Buying en primeur

What is en primeur?

En primeur, otherwise known as wine futures or opening offer wines, refer to the release and sale of wine by growers and their merchants before they are bottled and ready for physical delivery. Similar to the way in which cotton, coffee and other consumables are traded on the international markets. The main wine areas that are regularly involved in this process are Bordeaux, Burgundy and the Rhone; together with vintage Port. The wines themselves are delivered some time after the en primeur sale during which time the wines complete the maturation process, usually in barrels. They are then bottled before finally being delivered to the merchant and so become available to the customer, normally two or so years later.

How does it work?

Typically wine merchants will be invited to taste wines initially just after finishing the malolactic fermentation, and again while they are still maturing, and quite some time before they are ready to drink. Their experience enables them to say how the raw wine that they are then tasting will ultimately taste when it is a finished product, and judge whether the wine is worth the price that the grower is asking for it, even though it tastes quite different from the final drinkable wine. The wine merchant offers the wines it selects to customers in the form of a promise to deliver that wine later, at a fixed price now. This price excludes UK Excise Duty and VAT. If the customer chooses to buy; an invoice is raised for the product which states that the customer has a right to the wine at a future date and he pays the merchant for the transaction.

When the merchant finally receives the bottled wine, the customer has various options. He can take personal delivery, pay the UK Excise Duty and VAT and store, drink or sell the wines as he chooses. Many customers prefer to have the wine stored by merchants or specialist warehouse rather than at home. This can be "under bond" which means that the payment of Duty and VAT is delayed while the wine is in a properly registered and in a controlled warehouse. Some merchants ask their customers to pay the Duty and VAT when the wine arrives in the UK regardless of whether they take personal delivery or store the wine with them, I have never quite understood that.

Why buy en primeur?

Like all commodities, a futures contract is an agreement to buy or sell at a certain price, demand for some wines can well exceed their supply, and it is possible that all of a grower's wine is sold before it is bottled. It can then be very difficult or expensive to obtain that wine at a later stage. In addition, buying en primeur gives assurances about the provenance, since the customer is effectively buying directly from the grower. The customer can also be certain of the conditions in which it is stored; buying at a later stage, perhaps when the wine is ready to drink many years later, does not enable control of these conditions. The customer also has the ability to specify the bottle size. Finally, it has been the case that fine wine, in limited supply, has consistently increased in price. Customers have been able to sell at a profit. It must be said, however, that there is no guarantee of this, and the price of wine (as in the case of many other assets) can fall as well as rise. Rather like art, it is good advice to buy wine that you will enjoy, rather than count on it appreciating in value.

On the other hand there are risks and costs associated with buying wine en primeur. The first of these is that the wine may not turn out to be as good as projected by the merchant. Secondly, money is tied up while the wine matures when it could be earning interest. Thirdly, money has been paid to a merchant, and by the merchant to a grower, without taking possession of the product itself.

Why do producers sell en primeur?

The big advantage for producers is liquidity. Without this early sale they would require more capital to finance their operations without income for several years. Selling en primeur means better cash flow.

When are en primeur wines delivered?

This varies by region. The largest region is Bordeaux and the en primeur offer of the previous year's vintage is typically made in June of the following year. Delivery of the bottled wine will then take place 18 months to two years later (i.e. about 2½ years after the harvest or vintage).

Some customers will pay Duty and VAT shortly after the wines arrive in the UK; others will delay this payment and may even sell the wine without paying Duty and VAT (in other words while it is still stored in bond).

When is payment due?

Subject to a wine merchant's terms and conditions, payment is due when the customer's order is accepted by the merchant. Some merchants have closing dates for their en primeur campaigns, and if demand exceeds supply they will allocate the wine, perhaps by ballot. Other merchants sell on a (first come, first served) basis. In all instances payment is a significant time before delivery.

Is there a risk?

