Corn Prices

[JB64]

I have read a few articles lately regarding how the drought has caused the price of corn to raise to record highs. I know what bourbons I like to drink but I don't know much about the business side of making whiskey. How will the higher cost of the corn affect the bourbon distillers? Do the distillers have contracts with grain suppliers with fixed prices so they won't feel the impact of the price increases during the contract period? If not will the cost of the bourbon be higher when the whiskey produced this year is bottled or will the cost be passed on to the current bottlings. I am assuming the cost of corn is going up because the harvested amount will be lower than normal. Will this mean that bourbon production will decrease this year due to lack of corn availability? I am still seeing good deals on bourbon in the stores in my locale so as of yet the corn prices don't seem to be affecting the cost of bourbon.

[SmoothAmbler]

I don't know about the big boys. My guess, like you mentioned, is that they have a contract for a limited amount of time. But the higher prices are certainly affecting us. We take all of the grain our farmer grows. We buy it at market price. As much as he loves us, it wouldn't make sense, or be fair, for him to sell it to us for a whole lot less (we get a small price break) than he could get on the market.

[GaryT]

My dad and I were discussing this as well. What impact it has on the prices of the end product (since the cost paid today for the corn is for the whiskey sold years from now) may be tricky. They might start raising prices now or soon on their finished products, which might make more sense in terms of consumers understanding the price increase, versus trying to increase the prices years from now and hoping consumers recall why. I'm not as familiar as I'd like to be on the business model, so not sure what all options they have. The demand side could also drive prices (if people THINK their favorites are about to shoot up in price and demand surges, that would start to drive up prices right now as well). I've thought about whether I need to try to grab some of my favorites at today's prices, although lack of room is a factor there as well!

[Enoch]

They may price like the auto gasoline industry....price is based on replacement cost.

[callmeox]

The time from grain to bottle for the majors is so long that any immediate cost increases would be seen as gouging.

With millions of barrels aging, one bad corn year shouldn't harm the pipeline.

[Rutherford]

Bottling, distribution/marketing, aging (barrels+warehouses), personnel and equipment, markup, and tax costs help keep the actual cost of the corn in a bottle a fairly low proportion of what you pay.

[JayMonster]

Remember (this was a hot button topic some time ago), many distillers price based on a LIFO (Last In First Out) accounting model. So, what they base their "cost" on, for what they are selling now is based on what it is costing them to "replace" the stock. So, yes, it could affect pricing NOW and not 4 years (or more) from now.

[OscarV]

Corn futures are 52% up from mid June.

The last time I saw corn look so bad out in the feilds was the drought of 1988.

MI, OH, IN & KY are the hardest hit with this drought, followed by IL and other mid-western states.

Everything has corn syrup in it much to the dismay of people that want to eat healthy.

Maybe this would be a good time to kick the corn syrup habit and cut down on diabetes.

It's at record levels now.

[Leopold]

Corn prices are pretty much irrelevant to the cost of goods equation for distillers. Especially when we're talking about the older, pricier bottles that you folks prefer. The glass bottle is more of a cost than the corn for many whiskey distillers.

[CoMobourbon]

Corn prices are pretty much irrelevant to the cost of goods equation for distillers. Especially when we're talking about the older, pricier bottles that you folks prefer. The glass bottle is more of a cost than the corn for many whiskey distillers.

That's what I would have guessed. Basic raw materials often account for a tiny fraction of what 1st world consumers pay for a product, especially when that product has some kind of luxury value / function. Increased food commodity prices kill people in 3rd world countries who are pretty much only paying for the commodity, but when Americans buy food, we are mostly paying for packaging and marketing and convenience and other indirect services. So the price is (or at least should be) only marginally affected at most. This is why, for example, the cost of a box of Kellogs Frosted Flakes doesn't really go up when, as Oscar noted, corn futures go up 52%.

Not that there aren't huge differences between making-selling Frosted Flakes and making-selling bourbon. But the same principle applies; when the basic raw material cost represents an almost negligible fraction of the final sticker price of the product, it takes truly huge increases in the cost of that material to affect the sticker price.

[Special Reserve]

Corn prices are pretty much irrelevant to the cost of goods equation for distillers. Especially when we're talking about the older, pricier bottles that you folks prefer. The glass bottle is more of a cost than the corn for many whiskey distillers.

[cowdery]

As Tom says, the bottle costs more than the corn, to which I would add that the taxes are more than the corn and bottle and every other production expense combined.

I would also point out that except for commodities, price has nothing to do with cost. One of the biggest myths people have about business is that businesses calculate their costs, add a profit factor, and that's their price. Very few businesses price their products or services that way. Pricing is based almost solely on what the market will bear. If the price the market offers you is less than your costs, then you have a problem, but that's different than using cost to set prices.

Of course, yes, companies do say they're raising prices because their costs went up but that is...what's that term again?...oh yeah, that's a lie. Companies raise their prices because they believe they can, period.

[bllygthrd]

Of course, yes, companies do say they're raising prices because their costs went up but that is...what's that term again?...oh yeah, that's a lie. Companies raise their prices because they believe they can, period.

