Time is money: ageing, inventory and the cost of waiting

Interest: the price of money

If the winery does not have that money itself, it must borrow it, and lenders charge interest: a fee for using their money, worked out as a percentage per year. Borrow $10,000 at 6% for one year and you owe $600 in interest. Even a winery with its own cash pays an opportunity cost, because that cash could have sat in a savings account earning interest instead.

Over several years interest grows on top of interest. This is called compound growth, and it works like a snowball rolling downhill. At 6% a year, $10 becomes $10.60 after one year, $11.24 after two, and about $13.38 after five. The longer a wine waits, the faster the cost of waiting rises.

Getting paid early: en primeur

Some producers have found a way to make other people carry the cost of waiting. Each spring, many Bordeaux châteaux offer the wine from the latest harvest en primeur, also called selling futures. Buyers pay for the wine while it is still in barrel and receive the bottles a year or two later.

For the château this is a big help with working capital: money arrives long before the wine is ready. In return, it usually has to offer a price below what it expects the wine to fetch once bottled. The buyer takes on the waiting and the risk that prices fall, and hopes to be rewarded with a lower price than later buyers pay. Whether that hope comes true varies a great deal from year to year.

The risks of waiting

Time does not only cost interest. While wine waits, many things can go wrong. A batch of faulty corks can taint some bottles. A cellar can flood or overheat. Tastes can change, so a style that was popular when the wine was made is less wanted when it is finally released. Prices in the market can fall. Every one of these is a risk the owner carries, and economics says people expect to be paid more for carrying more risk.

That is why the price gap between a young wine and a long-aged one is often larger than the interest and storage bills alone. Part of the extra is a reward for patience and for taking those risks.

Who pays to wait?

Someone always carries the cost of ageing. Sometimes it is the winery, which then charges more. Sometimes it is a merchant who buys young wine and sells it later. Sometimes it is the drinker, who buys a young Bordeaux or Barolo and keeps it at home for ten years. In each case the person waiting gives up the use of their money, takes the risk that the wine is damaged or falls in value, and expects to be rewarded for it.