The big news in the wine world recently is that, according to a pair of Morgan Stanley analysts, we, as in everyone on Earth, are headed for a wine shortage. While perhaps not objectively the most pressing issue facing mankind, for many, the prospect of a wine shortage is nothing less than a cataclysm.
Of course, not everyone thinks the wine shortage is real. Seeking Alpha author Felix Salmon recently wrote an excellent piece arguing that the "shortage" is an analyst-invented fiction, furthered wholly "to put forward one particular investment thesis as strongly as possible". Mr. Salmon makes a great case, and the idea that big-bank analysts would use hyperbolic language to pimp their own investment ideas is in no way surprising (ethically dubious, certainly, but I doubt there's anyone naive enough to expect bank analysts to behave any other way). Still, even if there is no actual shortage, both the Morgan Stanley analysts and Mr. Salmon agree on one thing: global demand for wine is increasing.
Last year, I wrote a piece on Asset Prime describing China's changing taste for wine. (China, it should be noted, is also whence the Morgan Stanley analysts ascribe the growth in wine demand.) The piece is quite technical, breaking down the changes in demand for the different qualities of exported US wine, but the gist is this:
What the change in export number then means, really, is not that China is drinking more wine, per se, but that more people are drinking better wine. To that end, the article's thesis is entirely correct, but not just for French wine, for all high-quality wine. Until Chinese vineyards begin rivaling the quality and consistency of the best vineyards in France, the United States, and elsewhere, as China's citizenry gains spending power in the global economy, look for this trend to continue.
So, whether you believe the planet is in danger of running low on vino, or simply acknowledge that China's drinking mo' better wine, signs seem to point to a growing global demand for high-quality wine, specifically. As any economist will tell you, the logical response to increased demand and (potentially) short supply is first an increase in price, and then an increase in production to meet demand.
With all that in mind, I present my list of 10 Ways to Invest in a Global Wine Shortage, which, less-clickbaity, might also have been titled "several ideas for investing in higher wine prices and increased domestic wine production", but then, if I'd titled it that, would you even be reading this now?
1. Acquire Farmland
More wine requires more grapes requires more land. While farmland in classic viticulture hot spots like Napa, Sonoma, and Eastern Washington may be hard to come by, skilled vintners are constantly finding new climes in which to get high-quality vines to, literally, take root. Hell, the lead singer of Tool made a documentary a few years back about his vineyard in northern Arizona. So really, there's no telling where the next producer of great wine might be, and major demand from grape growers scouring for additional acreage, theoretically, would impact the price of ALL farmland. For those not able to own land outright, there is an intriguing option in the form of the first (to my knowledge) farmland REIT, Gladstone Land Corp (LAND). Briefly, if you didn't know, a REIT (real estate investment trust) is a corporation whose primary business is owning and operating a specific type of real estate, such that when an investor buys the stock of a REIT, her purchase is understood as proxy for investing in the underlying real estate. Ideally, a bet on wine would take the shape of an investment in grape-growing land, specifically, but unfortunately, LAND's farmland holdings are dedicated to many annual crops, not just grapes. Still, if we're really in a wine shortage, a rising tide should float all boats, and the grab for grape-growing land ought to bolster farmland prices in general.
2. Invest in Commercial Banks in Wine Country
Winemaking is a capital intensive business, and it can take a new vineyard up to five years before it begins to see revenues, let alone profits. As such, any new winery, or old winery looking to expand, is likely going to take out a few loans to finance operations. To that end, commercial banks in wine-producing regions ought to see a dramatic bump in issued loans. When deciding where to invest, look for banks that offer services for farms, or even vineyards specifically, located in major wine producing regions. From a very cursory survey, a few that jump out at me are SVB Financial Group through its subsidiary Silicon Valley Bank (SIVB), Bank of Napa (OTC:BNNP), and Columbia Banking System (COLB).
3. Buy Potash, Fertilizer, and Agricultural Chemical Companies
Before wine can be made, grapes have to be grown, and getting grapes to grow requires fertilizer. Unless you somehow happen to personally be in the potash mining game (live by the ash, die by the ash) your best option would be to invest in a large agricultural chemicals company that supplies fertilizer throughout the US. Specifically, we're talking about the usual suspects in the ag-chemical industry: Mosaic (MOS), CF industries (CF), Agrium (AGU), and Potash Corp (POT) to name a few.
4. Buy Farming Machinery and Equipment Companies
If I haven't beaten it into your head by now, the first part of winemaking is farming, so to a very real extent, investing in the future growth of wine production is exactly the same as investing in the future growth of American agriculture. Indeed, Cato the Elder wrote that producing wine should be a farmer's first priority, which might seem strange from a "sustain the empire" point of view, but makes perfect sense from a "make money" point of view, which, likely, is the very point of view from which you're reading this. Carthago Delenda Est. But I digress. The point is, all these new vineyards will need trucks, tractors, and other farm equipment just to become operational. That means investing in agricultural machinery companies such as Deere & Company (DE), Caterpillar Inc (CAT), and AGCO Corporation (AGCO).
