What resemblance does fine wine bear with crude oil? Too much, at least if you wish a diversified investment portfolio, say two shock-jock analysts from the International Monetary Fund. Serhan Cevik and Tahsin Saadi Sedik have attracted much attention by putting seeming opposites into the same economic model, and analyzing what comes out the other end. Their aim was to break new ground in the study of commodity prices, and in doing so found that, even when controlling for differences in their basics, fine wine and crude oil prices have moved in virtual lockstep for the last 12 years. Their takeaway? Demand is the salient factor in the price of any commodity, and not whether its supply is high, low or disrupted.
Fair enough. But it's the way that Cevik and Sedik get there that's generated more buzz than is usually accorded IMF working papers. Marketwatch did a nice chart of the correlation:
At the Financial Times, Javier Blas notes that the 20-page paper directly contradicts the judgment of loads of ostensibly sophisticated portfolio managers. "Investment in fine wines has boomed in recent years, partly in the belief that they diversify the risk of holding just equities, bonds and traditional commodities such as crude oil or copper," Blas writes. At the Wall Street Journal, Benoit Faucon calls it another stake in the heart of OPEC's reputation as a price-setter. The FT's David Pilling says the report explains the current explosion of food prices. "What is true for wine will hold for rice, wheat, potatoes and onions," Pilling says. "If the growth of India and China is destined permanently to inflate the cost of energy, it's a pretty safe bet it will have the same effect on the cost of food." A musician colleague of mine helpfully suggests that if diversification is the aim, maybe try rare violins.
Not surprisingly, the Cevik-Sedik notion sits well with oil traders. I talked to Phil Flynn at PFGBest, for instance, who sees many reasons why oil and fine wine prices ought to correlate -- and also why someone ought to start a wine ETF, meaning a tracking fund. "I would welcome wine futures. It might keep prices lower," Flynn told me.
Among wine experts, the enthusiasm is considerably less. That would include Vic Motto, who runs St. Helena, Ca.-based Global Wine Partners, a wine investment bank. Motto told me that these IMF fellows have simply unearthed a curiosity, not a fact. (To be precise, he said "I think it's baloney."). "They are mathematically correct, but that's all," he said. "There is no valid correlation."
According to Motto, the problems start with the data and the definitions. For wine, Cevik and Sedik rely on the Live-ex Fine Wine 100 Index, which tracks monthly price movements in 100 of the world's most sought-after rare and collectible wines. For oil, they used an average of Brent and WTI crudes. But if you look up the word "commodity," you get this: "A good for which there is demand, but which is supplied without qualitative differentiation across a market." And therein lies the fatal flaw, Motto says.
"Rare wine is not a commodity," he said. "It is rare. It is sold to the elite at auction. You can buy wine for $2 a bottle, for $20 a bottle, for $20,000 a bottle, and $200,000 a bottle. It has little to do with agricultural commodities."
The very best wines, Motto says, are French Bordeaux and burgundies, which are affected year by year by weather and other factors. Vintages go up and down in quality, and there isn't always rhyme or reason to how they are priced. The 2000 and 2005 Bordeaux vintages were fantastic, he said, but the former was initially underpriced in France, and the 2005 overpriced, and hence had to adjust according to very different consumer reactions. "I can't imagine how that might relate to crude oil prices," he said.
That of course is true. Crude oil prices do swing wildly at the whim of traders, but not as wildly as fine wine does when, say, a newly minted Russian oligarch is seeking to impress his friends.
But while they may offend the sensibilities of wine experts, Cevik and Sedik say none of this appeared to matter, at least over the last 12 years. Violins anyone?