THE KNOWLEDGE
Cask fever
The media today is full of warnings of the perils of investing in whisky casks. Some schemes are allegedly offered by unscrupulous operators, who prey upon the naive and unwary in what is essentially an unregulated market. But buying whisky as an investment – with all its inherent risks – is nothing new, as Iain Russell reports
MAIN PHOTOS: PETER SANDGROUND AND MIKE WILKINSON
Whisky distillers have traditionally matured their whisky in oak casks and sold them to customers in the wood. However, the spirit was not always purchased for immediate sale and consumption. The Irish whiskey boom of the 1850s saw the first great burst of speculative activity, from investors who hoped to cash in on anticipated shortages of supply and the consequent rise in prices. But it was the rapid growth of the market for blended Scotch from the 1860s that launched a tsunami of interest from private investors.
Blended Scotch requires flavoursome, aged single malts to add depth and character to the product. As blends soared in popularity across the world, demand for mature single malts increased rapidly beyond the availability of stocks and the existing capacity of distilleries to boost output sufficiently to meet requirements for the immediate future. The result was a scramble to purchase casks with a view to selling on when prices rose.
As new and inexperienced players competed with established whisky traders for stock, the prices for maturing spirit soared. Ridley & Co’s Monthly Wine and Spirit Trade Circular reported, for example, that there had been an astonishing 50 per cent rise in the price of Islay malts under 1 year old in 1883, largely owing to what it called ‘the speculative brigade’ piling in to secure casks. Independent whisky blenders and bottlers found it difficult to obtain fillings, as the speculators pushed prices far beyond what trade insiders considered to be realistic – Ridley’s reported their complaints that they were being ‘sacrificed to the gamblers in whisky’.
The bubble burst in 1884, when it became apparent that growth predictions had been over-optimistic, peaty whiskies had lost their popular appeal, and the whisky market had become saturated. Short-term speculators rushed to offload stock and the industry went into a brief recession. Among the casualties was the Leith blender Kidd, Eunson & Co, which had borrowed heavily on the security of over-valued warehouse stock and was left high and dry when the whisky tide went out.
The 1884 crash shocked the whisky trade, but the lessons were quickly forgotten. Continued growth in demand for blended Scotch encouraged a revival of speculative activity in the 1890s. Banks and other investors lent vast sums to finance the formation of new whisky companies and the construction of distilleries and warehouses, often offering loans on the security of over-valued spirits. Ominously, private investors – the Dundee Evening Telegraph referred to them as ‘amateur dabblers’ – joined once more in the headlong rush to get in on the act. This latest outbreak of ‘whisky mania’ prompted Ridley’s to warn in 1897 that ‘the boom has drawn within its tentacles a large number of persons quite ignorant of the Trade, of its facts, its practices and its prices.’
Not for the first or the last time, one might say…
With distilleries working at full capacity to meet increased demand from speculators, rather than consumers, the whisky bubble burst again. Overproduction resulted again in a glut of whisky left lying in the warehouses, and market prices slumped. There was panic among the ‘amateur dabblers’ and others seeking quick returns, and a rush to offload stock before prices fell further. The market crashed.
Among the most notable casualties was another prominent Leith firm: the blender and bottler Pattisons Ltd was unable to meet its liabilities after speculating rashly and, it was later discovered, fraudulently on predictions of scarcity and the rising price of whisky. The bankruptcy of the company and the subsequent conviction of two partners on charges of fraud and embezzlement caused a nationwide sensation, and greatly damaged the wider reputation of the whisky trade.
Evidence of fraudulent dealing and gross over-valuation of whisky stocks had a lasting effect on investor confidence.
ABOVE: advertisement for Pattisons’ blended Scotch whisky
ABOVE: Jimmy Barclay
For decades, the whisky trade was left largely in the hands of the distillers and blenders, and professional brokers such as the legendary Jimmy Barclay, who understood its workings. After the Second World War, however, a great revival in blended Scotch sales encouraged new waves of private investors to look again at the prospects for profit in whisky casks.
