Friday, 18 July 2014

The American Oak Bubble

The Spanish cooperage business is facing an unprecedented American oak supply crisis. On top of the national economic crisis, cooperages literally have to compete with one another to obtain their raw material. As a consequence of the oak shortage, prices have been forced up by 83% since 2012. There are various reasons for this phenomenon as follows.

The main reason is the boom in wood matured spirits. The big producers of Scotch and Bourbon foresee increases in worldwide demand for their products of over 10%. A good example of this would be Brown Forman who produce in their own cooperage 3,500 Bourbon barrels daily, and are building another cooperage to open in 2015 to augment their barrel production to 5,500 – 6,000 daily. This will increase their annual production to around 2,000,000 barrels, while the production capacity of Spanish cooperages is around 150,000 barrels annually.

This gives us an idea of the pressure on the supply of wood, and as a consequence the price of a Bourbon barrel has doubled in recent times and the entire production has been sold, not only for 2014, but for 2015 and 2016 as well. Recession in the US from 2008 caused a drop in Bourbon sales and by extension, bourbon barrels, and now US cooperages are working at full tilt to try and make up for the shortfall, estimated at some 130,000 barrels. This should only be a temporary glitch however.

The second reason is the increase in demand for oak as a building material. The economic crisis is ending in the US and there is a huge increase in house-building. The Americans build many of their houses from wood and sales are increasing in double digit increments.

The third reason is the poor climatic conditions in 2013. A long warm winter saw torrential rain making it almost impossible to get into the forests. The summer also saw torrential rain which resulted in many sawmills remaining closed for months for lack of tree trunks.

Tall and straight, perfect for barrels (pic UC Davis)
The fourth reason is that oak is in very heavy demand worldwide for other purposes. For example, it is very fashionable for home decoration in China. We are going to have to understand that it is now becoming a limited and over-exploited resource as it takes at least a century to grow suitable American oak trees, and longer still for European oak. As a result of the pressure on American oak, both on supply and on price, European oak is beginning to experience strong worldwide demand, with the price of French oak increasing 10% over the last five years.

The final reason is financial. American banks are reducing their exposure to risk by lending less, which restricts the growth of products. Oak suppliers who abandoned the business because of the crash in 2008 are now finding that they cannot obtain the finance to start up again.

The Sherry industry is comparatively lucky. While it uses American oak for its butts, it uses them for a very long time to avoid any wood flavours in the wine, thus there are few new butts being made for Sherry itself. The table wine business uses a lot of American oak as well, but not for as long as the Sherry producers, usually around three years. The American Bourbon industry must by law always fill new whiskey into new barrels, hence the pressure on wood supply, but while the other spirits producers of the world: the Scotch, Irish, Japanese whiskies, Rum, Brandy etc. can use second hand barrels – mostly ex bourbon barrels – they are increasingly interested in new barrels through sheer necessity.

It looks as if the American oak bubble is here to stay for the next 2 or 3 years. The whisky boom cannot last forever however, and after that the prices may go down, but never again to the levels of 2012. Soon, however we hope that there will be a Sherry boom!

(Based on an article in La Semana Vitivinicola, but with additions))

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