Bourbon, as you may know, is having a moment. As the graphic above shows, production and sales have soared in recent years. But the Wall Street Journal reports that supply chain problems may keep the industry from growing further (Bourbon Feels the Burn of a Barrel Shortage, May 11). The specific issue relates to barrels. Federal law requires that bourbon be aged for two years in new oak barrels (Why is there a federal law about bourbon? See here.) and it is getting hard to get enough bourbon barrels.
The shortage reflects a supply-chain conundrum. Upstream, barrel makers face a wave of demand because a half dozen established bourbon distilleries and 300 new, craft distilleries are increasing production amid a bourbon boom. Downstream, they face a shortage of white oak wood used in barrels because the lumber industry hasn’t rebounded from the housing market’s collapse. …
All the growth might have been intoxicating except for a sobering fact: The demand for more barrels coincided with a massive contraction in the lumber industry. As the housing market crashed in 2007, sawmills shut down and loggers abandoned the market. Lumber production shriveled to about 5.9 billion board feet in 2009 from 11.7 billion board feet in 2005, according to the Hardwood Market Report, which tracks the forestry industry.
The real problem here is that whiskey barrels are pretty much rounding error on the overall US lumber market. As the article tells it, the problem is not that there is an insufficient supply of white oak standing in forests but that too many loggers have left the industry. Demand may be strong for bourbon barrels but that in and of itself is not a reason to get into logging.
So who wins and who loses here? Not surprisingly, this is one of those settings in which it pays to be big. Large firms — either independent cooperages or in-house barrel production for major distillers — have expanded their operations to both keep up with demand and to broaden their geographic footprint. Brown-Forman (which produces Jack Daniel’s and other whiskeys) has, for example, opened a new cooperage in Alabama. It selected the location in part because it opened up a new territory for buying logs.
The losers are likely to be smaller distillers. Upstart, craft distillers don’t have the established relationships with barrel suppliers or the deep pockets (or scale) to invest in their own cooperage. That leaves them at risk of not being able to get the supplies they need.