WineLeaks #7 - The Bank Holiday Edition
Shall I buy wine to shield myself from inflation? And again, shall I buy wine that could have been affected by smoke taint?
Welcome to In the mood for wine — a weekly newsletter on wine for the next gen of wine lovers and investors. This is WineLeaks, a curated overview of the wine market, which will be with you every Monday at 10 a.m. (London time).
If you are new, you can join here. Please hit the heart button if you like today’s newsletter and reply with any feedback.
For those of you in the 🇬🇧 like myself (roughly 45% of this wine community) — Happy Bank Holiday Monday! I’d love to hear what you’ve been drinking during this long weekend in the comments.
The Investment Take
🔴 “There is precedent for collectibles as hedges” (FT)
There is currently a mainstream narrative —and that is about inflation and how wine is a great hedge against rising prices which, of course, wine merchants are heavily supportive of. This piece from Reuters. On Liv-Ex. The FT reported on Bordeaux Index and its record sales (discussed in the Tech Edition). “From diamonds to wine, investors rush to luxury collectibles“ — another very interesting article by Madison Darbyshire which highlights how collectibles were “once the playground of affluent collectors” but that “assets such as classic dresses and baseball cards are increasingly open to all,“ also noting that “hedge funds and professional investors are carving out pieces of the pie to put their money into collectibles“.
While commodities (among those: collectibles) have long been considered a good store of value during inflationary periods, the key to lock in profits is the timing during which these investments are made. To understand this point, here’s my thinking.
What Is Inflation?
Inflation is defined by the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising.
In everyday terms, during inflationary periods, $1 is worth less and less because everyday items become more and more expensive.
During inflationary times, central banks need to act fast in raising interest rates, thus reducing the money circulating in the economy, which in turn will slow down the economy. The speed at which rates are increased needs to be measured against the risk of recession (if done too fast this will bring the economy to a halt).
What Is an Inflation Hedge?
An inflation hedge is an investment that is selected to protect against the decreased purchasing power of a currency that results from the loss of its value due to rising prices.
Intuitively, keeping your savings “under the mattress“ during inflationary periods means that you might wake up one day feeling a lot less cushy.
So-called safe-haven investments like precious metals and real estate, for example, usually perform well in inflationary climates; theoretically, bitcoin could be a strong inflation hedge. Assets that investors run to in times of rising prices are ones that are scarce or move counter to paper money or financial assets. Bitcoin fits the bill. The problem is, bitcoin hasn't much of an investment history: Created in 2009, it's only been actively traded for a decade or so, and inflation hasn't been much of a factor for most of its short life. Energy and banking stocks also benefit from rising prices and interest rates respectively because of top-line growth.
To understand whether wine is a good store of value during inflationary times, I have superimposed world inflation (%) over the Liv-Ex indices during the course of the last three decades.
By looking at the chart, it’s clear that fine wine prices move in anticipation of an inflationary period.
The ‘size’ of inflation doesn’t matter a great deal — the expectation that inflation will change is what drives prices of fine wine up or down.
Inflation and fine wine prices are concurrent — meaning, when inflation hits, it’s too late to buy.
If central banks are successfull in their attempt to control inflation, a recession (and consequent drop in inflation) are likely in the next few years. That also means a significant drop in fine wine prices is likely to happen soon.
Inflation is a natural occurrence in an economy, and a disciplined investor can plan for it by cultivating asset classes (read: fine wine) that outperform the market during inflationary climates.
Buying fine wine at the right time is the most important aspect of successfully investing in this asset class, and taking advantage of the benefits.
Private Cellar Offer
🔴 “The cellar is a veritable Who's Who of fine wine, worth nearly £700K, and priced keenly in the market“ (Goedhuis & Co)
This past week, I received an email from Goedhuis with this private cellar offer. While pricing isn’t very attractive (perhaps stay away from 2013 Burgundys), the list is still very interestring and, more so, some names on the list are hard to come by.
🔴 “Should you consider buying a wine from a region/vintage that has been exposed to smoke?” (TWI) ($)
As the fires swept across the Gironde this summer, largely caused by drought, back in July we wrote that the CIVB wine bureau had said that “no vineyards have been impacted, and consultants are cautiously optimistic”.
The Drinks Business reported this week that the CIVB has been contacted by vineyards of Australia and California who shared their expertise and re-iterated that “berries have been analysed and nothing has been detected, the rains of last week and this week have allowed to rinse any possible traces”.
In the notes from Jane Anson (see Harvest Reports below) she comments that the harvest is underway with the Sauvignon Blanc in Bordeaux and the reds will soon start.
