Wine market prices and investment under uncertainty: an econometric model for Bordeaux Crus Classes

This paper describes an econometric assessment of wine market prices for 21 of the Crus Classes chateaux in the Bordeaux region of France, The model d eveloped in the analysis attempts to define the relationship between factor s that influence wine quality and those that influence wine prices. Charact eristics of the models are: (1) climate influences on grape composition (ac id and sugar levels), (2) grape composition influences on market prices, (3 ) subjective quality evaluations (Parker-points) on market prices, and (4) the effects of age of the wine on market prices. The results indicate that composition levels of Merlot-dominated wines are more climate sensitive than those from Cabernet Sauvignon-dominated wines. Overall, warm, dry summers result in high sugar and low acid levels at harv est which in turn lead to higher quality wines. Wine market price sensitivity to Parker-point ratings indicates that proper ties with high Cabernet Sauvignon-dominated wines are highly dependent on t he external ratings while Merlot-dominated wines have a decreased rating se nsitivity. Smaller properties tend to gain over proportionally from high ra tings indicating great jumps in price from year to year. Additionally, chat eaux that have experienced high ratings for past vintages exhibit great sen sitivity to point steps in ratings for current vintages. Aging has a positive effect on Bordeaux wine pricing. This is due to the in creasing maturity as well as the increasing absolute scarcity. Absolute sca rcity of product is expressed by the size of the property, with small prope rties producing less per vintage and therefore having less in the market. A dditionally, Merlot-dominated wines exhibit more maturing potential and pro fit more from aging than Cabernet Sauvignon-dominated wines. Average per chateau real annual profit ranges from 1 to 10%. High levels of grape ripeness, absolute scarcity, and smaller properties that are dominat ed by Merlot in their blend lead to the highest profits. Forecasts for a vi ntage not yet on the market indicates that 1995 is better than 1994 for bot h Cabernet Sauvignon and Merlot-dominated wines, but that 1996 and 1997 are not as good as 1995, especially for Merlot-dominated wines. (C) 2001 Elsev ier Science B.V. All rights reserved.