Graham Warner ’02 G’13, chief operating officer of Deutsche Bank’s Global Transaction Bank (GTB) Americas, will deliver the 2018 convocation address to bachelor’s and master’s degree candidates of the College of Visual and Performing Arts (VPA) at the college’s convocation…
Supply Chain Expert Shares Groundbreaking Research on Wine Futures
Researchers from the Martin J. Whitman School of Management have revealed a highly accurate model for pricing wine futures. In a recently accepted paper in Manufacturing & Service Operations Management, Burak Kazaz, Steven Becker Professor, Laura J. and L. Douglas Meredith Professor of Teaching Excellence and associate professor of supply chain, and his co-authors, Tim Noparumpa (Syracuse Ph.D. ’12) and Dr. Scott Webster (Arizona State University, formerly Syracuse University), examined the impact of wine tasting experts and their reviews when it comes to selling wine before it is bottled, known as “wine futures.”
Their research shows how to price wine futures, as well as what proportion of the wine should be sold in advance versus through retail chains. It demonstrates that Bordeaux grand cru wineries increase their profit by approximately 10 percent; they estimate that small and artisanal winemakers in the U.S. can benefit from such financial markets by improving their profits by 14 to 15 percent.
“Our work is significant, as it is perceived as the first of its kind in pricing wine futures with accuracy,” says Kazaz. “Earlier research thoroughly examines the pricing of bottled wine, but has not explored a model for pricing wine not yet bottled.”
Kazaz and his research team used data obtained from Liv-ex.com, the primary electronic exchange where merchants, brokers, retailers and consumers can purchase wines in advance of their distribution for retail operations to analyze barrel scores, which are quality ratings expert reviewers give to wine tasted from the barrel.
Barrel scores indicate the potential quality of the wine, offering clues as to whether it will be a success or failure. Winemakers use barrel scores to determine how much wine to sell as futures and how much to retain for retail sale. The team determined that barrel scores, together with consumer and winemaker preference, influence the winemaker’s allocation and pricing decisions.
What’s more, the study concluded that it’s more profitable for winemakers to sell to a more diverse consumer population, which would include futures and retail sales. Finally, the study offered an empirical formula by which to price wine futures.
“Our study is groundbreaking for smaller artisanal and boutique wineries, because it represents a way for them to maximize their cash flow and profits, thereby allowing for more innovation,” says Kazaz. “Working with one such winery in the Finger Lakes wine region in New York, we were able to demonstrate that it should allocate a significantly larger percentage of its wine as futures. This allows winemakers to recover their cash investment earlier, reduce their risk and invest in quality.”
Kazaz adds that U.S. winemakers have a higher need for a futures market and would benefit financially even more than Bordeaux producers, which historically have participated in the wine futures market.