As wine critics start writing about the 2020 vintage in California and Napa Valley — it’s interesting to see what’s lying ahead for Bordeaux.
Back in August 2020, Decanter was noting that in California, at the time of the harvest, many wineries were conducting extra checks for signs of smoke taint.
Harvest went ‘full steam ahead’ and, although some reports had raised concerns about smoke taint affecting areas of the vintage (perhaps not presenting a united message as the CIVB in Bordeaux is doing), in truth it was too soon to tell.
What Is Smoke Taint?
Smoke taint occurs when developing grapes are exposed to the smoke from wildfires for any period of time.
A number of factors will determine the level of impact the smoke will have on the berries: the state of berry development during the exposure, the duration, and the concentration of smoke.
More on that from the Australian Wine Research Institute “Smoke taint – entry into grapes and vineyard risk factors“ and from the Department of Agriculture and Food Western Australia “Effect of smoke in grape and wine production”.
How Does Smoke Taint Affect Wine?
“Smoke taint involves more than just the unpleasant classic aromas of campfire, ash and wood smoke. Tasters experience elevated levels of perceived tannins and alcohol; the wine tastes rougher and hotter than it actually is”, writes Arnica Rowan for jancisrobinson.com, adding: “with training, which I do not recommend, you can often smell the base fuel from the fire, such as a pine campfire aroma from a pine forest“
Aside from the obvious smoky character, a more worrying note from Perrotti-Brown is that some wines don’t exhibit the taste of it but “smoke taint is insidious in its ability to remain masked for a period before emerging”.
“Some grapes seem to absorb more of the offending taint compounds than others. Syrah seems to favour this smoke character.”
Most white grapes tend to have little or no skin contact, and late-season smoke mainly affects the skin.
Key Takeaways on Napa
Fast forward two years, Lisa Perrotti-Brown MW cautions against buying California Central Coast and Napa Valley 2020 as “smoke-tainted 2020 wines are being bottled and sold, even by reputable wineries“.
Winemakers have lab-tested their wines and were told the smoke taint compounds numbers were below that lab’s stated detectable thresholds.
“The problem is that” explains Perrotti-Brown, “laboratories cannot test for all the taint’s compounds. Most of the time, I can detect what winemakers have been told is undetectable.”
Regarding the red varieties, Perrotti-Brown has tasted smoke tainted 2020 wines from sites in California north of San Luis Obispo, including the major areas of Paso Robles, Sonoma, and Napa Valley. She will release a largescale report on California Central Coast and Napa Valley later this year which will focus on this issue.
Perrotti-Brown hasn’t yet tasted any 2020 white wines that have smoke taint and she doesn’t expect to, since most white grapes were harvested before the smoke became a real issue in most areas.
What’s clear from this word of caution from Lisa Perrotti-Brown MW is that buying a wine from a region/vintage that has been exposed to smoke is very risky indeed. Leaving aside the vintage considerations — a smoky vintage will be considered, no doubt, a lesser vintage, thus reducing its value on the secondary market; but what’s still not quite clear is if and how smoke taint can affect wine in their later years — will it reduce the ageing potential? will compounds remain hidden until the bottle is opened?
Many questions that perhaps winemakers themselves don’t know the answer to.
A few harvest reports started to come in:
🔴 “‘Earliest ever’ Bordeaux harvest begins” (janeanson.com) ($)
“Rain and slightly fresher temperatures have returned to Bordeaux this week after six weeks with almost zero rainfall, and the driest July since 1959.”
It’s now the perfect moment to harvest Sauvignon Blanc, “as the aromatics are high” says Jacques Lurton, president of the Pessac-Léognan syndicate.
The first reds, according to the CIVB, are expected to begin across the region around September 12, although several winemakers are suggesting that date may be closer to September 1.
Yields are expected to be between 13-21% higher than in 2021.
🔴 “2022 Harvest“ (Inside Burgundy) ($)
Jasper Morris reports that “Burgundy has mostly escaped the hottest weather this year – the canicules – and the nights have remained surprisingly fresh”.
Relaxed harvest, especially compared to the stress just before harvest in 2020 and the complicated 2021 season.
🔴 ”Heat and drought weigh on the 2022” (winenews)
Italy’s 2022 vintage will be, across the board, affected by drought and above-average temperatures that, for the most part, will limit the yield, “but also, by fewer treatments against [fungal] diseases, which were practically absent.”
Some of the whites seem to lack acidity (see: Gavi).
Until next Monday,
In the mood for wine (a.k.a. Sara Danese)