Supply and Demand in Oil and Gas Markets Is Mirrored in Whiskey Market

It may be somewhat simplistic to say that when demand outstrips supply the cost goes up or the quality goes down.  However, simple as that aphorism is, it is true.  In the hydrocarbon/gasoline supply industry, the Federal Government wants industry to produce a product, gasoline, that is quality controlled by federal law.  As such government policy and politics (political power struggle) plays and important role in controlling, affecting, or distorting the law of supply and demand.

The problem is that production costs of gasoline and hydrocarbons are not controlled by federal law thus leading to uncontrolled price increases as world wide demand escalates.  The government has encouraged industry to find a substance that is cheaper than gasoline to extend the present supply.  Alcohol, produced by the Agriculture Industry, is presently added to gasoline and many consumers are finding out that too much alcohol in the gasoline will ruin the fuel system of older cars not engineered to resist the presence of alcohol.

Food products, such as corn and many grains are fermented to produce alcohol, thus creating food shortages and raising world wide food prices.  In the U.S. where there is an abundance of food, the Federal and State governments control the manufacture of whiskey.  Thus, this article will use an example of one brand in the whiskey industry.

Makers Mark whiskey finds itself in the enviable position of not being able to supply the demand.  So they are adding water to their whiskey and lowering the alcohol strength from 90 Proof to 84 Proof.  In order to increase the supply and hold the present price steady, the manufacturer has chosen to add water to increase the supply of whiskey by 6%.  Apparently there is not enough demand to justify a  new distillery or purchase of extra equipment.

Bruce Schreiner wrote a story about Makers Mark that illustrates the point.  LOUISVILLE, Ky. – The producer of Maker’s Mark bourbon is cutting – likely permanently – the amount of alcohol in each bottle to stretch every drop of the famous Kentucky whiskey. The alcohol volume is being lowered from its historic level of 45 percent to 42 percent – or 90 proof to 84 proof.

The brand known for its square bottles sealed in red wax has struggled to keep up with demand that more than doubled the past seven years. Distribution has been squeezed and the popular premium brand has had to curtail shipments to some overseas markets.

“Over the last 100-plus days, there are many, many instances across lot of different cities where bars, restaurants, package stores have run low, run out,” Rob Samuels, chief operating officer for Maker’s Mark and grandson of the brand’s founder, said Monday.

“Given the surge in demand outstripping supply, what we’ve decided to do very carefully is to slightly reduce the alcohol volume.”

The recipe and production process will stay the same, except “a touch more water” will be added when the whiskey comes out of the barrel for bottling, Samuels said. The brand’s bourbon is made at its distillery near the small town of Loretto, 45 miles south of Louisville.

Water is typically added before whiskey goes into the barrel for aging and after bourbon comes out for bottling, he said.

It’s the first time the bourbon brand, more than a half-century old, has altered its proof or alcohol volume.

The lower alcohol volume is seen as permanent and will increase available volume by about 6 percent, Samuels said.

The change was done only after extensive testing showed that it didn’t alter the taste of Maker’s Mark, he said.

“Paramount in our decision was ensuring the taste standard is exactly the same,” Samuels said.

His father, Bill Samuels Jr., chairman emeritus of the brand started by his parents, said he thought his father would approve.

“He never really was wed to 90 proof anyway,” the elder Samuels said. “It’s just that he had to pick something, and he knew that anything over 90, the alcohol smothered the taste of whiskey and he was a little nervous about going too much lower.”

Chuck Cowdery, an American whiskey writer and author of Bourbon, Straight, said “time will tell” how the change sits with the brand’s legions of devoted fans in an industry that clings tightly to tradition.

“They’re banking that this won’t be a deal-breaker with their consumers, that there will be a hew and cry for a few days, but sales won’t miss a beat,” he said in an email. “Are they right? Maker’s is in many ways unique, so it’s hard to say.”

Maker’s Mark is owned by spirits company Beam Inc., based in Deerfield, Ill. Its other brands include Jim Beam bourbon.

The supply shortage at Maker’s Mark comes amid an ongoing expansion of its operations that has cost tens of millions of dollars.

A distillery expansion completed last year boosted production capacity by 45 percent, Rob Samuels said. Maker’s last year added warehouse space for 100,000 more barrels of aging bourbon, and it expects that expansion pace to continue for at least another five years.

Maker’s bourbon ages in barrels for at least six summers and no longer than seven years before bottling.

One shortcut the bourbon maker refuses to accept, Rob Samuels said, is trimming the aging process, which would increase market supplies. It also won’t buy surplus whiskey from other distilleries, he said.

The supply shortage at Maker’s comes amid growing demand for Kentucky bourbons in general.

Combined Kentucky bourbon and Tennessee whiskey sales from producers or suppliers to wholesalers rose 5.2 percent to 16.9 million cases last year, according to the Distilled Spirits Council, a national trade association that released figures last week. Revenue shot up 7.3 percent to $2.2 billion, it said. Premium brands, generally made in smaller batches with heftier prices, led sales and revenue gains.

Kentucky produces 95 percent of the world’s bourbon supply, according to the Kentucky Distillers’ Association. There are 4.9 million bourbon barrels aging in Kentucky, which outnumbers the state’s population.

In the last year, Kentucky distilleries invested nearly $230 million in new and expanded production facilities, warehouses, visitor’s centers, bottling lines and more, according to Eric Gregory, president of the Kentucky distillers’ group. It’s the largest expansion since Prohibition, he said.

In the same way, it may be stated that hydrocarbons, oil and gas, are scarce, and that the supply does not equal the demand therefore there are high prices to by paid by consumers.  However, many of the shortages and scarcities are tied to government interference in the market place.

 

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