5. Invest in Plastics and Steel Producers
When I set out to research this piece, I was hoping there might be some massive, publicly-traded company called "Wine Presses and Crusher/Stemmers Inc." that I could direct you to invest in. Turns out, almost all grape-processing machinery for winemaking is made by European artisans. (It's the kind of thing where their ancestors were probably building the wine vats for Cato's aforementioned farm.) The closest you could come is to invest in the raw materials needed to build all of the storage and processing equipment that lives inside the winery. In this case, we're talking mostly about steel and plastic. That means either investing in commodities futures directly (Hot-Rolled Coil Steel, for example), or in the companies that produce those raw materials. The candidates include US Steel Corp (X), Nucor Corporation (NUE), and DuPont (DD). I should say that, of all the ideas on the list, this is perhaps the most tenuous; the amount of plastic and steel that goes to the wine industry is a tiny blip compared to the broader economy, so don't look for burgeoning wine production to much affect the business of steel and plastics producers.
6. Buy Oak and Hardwood Timber
High-quality wine, which is precisely the type of wine for which demand is growing, is aged in oak barrels. Oak is neither abundant, nor cheap, nor quick to produce. A rise in quality wine production would almost certainly mean increased oak demand for barrel making. Now, I wish I could recommend purchasing an oak futures contract, but unfortunately no such thing exists. Softwood lumber futures (traded on the CME) refer specifically to lumber derived from coniferous evergreen trees (i.e. pines and firs), typically used in home construction. As such, the price of oak, which is classified a hardwood (derived from deciduous, broad leafed trees) would not necessarily be that correlated with the price of softwood lumber futures. With that in mind, the best play here would likely be to invest in companies that produce oak and other hardwoods. This includes lumber companies such as Weyerhaeuser (WY) and Rayonier (RYN), or timberland REITs like Potlatch (PCH) and Plum Creek Timber (PCL).
7. Sell Flooring Companies Short
This one is a little crazy, but follow me for a minute here. Flooring companies are major processors of two types of wood integral in winemaking: oak, and cork. The former we've discussed already in the previous bullet, so suffice to say that if hardwood prices rise, so will flooring companies' costs to produce hardwood floors. The latter wood, however, provides a bit more interesting a case. We all know of the relationship cork has with wine, but cork is also, somewhat surprisingly, one of the major inputs in linoleum (in the form of cork dust). Cork floors, in their own right, are also gaining popularity as an alternative to traditional flooring. While many wine makers are moving away from natural cork stoppers to synthetic, consumers often still prefer the aesthetics of the more traditional wooden cork. As such, a growth in wine production would most likely mean a run on cork, almost certainly driving up the price. Flooring companies getting pinched on both hardwood and cork prices as demand grows from the wine industry stand to see their margins diminish from higher material costs. Very indirectly, a wine shortage spells trouble for the flooring industry, and companies like Armstrong (AWI) and Mohawk Industries (MHK) seem prime targets for short sales in such an event.
8. Invest in Glass Bottle Makers
Despite what you may remember from college, the wine that the world wants to drink comes in a glass bottle, not a box or a plastic bladder. An increase in wine production means, obviously, an increase in glass bottles. There are very few publicly-traded glass bottle companies, so you're basically looking at Owens-Illinois Inc. (OI) and Rexam PLC (OTC:REXMY).
9. Buy Stock in Companies that Make Wine
Man, bet you didn't see this one coming. Get this: as demand for wine increases, wine companies stand to make more money by selling more wine. Amazing. Diageo Plc (DEO), Brown-Forman Corporation (BF-B), Willamette Valley Vineyards (WVVI), Constellation Brands (STZ), and to a lesser extent, Moët Hennessy Louis Vuitton (OTC:LVMUY) all produce wine. Make sure you do your research, however, as most of these companies also produce other products (typically spirits), so focus on those companies whose wine operations are a significant portion of their business.
10. Invest in Beer Companies
There's a saying in the wine business: "it takes a lot of beer to make good wine". Making wine is hard work, and nothing soothes at the end of a long day like a cold, frosty beer. Besides, if you've spent the day out in the field tending your grapevines, or prepping your fermenters, or taste-testing wine musts at various stages of completion, the last thing you want at the end of your shift is a bottle of wine. Anheuser-Busch InBev (BUD) and SABMiller (OTC:SBMRY) should keep winemakers happily quenched with brewed suds as they work to meet world wine demand.
So there you have it. While I realize this article does not present an outright strategy for profiting from a (real or fictional) wine shortage, hopefully the list has given you some idea about the ways the American wine industry affects the economy at large, which, I have to admit was the point all along.
I would like to extend a tremendous thank you to Stephen Smith and Dermot Conlon, two of the founders of Three Arches Winery in Sunnyvale, California for taking time out of their day to answer my remedial winemaking questions, and lending their expertise to this article. If you're in Sunnyvale, go visit them, and enjoy their delicious product.