Who Killed the WINEFEX?: Autopsy of the Bordeaux Wine Futures Contract

Abstract

Euronext’s September 2001 launch of the WINEFEX Bordeaux wine futures market quickly turned into a complete fiasco. The purpose of the present study is to analyse the reasons for this failure, the responsibilities of the various actors involved and the effects that this half-baked attempt to wed fine wine and market finance will have in the future. We will ultimately come up with three conclusions: the first will focus on what was an exceptional conjunction of technical errors and bad luck; the second clearly specifies Euronext’s responsibility in this affair; and the third discusses the pessimistic outlook for a viable wine futures market. The original error clearly lies in the technical characteristics of the contract such as it was defined by Euronext. The small face value and the fixed conversion factor between the various grades of deliverable wine largely explains the lack of interest by the three actors who are indispensable to the success of a futures market: branch professionals; speculators; and arbitragers. A second type of error relates to Euronext’s approach. At first, this exchange company misjudged the underlying asset’s volatility (and to be specific the exogenous elements that can cause variations in Bordeaux wine prices in general and in grand cru prices in particular). Even more surprisingly, Euronext executives then totally ignored objections coming out of Bordeaux regarding the WINEFEX’s feasibility. Finally, the third type of error relates to the contract’s launch calendar. Although no one could have predicted the events of 11 September (nor their impact on a contract that had initially been planned for 14 September), the history of futures markets has long taught us that the best time to launch a contract is when a bull market is just at its outset. And yet, a long-term analysis of Bordeaux price cycles already indicated back in early 2001 that the underlying product was coming to the end of its upwards cycle. The WINEFEX’s failure is likely to have two kinds of consequences for years to come: it will undermine the launch of any similar contract, mothballing all plans for wine futures, regardless of their particularities; and it also will force everyone to cogitate over the quasi-ontological general question of whether wines are basically soluble with market finance, and more specifically, whether a grand cru can be wed to a futures markets. “A market is a success when it appeals to investors, speculators and arbitragists all at the same time”. J.M.KEYNES