clock menu more-arrow no yes mobile

Filed under:

Why America needs whiskey futures to cure the bourbon shortage

Mmm ... bourbon
Mmm ... bourbon
Ron Dollette/Flickr

All month there's been a growing chorus of media reports of a whiskey shortage, all seemingly keyed off a May 8 press release from Buffalo Trace Distillery warning consumers. Putting out releases about shortages seems to be companies' new favorite way of trying to soften the blow of price increases, and the modern social web loves shortage stories. And indeed, the May 2014 whiskey shortage boom was preceded by a Wine and Spirits Magazine article detailing "The Great Whiskey Shortage of 2013."

These "shortages," in other words, are really just a way of saying that whiskey is getting consistently more popular.

But the whiskey market does have one interesting wrinkle — aging. Normally when a product becomes more popular, prices start to rise. Then since prices have risen, it's profitable to increase production. Supply keeps growing until prices moderate enough that it's no longer possible to increase production. The problem is that 2014 prices for 12 year-old Scotch can lead to increased production of 12 year-old Scotch in 2026 but to bring more product onto the market in 2015 you'd need to go back in time to 2003 and increase production back then.

In theory, this is the kind of situation where a futures market could help a great deal. In markets for things like oil or wheat you can bet on the future price of commodities. With whiskey futures, we could have seen a rise in 2015 whiskey prices way back in 2003 and distillers would have known to start ramping up production. That wouldn't eliminate price swings due to surprise events or bad weather, but it could smooth things out. Since whiskeys are sold at different ages, the prices of different futures contracts would also let us impute a "yield curve" to help distilleries understand when it makes sense to keep aging and when it makes more sense to cut the process short and get product to market.

The problem is that one of the things that makes whiskey so fun — the great variety of different brands and flavor — also makes it difficult to turn into financial instruments.

Futures work best when you have standardized commodities. People can trade oil futures because oil is oil. You don't need to ask which barrel of oil the contract entitles you to. It's just some oil. Whiskey is a deliberately non-standardized product. A bottle of Pappy Van Winkle can't just be swapped out for a bottle of Woodford Reserve. That makes it difficult to create futures contracts, and that makes it difficult for producers to plan for future demand.