FUTURES PAST?

Several attempts have been made to render some parts of the wine market more liquid – and more transparent and efficient at the same time. But could these initiatives also bring about more stability to the prices paid to wine/grape producers as well as to those charged to consumers? Some twenty years ago, producers of Bordeaux en primeur (sold forward in cask, in the spring following harvest) and merchants dealing in these fine wines around the world were given a serious opportunity to reduce their exposure to risk by trading in proper wine futures.

Futures contracts are a powerful financial instrument that makes it possible to transfer price volatility (risk) from people who seek to avoid it to those who wish to take it. They allow buyers and sellers of the goods to cover – in full or in part – their normal transactions against unwanted price changes, by using a proven technique called hedging. Investors (speculators) provide the necessary liquidity for this to happen. And since futures are essentially used for hedging, less than 5% of the volumes traded on futures exchanges typically result in physical transactions (i.e. in the goods being either delivered to or collected from the exchange) when the contracts reach maturity.

In September 2001, the Pan-European exchange Euronext* launched what should be considered the world’s first proper wine futures under the name ‘Winefex Bordeaux’, for the 2000 and 2001 vintages. This came weeks after the fine wine traders Bordeauxindex had opened up their own on-line ‘two-way price service’ for Bordeaux 2000 en primeur.

Strictly speaking, en primeur wine sales are forwards and not futures. Some draw a sharp distinction between the two types of contracts, the difference being that futures are interchangeable (because of their standard terms) whereas forwards are not. It is the interchangeability of the contracts that makes hedging possible.

The advent of wine futures horrified the wine establishment, mainly because of the populist view that futures could only increase instability. Yet according to The Economist, in January 2001, trading on Bordeauxindex.com was already having a sobering effect on the inflated en primeur price of the 2000 vintage and was likely to impact on the next. The price of the 2001 vintage was itself being traded on the Winefex exchange at that time and the next batch of futures contracts which were due to open in July, for the 2002 vintage (i.e. months before the grapes are even picked and nearly a year prior to the date at which the en primeur prices are officially announced), should have come to reinforce Winefex’s stabilising properties. Sadly, as with many new contracts, trading proved too thin and was suspended after the set trial period of nine months. The timing of their presentation in London, on the 11^th of September 2001, was also most unfortunate.

The fairly complex specification of the Winefex contracts may have deterred some in the wine trade from using wine futures as an effective tool for managing risk in their day-to-day business. When it launched them, Euronext was confident that once futures’ effectiveness had been proven, producers and traders would overcome their usual scepticism and become keen users of them, as had been the case in other markets. It hoped it could then extend futures to other wines from Bordeaux (e.g. to génériques – wines that are traded in bulk, before their accréditation, and that made up 60% of the region’s sizable production of 555 million litres in 2000/01). Wines from other well-known regions of France and the world were meant to be added to the list later. But such plans were apparently too disruptive of the traditional ways in which most of the Bordeaux wine trade liked to operate.

* set up in 2000 as the merger of the Paris, Brussels and Amsterdam exchanges, Euronext merged with the New York Stock Exchange and was acquired by the Intercontinental Exchange Group later, which spun it off in 2014.

First published on April 8th, 2011. Updated on September 1st, 2020