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Massive investment in Whiskey production will lead to a glut in supply in a couple of years
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2019-08-25 at 3:46 PM UTC
Whiskey production can be one of the longest production processes in the entire economy. Planning whiskey production is extremely difficult, even if you assume a perfectly stable, hard money economy. Even moderate quality whiskies need to be planned years in advance. The youngest whiskey that can be legally labeled as bourbon must be barrel aged for at least 2 years, but most middle shelf bourbons are aged for 4, 6, or 8 years. Scotch whiskey has even stricter requirements; to be labeled Scotch the whiskey must be aged for a minimum of three years, but it is rare to find a moderately rated Scotch aged for less than 8 years. The most popular Scotches are aged 12, 14, and 16 years while the most luxurious whiskies are aged as long as 25 or even 50 years. Compound this with losing 2 percent of volume per year aged to the “angel’s share” and you are in a very difficult entrepreneurial situation.
https://www.zerohedge.com/news/2019-08-24/coming-whiskey-bubble
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The distiller-entrepreneur will first need to determine the recipe, this will determine the proportion of grain, corn, rye, or barley that must be acquired based on the predicted preferences of the customer years later. Once the ingredients are acquired malting begins where the barley (for example) is steeped in water on the malting floor to start the germination. This process involves monitoring the germination of the barley until the sugar content is within the target range. Once the barley is ready it is dried out in a kiln where peat is burned in order to add flavor and stop the germination. The malted barley is then ground down and water is added, this is referred to as the mash. It is then allowed to ferment into a beer like substance called the wash. The wash is subsequently transformed into whiskey by distilling it in copper pot stills. The distiller-entrepreneur then needs to decide how long to age this clear, harsh whiskey and in what type of cask. A popular combination would be an oak cask that was previously used to age sherry, aged for 12 years. During this 12 years the cask sits in an enormous dunnage warehouse. Once the maturation is complete, the whiskey is sent through a strict quality assurance program, bottled, labeled, and distributed all over the world. At this point the distiller has finally sold his product. So in short, the distillery needs peat harvesting equipment, malting floors, kilns, copper pot stills, thousands of casks, dunnage warehouses, land, and a lot of time.
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During the 2000s boom, we found that this extra spending was directed largely toward luxury items, whether it be houses, cars, or vacations.
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Unfortunately, in the current economy, over-investment (or malinvestment) is occurring now, squandering the resources that are expected to be available to fund the consumption in the future. During the contraction, when unemployment will rise, it stands to reason some of the first items to drop off a household’s budget will be discretionary luxury items, like bottles of whiskey. This will cause the demand for whiskey to plummet at the same time the supply is exploding.
Conclusion
Massive investment has entered this industry in response to rising prices. Unfortunately, solid economic theory is telling us that this investment is probably in error.
