Wine futures: Pricing and allocation as levers against quality uncertainty

Abstract

This study examines the impact of using wine futures in order to mitigate the winemaker’s risk stemming from quality uncertainty. In each vintage, a winemaker harvests grapes and crushes them in order to make wine. A premium wine sits in barrels for 18–24 months. During the aging process, tasting experts take samples and establish a barrel score; this barrel score often indicates the expert’s perception of whether the wine will be a superior wine. Based on the barrel score, the winemaker can sell some or all of her/his wine in the form of wine futures and in advance of bottling. The winemaker makes three decisions: (1) the price to sell her/his wine futures, (2) the quantity of wine futures to be sold in advance, and (3) the amount of wine to be kept for retail and distribution. The wine continues to age for one more year after barrel samples. The tasting experts then provide a bottle score upon the bottling of the wine. At the time the winemaker determines the price and quantity of wine futures, this unrealized bottle score represents the uncertainty that influences the market price of the wine. This study makes two contributions to the optimization of pricing and quantity decisions and offers insightful recommendations for practicing managers. First, it develops a stochastic optimization model that integrates uncertain consumer valuations of wine both in the form of futures and in bottle, and the uncertainty associated with bottle scores. Second, it provides an empirical analysis using data collected from Bordeaux wineries engaging in wine futures. The empirical analysis demonstrates that wine futures can be used as price and quantity levers to mitigate the negative consequences of quality uncertainty. The results provide clues as to how other markets (e.g. Italy and the U.S.) can establish similar wine futures markets in order to help their small and artisanal winemakers.