Wine Analytics: Fine Wine Pricing and Selection Under Weather and Market Uncertainty

Abstract

We examine a risk-averse distributor’s decision in selecting between bottled wine and wine futures under weather and market uncertainty. At the beginning of every summer, a fine wine distributor has to choose between purchasing bottled wine made from the harvest collected two years ago and wine futures of wine still aging in the barrel from the previous year’s harvest. At the end of the summer, after seeing weather and market fluctuations, the distributor can adjust its allocation by trading futures and bottles. This paper makes three contributions. First, we develop an analytical model to determine the optimal selection of bottled wine and wine futures under weather and market uncertainty. Our model is built on an empirical foundation in which the functional forms describing the evolution of futures and bottle prices are derived from comprehensive data associated with the most influential Bordeaux winemakers. Second, we develop structural properties of optimal decisions. We show that a wine distributor should always invest in wine futures because it increases the expected profit in spite of being a riskier asset than bottled wine. We characterize the influence of variation in various uncertainties in the problem. Third, our study empirically demonstrates for a large distributor the financial benefits of using our model. The hypothetical average profit improvement in our numerical analysis is significant, exceeding 21%, and its value becomes higher under risk aversion. The analysis is beneficial for fine wine distributors, as it provides insights into how to improve their selection in order to make financially healthier allocations.