Classic Wines

The Currency of Wine

So we have dealt with more microscopic levels of finance in terms of what it costs to manufacture, say, a nice bottle of Pinot. But what about the global market? What are the issues that we have to face with the ever-sinking dollar, the ever-thermal cost of gas, and all points in between?

Yeah, even wine is coming under the crush of these financial hammers. Think about it.

Already we are seeing some costs associated with shipping and distribution rising due to gas alone. An eighteen wheeler that carries 200 gallons of diesel that is close to $4.50 a gallon versus almost half that of a year ago will certainly impact the relatively simple task of moving boxes from point A to point B. And that's just the long haul guys, who are the most efficient, don't get started on the distributors who have fleets of trucks all over the place, bouncing back and forth between the warehouse, the customer, the warehouse, the gas pump, etc... plus the prepaid gas cards for their sales force. You know who will be paying for all of that excess gasoline. Either the winery or the end consumer, or both. And that's just the cost of doing business domestically.

A bottle of nice stuff from across the pond, let's say France, has seen an increase in the final price of about twelve percent over the past year simply due to the falling dollar. But even despite the euro, you have to realize that their fuel is rising as well, and realize that they are not exactly fading in popularity around the globe. Bordeaux is breaking records every year, almost regardless of vintage. The "lesser" regions are also gaining popularity as more value seekers search other regions, thereby killing the very thing they are seeking. So even without the factors of fuel and currency, the wines are going up just by demand.

A noted European importer set their 2008 book prices last December, and released those prices to all of their distributors across the country. Since January, they have had THREE price increases. Not because of the euro, it hasn't changed that much in the past six months (the dollar has dropped about ten cents.) But what has? Good old petrol, which has doubled in price from just over $US60 a barrel to just under $US130. Understand that while we are moaning and groaning (rightfully so, but I digress) about the insane rise in gas, France, for example pays on average $US8.06 a gallon. The importer apologized, but what can they do? They have to truck the wine from their vineyard to a port, then load that wine on a boat across the Atlantic. Imagine the diesel it takes to power a freighter across the Atlantic. That is a cost that they cannot ignore, they cannot change. And remember that the FOB price from the importer is still "stepped on" by the distributor, then the retailer, both of which have their own fuel issues to deal with, and you see how the prices can get out of hand rather quickly.

So why are we talking about how currency markets and crude prices affect your bottle of wine? Because nothing is sacred. It all gets affected. Rice, shoes, apples, and fermented grape juice.

From an investment point of view, you are going to see the big boy Bordeaux rise accordingly (though they go up every year regardless nowadays) but with little to no slow down in buyers as most who play in that pond are what we like to call "insulated" from such trivialities as rising oil prices or falling dollars. I say "insulated" in that while they may lose more money in a bad week than you and I earn in a year, they are still doing quite well, and a bottle of wine is still, relative to their wealth, a non-issue at twice the price.

The guys that are going to really feel it are the smaller producers, the little guys who are on the edge of the radar when it comes to the "luxury good" that is wine.

Next week we will look a little closer at how these smaller regions are more than likely to feel the pain when they try to export, and why it may pay to dig a little deeper on this side of the pond when trying to satisfy your old world tastes.