On Thursday, famed bourbon distillery Buffalo Trace confirmed what many drinkers have already noticed: many of its products, including its namesake Buffalo Trace, the popular Eagle Rare, and critically acclaimed Pappy Van Winkle, were simply not available on many shelves nationwide. Supply was too low, and demand was too high. Buffalo Trace believes the shortage could continue for years, and that there "is no way to predict when supply will catch up with demand."  

This isn't a new trend. When whiskey giant Jim Beam (BEAM.DL) announced last year that it would be watering down Maker's Mark, its leading premium bourbon brand, it was merely the most visible sign of an industry-spanning shortage of whiskies likely to last for several years. The taste for premium American whiskey, both at home and abroad, has soared over the past decade, but good whiskey takes many years of barrel-aging to be consumer-ready. Not anticipating the bourbon boom, American distillers are now finding that they didn't lay in nearly enough product over the last decade to meet demand. While that's not great for whiskey drinkers, could it mean bumper profits for distilleries? Or will this boom turn to bust?

Bourbon aging in oak casks. Source: Buffalo Trace Distillery

Various distillers have pursued different strategies to deal with the American whiskey shortage, none of them particularly good for whiskey drinkers. In Jim Beam's case, pushback from consumers led the company to abandon its plans to dilute Maker's Mark, but that wasn't the end of the story. With demand skyrocketing and inventories running out, and watering down the whisky no longer an option, the company could either raise prices or face shortages at a time when Jim Beam was trying to aggressively expand Maker's Mark as a global premium brand. Beam quietly raised prices for Maker's Mark, with CEO Matt Shattuck telling Reuters that "Beam would control the supply of Maker's by managing bottle sizes, prices, and promotions."  Sales of Maker's Mark soared 17% in 2013, far higher than any of Beam's other core brands. 

Many distillers have followed suit in raising prices, sometimes dramatically, particularly on the most aged whiskies. Distillers big and small have been rushing to take advantage of this trend. Brown-Forman (BF.B -0.50%), best known for its iconic Jack Daniels whiskey, last year announced it would be investing $35 million to expand production of its super-premium Woodford Reserve bourbon.

Global drinks giant Diageo (DEO -0.05%) is expanding the reach of its core bourbon, the Bulleit brand, but it is also literally scouring its warehouses for any whiskey that might be unaccounted for. Diageo's "Orphan Barrel" series finds long-aged bourbons not previously allocated to a brand, bottles them for a special release, and sells them for eye-popping prices. One of the first offerings from the Orphan Barrel series, called Old Blowhard bourbon, carries a suggested retail price of $150.  So is it time to jump on the bandwagon with the bourbon makers?

What goes up. . .
Investors shouldn't assume this trend will last. Historically, American whiskey has followed a boom-and-bust cycle, and it's easy to see how this could play out yet again. Distillers are laying in more product today than ever before, but since the product takes time to age, that means we'll have something of a glut in 10 years, but we'll still see skyrocketing prices for aged and super-premium whiskies over the next five. Continually rising prices for the same products could frustrate established premium drinkers and turn off more recent converts.

With consumers throwing money at the bourbon category today, there's incredible temptation to boost supply right now through any means necessary, sacrificing the quality of the product and dampening drinkers' expectations and enthusiasm. Watering down whiskey, mixing a longer-aged spirit with a younger-aged spirit, and various schemes to rush product to market like putting young whiskey in a pressure cooker, or adding artificial oak flavor and other additives are all methods that have been tried to increase today's supply of whiskey, but at what cost?

The most illustrative—and disturbing—evidence of this trend to get product to market regardless of consequences is the relatively recent introduction of "white," "white dog," "ghost," or "lightning" brands, spirits that are aged either very briefly or not at all, and are more like moonshine than what drinkers recognize as whiskey. Barrel-aging confers color, flavor, and depth to a whiskey while mellowing the raw alcohol in the spirit. Skipping this step or giving it short shrift, while still advertising the product as American whiskey, could weaken the category's brand and appeal.

So while the whiskey faithful wait five to 10 years for distilleries to bring supply through the traditional aging process, they may well have to wait through an extended period of inferior product selling at inflated prices. By the time today's capacity investments finally pay off with a greatly increased supply of whiskey, how many drinkers will still be willing to pay today's high prices?

Of course, every cloud has a silver lining. A bust in aged whiskey prices in 10 years' time might not be good news for distillers, but it would be a real treat for their customers.