The supply and demand imbalance that underpins Fine Wine investment is fantastically idiosyncratic. It creates a distinctive price momentum that is the foundation for consistent performance.
The overall supply of investment grade wine is limited by a wide range of legislation, such as Appellations d’Origine Controle (AOC) within France. These strict classification systems, place limits on yields, as well as restrict growing locations and winemaking methods, ensuring that a region’s reputation and history is upheld.
Subsequently, volumes are finite and that is before considering the role of mother nature in each vintage, which can significantly impact production totals. The final compounding element within supply, is the single use characteristic. Unlike Classic cars or fine art, once a bottle is opened, the intrinsic investment value is gone.
The final compounding element within supply, is the single use characteristic. Unlike Classic cars or fine art, once a bottle is opened, the intrinsic investment value is gone. A great wine will evolve in the bottle for decades, with this maturation steadily improving quality. An awareness of the increasing quality may see collectors unable to avoid the temptation of opening a bottle. Consequently, supply begins to narrow as demand grows.
This level of demand is demonstrated by the bid to offer ratio on Liv-ex consistently achieving over 1. Noting that a ratio above 0.5 indicates an upward market trend and price stability. At the very least this demand will continue to ensure the underlying value of the asset. Although more than likely, it will drive market growth and values higher and higher benefitting those well positioned investors.
Within this imbalance, we often also see demand accelerate as the wine moves towards the optimum point at which to open it, within its drinking window. This has the effect of creating increasing price momentum. The desirability and value of the bottle grows exponentially in tandem. This tail-end market demand is enormously attractive and beneficial when considering liquidation and exit.