Corn Prices

Many things go into pricing - cost, competition/scarcity, market efficiency, and price elasticity of the good or service.

They could charge "anything they want" for the bourbon if there was little competition (hence, McDonald's cannot charge $100 when Burger King will sell it for $1 across the street - if they are the only restaurant within a 500 mile radius, they can charge more).

They have to consider the consumer's willingness to substitute - your favorite straight bourbon too much? Drink it less and buy your second favorite that is cheaper. Go to blended scotch, or something else altogether. If McD's charged $100 for a hamburger, wouldn't you be willing to substitute a prime cut porterhouse?

Not crying the blues for a producer here, but you can just look to the boards here for plenty of posts about price elasticity - how many are willing to buy THH at $55 but not $75? And for the bourbons lower on the shelf, the more resistant you are to price changes - OWA at $20 but not $27 ... etc.

All of these factors will then play into the price/volume to maximize total revenue - sell 5000 bottles at $100/bottle, or sell 10000 bottles at $55 ....

I'd guess that the margin on a low- mid- shelf bourbon isn't high - it is more of a high volume/low margin game. You are looking for asset turnover as another lever to profitability. So sometimes what appears to be a relatively modest increase in pricing can eat into profits if it is sustained. Add to that the general rise in all commodities due to oil prices, and it can have a substantial impact, esp. when the same price increases are influencing your customer's disposable income - too much at the gas pump and the grocery store, less spent on bourbon and other luxuries...

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Originally Posted by sutton

Many things go into pricing - cost, competition/scarcity, market efficiency, and price elasticity of the good or service.

They could charge "anything they want" for the bourbon if there was little competition (hence, McDonald's cannot charge $100 when Burger King will sell it for $1 across the street - if they are the only restaurant within a 500 mile radius, they can charge more)....

I'd guess that the margin on a low- mid- shelf bourbon isn't high - it is more of a high volume/low margin game. You are looking for asset turnover as another lever to profitability. So sometimes what appears to be a relatively modest increase in pricing can eat into profits if it is sustained. Add to that the general rise in all commodities due to oil prices, and it can have a substantial impact, esp. when the same price increases are influencing your customer's disposable income - too much at the gas pump and the grocery store, less spent on bourbon and other luxuries...

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All good and well-articulated formulations, but I am not sure what your point is here. Is this an argument for why rising corn prices will indirectly cause rising bourbon prices? (What is the "substantial impact" on: sales? profit? costs? prices?...)

If it is, then I am not sure that it works like that. Even if the margins are relatively small for low-mid shelf bourbons due to market factors like competition (and for something like bourbon, it's never that small), commodity costs constitute such a small fraction of the production cost, not to mention the total cost, (not to mention taxes) for these guys that an increase in corn prices should have negligible impact on that profit margin. All of the other market factors you described - scarcity, competition, market efficiency - that is to say, all of the factors stemming from the consumer's perception of value or factors which the consumer otherwise brings to the table - have so much greater impact on the bottom line that a bourbon seller would be crazy to change his prices based on commodity costs, especially a fairly minor commodity cost like corn.

Think of it this way. You are willing to spend a certain amount of money and time to support your capacity to own and use your own complete set of dishes. Between the dishes themselves, the dishwasher, the cupboards, the water, the time and energy spend washing them (even the table and chairs and napkins if you want to widen the scope even more),the total cost is substantial. Detergent represents a tiny percentage of that total cost. If detergent prices soared (50% - 100% -300%), you might be a little unhappy about it, but your dishwashing and dish-using system wouldn't change at all. You wouldn't use less dishes per meal, for example, just to save money on detergent.

(Oil prices are a little unique in that a.) gas costs relatively a lot (more than many other commodities like corn) and b.) oil prices do have a small but radical effect on the price of just about everything else. But still, in a luxury market like bourbon, we are pretty much talking about peanuts here.)

I think the message of this thread is that it is wrong to assume that rising corn prices will mean rising bourbon prices. The cost of raw materials is but one of many factors that determine the price of the finished product.

I know that some of the producers have long term contracts directly with farmers, while others buy from silos. I'm not sure if MGPI obtained Rushville when it bought LDI. Rushville was a silo that provided all of the corn for LDI and Four Roses, which Four Roses continued to use after the sale to Kirin. The biggest part of MGPI's business is corn processing of various kinds, so they may have other arrangements. I know Beam deals primarily with one silo in Indiana. I think the directly-with-farmers deals are mostly with farmers close to the distilleries.

You can be confident that all of the producers have very sophisticated ways of mitigating the effects of price fluctuations.

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Originally Posted by CoMobourbon

All good and well-articulated formulations, but I am not sure what your point is here. Is this an argument for why rising corn prices will indirectly cause rising bourbon prices? (What is the "substantial impact" on: sales? profit? costs? prices?...)

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I was merely responding to the thought expressed earlier that producers can charge whatever they want - or use any excuse, no matter how minimal (i.e., corn prices going up but being a very small portion of total cost) to raise prices. While I'm sure some producers may try, it isn't without possible impact to their market share...

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Originally Posted by sutton

I was merely responding to the thought expressed earlier that producers can charge whatever they want - or use any excuse, no matter how minimal (i.e., corn prices going up but being a very small portion of total cost) to raise prices. While I'm sure some producers may try, it isn't without possible impact to their market share...

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That makes a lot of sense. I think we actually may have the same premise: market factors like competition and price elasticity are powerful determiners of price - much more powerful than say commodity costs like corn. Thanks for clearing that up.

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Originally Posted by cowdery

I think the message of this thread is that it is wrong to assume that rising corn prices will mean rising bourbon prices. The cost of raw materials is but one of many factors that determine the price of the finished product.

You can be confident that all of the producers have very sophisticated ways of mitigating the effects of price fluctuations.

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Sounds about right to me.

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Originally Posted by cowdery

You can be confident that all of the producers have very sophisticated ways of mitigating the effects of price fluctuations.

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Bingo! I buy $30,000 worth of cornfed beef every week for the restaurant and my beef costs are already at all time highs. We can't raise prices anymore than we have so we will be getting creative to try and protect margins. There is more than one way to skin a mule

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Originally Posted by Restaurant man

Bingo! I buy $30,000 worth of cornfed beef every week for the restaurant and my beef costs are already at all time highs. We can't raise prices anymore than we have so we will be getting creative to try and protect margins. There is more than one way to skin a mule

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Mix in some horse?

What is this corn stuff you speak of? I though whiskey was made from rye!;)

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Originally Posted by cowdery

Mix in some horse?

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Hey - you could charge more for horse (that there's a delicacy in France!)

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Originally Posted by cowdery

I think the message of this thread is that it is wrong to assume that rising corn prices will mean rising bourbon prices...

You can be confident that all of the producers have very sophisticated ways of mitigating the effects of price fluctuations.

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I don't disagree that producers have ways of dealing with short term issues like this... BUT (you knew that was coming), many producers are not above using such short term "reasons" to explain away raising their prices. Heck, didn't Beam use "rising price of corn" in their justification of raising prices before this drought began?