 1970s, it used to be an accepted wine-trade belief that you could double your money in as little as two to three years by buying Bordeaux wine futures.

While prospects are not as bright these days, Roland Peens, director of the fine wine merchants and cellars company Wine Cellar, believes Bordeaux wine futures still provide a good opportunity for South African investors to hedge against the rand.    

The en primeur system allows investors from all over the world to buy premium quality Bordeaux wines six months after the harvest and two years before the bottled wines become available in the market, says Peens.

“The sale benefits include a boost in cash flow for farms, while securing availability early and theoretically allowing consumers to buy fine wine at a more favourable price.”

Return on investment used to be around 20%, depending on the quality of the vintage, but positive returns, as with any investment, are not guaranteed.

In fact, the en primeur system has been under a lot of strain since the start of the global financial crisis in 2008, with five of the last eight campaigns not making any money. Peens feels that this is a way of the market correcting itself. 

Peens believes that en primeur could also provide South African producers with an opportunity to hedge against a depreciation in the rand. “The Château Pichon Longuevill Comtesse de Lanlande 2005, for example, sold in South Africa for R900 per bottle in 2006. Since then its price has increased by 90% to R1 700 per bottle. The price for this wine in euro terms, nevertheless, remained pretty flat over this period.” 

South African application 

Wine Cellar is busy developing an online trading platform through which premium quality wines can be traded in real time, says Peens. While investment in South African wine is still relatively new, the huge strides South African wines have made in quality over the past decade, along with the depreciation of the rand in comparison with other major currencies and the growing global demand for fine wines, is promising.

Wine Cellar’s platform would be different from the en primeur system, as wine would only be sold once bottled: “Until demand ferociously exceeds supply and the fine wine market is more developed, it will not make economic sense to sell wine while still in the barrel.” 

Johann Krige, co-owner of Kanonkop Wine Estate, agrees that the time is not yet ripe for a full en primeur platform in South Africa. “Kanonkop sold wine en primeur style between 1986 to 1992. We called it wine futures at the time, as that was a more familiar concept in the South African market. The wine was sold six months after it was barrelled and then aged for another 18 months in the barrel before it was bottled. The bottled wine was released to the market two to three years after the harvest,” he explains. 

The system yielded huge financial benefits as it provided a counter for inflation (about 20% at the time) and helped to improve farm cash flow. The estate only paid taxes two to three years later when the bottled wine was released.

Unclaimed wine

The Kanonkop system failed because investors did not collect their wine upon release. Some buyers wanted Kanonkop to keep the wine longer to age, some lost their certificates and some disappeared. “This put serious strain on our cellar space, since we ended up with about 12 000 cases of wine that didn’t belong to us. It was a logistical and administrative nightmare,” Krige recalls.

They charged cellar storage fees for keeping the wine, but almost 5 000 cases of wine were never claimed, and were later sold a second time. “Buyers could still on presentation of their certificates claim their money back for those cases. But the problem with wine futures is that the people who buy these wines are wine lovers. They want the wine, and wine is not like a car that can be replaced,” says Krige. 

In 2008 Kanonkop ventured to sell its Kanonkop Black Label Pinotage en primeur style, but decided against this after seeing the impact of the financial crisis on the French system. “The thing with en primeur is that you need to have a long-term vision with the wine and that means that you have to operate in a relatively stable financial environment, especially when you start out.”    

The economic environment has not been conducive for another attempt up until now. “The problem is that South African buyers would end up paying a lot of money for a bottle of wine that would sell for cheap in real terms overseas [due to a depreciated rand],” Krige explains.  

If Kanonkop was ever going to sell wine shares again, they would use wine marketers or négociants, as they are called in France: “We don’t have the time or capacity to market these wines or follow up sales, so would prefer that some form of middle man come and collect the wine from the cellars when it is released and they would then have to manage the distribution or storage on behalf of buyers.”

This article originally appeared in the 24 November edition of finweek. Buy and download the magazine here.