[Bourbon Boiler]

Most major food companies have their input costs hedged in the futures market, and I assume the alcohol producers do the same. This can be done effectively out about 18 months, so there shouldn't be a shock to the bourbon marketplace anytime soon. If you like cheap beef, that's another story.

[KYPayne]

We also can't forget that the federal subsidy on corn grown for ethanol has expired, so farmers who reaped some profit from that now must make their dough from the vegetable consumer.

[tmckenzie]

I agree with what Leopold and Chuck said. We are seing increases. We run bourbon one month and rye the next. I have seen about a 10 percent increase in the cost of the corn each load I have got this month, 3 so far. Another interesting thing around here is, as we are buying barley to have malted right now, barley price are shooting up due to some of the farmers are going to use it to feed cows wth instead of corn. We pay a premium for good grain to start with. We make a pile of fruit based liqors and fruit prices are through the roof. Cider is expected to double in price. Stuff like that will increase prices.

[Special Reserve]

Of course, yes, companies do say they're raising prices because their costs went up but that is...what's that term again?...oh yeah, that's a lie. Companies raise their prices because they believe they can, period.

Exactly! Particularly true with luxury items such expensive bourbon.

[OscarV]

Of course, yes, companies do say they're raising prices because their costs went up but that is...what's that term again?...oh yeah, that's a lie. Companies raise their prices because they believe they can, period.

The only reason a hamburger at McDonalds is 89 cents is because they think that's all they can get for it.

If they could sell them at $100.00 each they would.

Also us consumers bear a good amount of blame for high prices and poor service.

Everytime we buy something we are saying to the company that produces it, "it's a fair price and a good product."

[CoMobourbon]

Also us consumers bear a good amount of blame for high prices and poor service.

Everytime we buy something we are saying to the company that produces it, "it's a fair price and a good product."

Totally agree. No consumer is ever a passive victim of unilateral business practices; consumerism is a two way street.

The only reason a hamburger at McDonalds is 89 cents is because they think that's all they can get for it.

If they could sell them at $100.00 each they would.

This case actually, I think, shows a key limitation of Chuck's very good and necessary point. McDonald's could charge more than 89 cents for a hamburger (not $100, but statistically much more). Actually, I have it on good information that McDonalds LOSES money on their 99 cent McDoubles. That damn fake cheese is actually kind of expensive (hence, 1 slice of cheese for a double!). People would pay 10-15 cents more, and McDonalds would make A LOT of money in the short term (billions served, remember?). But they have calculated that keeping prices low on certain items actually increases their market share and, therefore, allows them to make more money over the long term (on other products - think Chicken Selects and the slushie of the year). More people walk in, more money is ultimately made. Advertising, presentation, and 99 cent burgers all cost McDonalds a lot of money up front, but if they win the company more market share, it's all worth it in the end.

So. It is completely true that commodity prices account for a fraction of the cost of business in the 1st world (especially for luxury products), and it is completely true that the market, not the costs, determine the sticker price of products in such business. But in 1st world markets which can bear prices that have almost no relationship to commodity costs, there is always TONS of competition for market share, and competing for market share does cost a lot of money / energy. In many ways, then, when we pick one whiskey over another, we are subsidizing an increased market share for the company that produced it. It's kind of annoying to think that some of what we pay does not go into the production itself, but increasing the market share for companies that we think make better whiskey is pretty decent consolation.

[CoMobourbon]

Yes, but it does provide an opportunity to raise prices and blame it on the increase in the price of corn.

The only reason a hamburger at McDonalds is 89 cents is because they think that's all they can get for it.

If they could sell them at $100.00 each they would.

Also us consumers bear a good amount of blame for high prices and poor service.

Everytime we buy something we are saying to the company that produces it, "it's a fair price and a good product."

Pricing is based almost solely on what the market will bear.

Of course, yes, companies do say they're raising prices because their costs went up but that is...what's that term again?...oh yeah, that's a lie. Companies raise their prices because they believe they can, period.

I think that these three posts need to be read in conjunction with each other.

Even if there is really no correlation between any cost and final sticker price, not to mention sticker price and commodity cost, companies get away with increasing prices along with increasing commodity costs because they know that we THINK that they have to. If all consumers were educated, and everyone knew that there was little-to-no relationship, then they couldn't get away with raising prices for BS reasons. But if a luxury market consists of uneducated consumers who sympathize with rising corn costs, then the market can bear increased prices for no good reason. (Today's Moral: Education Is Important!)

So for the OP, my opinion is 'it shouldn't affect bourbon prices, but if producers think enough bourbon consumers are stupid, then it will.'

*I realize that I sound much angrier than I am. I am completely OK with pretty much all of this. My own cheapness/interests aside, I have no problem with bourbon producers charging what they can get for their product. I will add a few smiles to demonstrate my attitude. :grin: :cool: :grin: :grin:

Edited July 21, 2012 by CoMobourbon

[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).

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...

[CoMobourbon]

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...

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.)

[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.

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.

[sutton]

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?...)

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...

[CoMobourbon]

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...

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.

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.

Sounds about right to me.