Wine prices can fall as well as rise. Wines can turn out to be less attractive than expected. In addition there is a clear risk in paying for a product which is delivered a considerable time later, and there have been many instances where a merchant has sold more wine than he has managed to obtain from the grower. Some people will then be disappointed! There have also been bankruptcies of honest merchants or growers between the time of payment and delivery of the wine, and as a consequence customers have not been able to obtain delivery of the wine that they paid for. It is also possible but rare, that a grower oversells his output, and when the time comes to deliver is not able to do so, despite having been paid by the merchant.

There have been instances of fraud and non-delivery of wine, dodgy dealing; despite the payment and contracts. The problem here is the natural time lag between paying for the wine and delivery, normally eighteen months to a couple of years, given the large amounts of cash involved, this becomes a perfect vehicle for unscrupulous people with dubious motives for relieving you of your hard earned cash. Not surprisingly, the same names keep cropping up when this happens.

So there certainly are risks to buying wine in this way. However, dealing with a reputable merchant can reduce these considerably.

Checklist - ask these questions about the merchant offering en primeur wine:

• Consider the size and reputation of the merchant.
• How long has the business been trading?
• How much cash and other assets does the company have compared to their en primeur purchases?
• How is the management supervised?
• Consider whether the merchant offers guarantees or carries insurance. Some merchants ensure that if a grower does not deliver the wine as arranged that funds are returned to the merchant and so to the customer, through a bank guarantee or insurance, or wine obtained from another source.
• Does the merchant own the wine he is offering for sale, or does he just hope to buy it from the grower once he has your order?
• Are prices competitive? Do they include delivery?
• Where can they be stored once delivered to the UK? Are these facilities secure and climate controlled? What is the rental charge and does this include insurance?
• What paperwork, such as invoices and statements, will you receive to ensure that you can prove your entitlement to the wine that you have paid for?
• Is the title to your wine clearly established, through labelling and/or statements and invoices?
• Is your wine stored separately from the company's own wine?

Demand and the consequences, or missing out.

The Bordeaux producers have been getting better and better at creating hype, the best vintage of the century....how many times have we heard that statement arising out of Bordeaux, I know I've lost count over the past 30 years. But when the vintage is good, demand is huge, because people know these wines are being traded by wine enthusiasts and gamblers all over the world. The new phenomena of wine investment has driven prices ever higher, people clamour to buy and its not unusual for prices to rise 20, 50 and even 100% in a matter of weeks. The 2000 Bordeaux vintage was oversubscribed for the best wines by more than 600% and prices rose dramatically, similarly 2005, even though not quite as great a vintage, but between en-primeur and delivery prices saw uplifts of between 150% and 250% on their purchase.

Good for the consumer?

There are a number of advantages to buying en-primeur, these include securing rare wines, because they are not yet in bottle you can determine what format you want, half bottle, magnum, double magnum...but most of all is the financial advantage. However, this is not always the case, Rhone and Port are typical examples, often these can be purchased for the same price on release. Poorer vintages, particularly those ending with a 7 from Bordeaux have historically lost money, both for the client and the merchant. Poorer vintages need to be sold by the merchants, the greater vintages sell themselves, unless there is a major external force applying pressure from elsewhere.

Who to trust?

I set this business up because often I was sold wines by UK merchants who informed me it was a great wine. When it came to tasting the wines had been SOLD TO ME, I was often disappointed, but when I bought wines which I had previously tasted, I was never disappointed. What about the wine critics? Robert Parker, James Suckling, Steve Tanzer, Jancis Robinson et al. Biggest problem here is they tend to disagree with each other on a regular basis...many wine critics suffer from the tall poppy syndrome, most are very good at what they do, but each has their own favourite styles and producers, one thing to consider, find one that you're happy with and stick with them, but the problem there is the biggest uplifts are always on the wines rated by Robert Parker, James Suckling comes a close second, in terms of moving the markets with price. So if its uplift you want, Parkers your man.

Happy hunting.