In the 1960s, speculators in the US and Germany were encouraged to invest in grain whisky. Few appear to have made significant gains on their investments – the Scotch whisky companies had ready access to all the cheap grain spirit they might require. In the 1970s, however, whisky drinkers rediscovered the attractions of single malts. Some businessmen, including confidence tricksters and fraudsters who had been involved in promoting investment in fine wines, saw an opportunity to develop a new ‘premium’ investment category. They targeted inexperienced and unsophisticated investors with offers suggesting – sometimes ‘guaranteeing’ – fantastic returns on casks of single malt Scotch.
The renewed investment surge was not confined to the UK: the industry expert Ross Wilson reported in the Wine and Spirit Trade Record that there were 40 brokers offering casks to Americans in the early 1970s. ‘The industry is replete with fraud’, commented one broker, noting that some middlemen were selling to investors at mark-ups of up to 100 per cent of the market price for their whiskies. Other brokers sought to allay investor fears by forming a trade body to draw up ‘guidelines for fair practice standards’, but their Scotch Whisky Association of America was short-lived and, it seems, quite ineffectual. By the end of the decade, many investors were left with whiskies for which they had paid greatly over the market price, and for which there was no strong demand.
Once again, however, warnings of the pitfalls of whisky cask investment were quickly forgotten. There was yet another revival of interest in whisky investment in the early 1990s, with the usual promises of huge yields which proved to be illusory for all but the canniest (or luckiest) investors.
This latest boom came to a juddering halt in early 1996. Journalist Andrew Jefford, who had been exposing scams in the sale of ‘fine wines’ as investments, made a programme for Channel 4 investigating the activities of Marshall Wineries and their offerings of casks of ‘Grandtully’ – actually a very young spirit acquired from the recently-opened Speyside Distillery, for which investors were charged around three times the market value.
Other journalists latched on to the story. Jenny Booth reported in the Scotsman on deals that had turned sour and recounted a familiar tale, of a punter who complained he had been promised average annual returns of 18 per cent on two hogsheads of whisky. He paid £1350 for each cask but discovered later that was nearly double the trade price.
Amid a growing scandal, the Scotch Whisky Association issued a leaflet warning the public of the dangers of investing in whisky casks. Their director of consumer affairs, Campbell Evans, was quoted widely in the press advising that small investors had little prospect of selling on their casks at a profit. Those casks were ‘in many cases, quite frankly, not ones that command great prices’ and he queried the notion that there would be interest from whisky companies seeking to boost their stocks: ‘Why would anyone in the industry want to buy at a price these investors expect when they can buy it in bulk more cheaply at the trade price?’
The SWA lobbied the Department of Trade and Industry and various foreign regulators with a view to cracking down on whisky investment fraud ‘in the public interest’. Evans remembers today that 26 investment companies were subsequently closed down, with others going into voluntary liquidation. They left behind thousands of investors with casks they were unable to offload at anything like the prices they had paid or, even worse, with the realisation that they had been defrauded and did not own any casks at all!
In 2000, the Scotsman estimated that around £60 million had been invested in the 1990s in fraudulent whisky investment schemes. In 2004, Stephen Jupe of Marshall Wineries, the company that was the focus for Jefford’s original investigation and had persuaded more than 2,000 investors to invest millions of pounds, was sentenced to five years in prison on three counts of fraudulent trading. Three other whisky and champagne ‘investment managers’ were also jailed.
Recent events have shown that a popular enthusiasm for cask ownership persists, despite negative headlines and evidence of a number of pop-up, predatory middlemen appearing on the scene to take advantage of eager enthusiasts who lack an expert knowledge of the market. The lessons from the past suggest that potential buyers can alleviate the risks involved in purchasing a cask by doing their homework, and then selecting an outfit with a sound reputation and a proven track record in the industry: one with a sound working knowledge of the whisky trade and its complexities, and which is in business for the long haul.
That’s where you can turn in good faith to The Scotch Malt Whisky Society. It has been sourcing casks to bottle for its members for more than 40 years and is widely recognised today as one of the Scotch whisky industry’s ‘national treasures’.
Now, through its 50th Anniversary Cask Club, the Society is offering members the opportunity to own a cask of their own, to be bottled in 2033 when the whisky turns 10-years old.
It’s an opportunity to be part of the journey to the Society’s 50th anniversary, safe in the knowledge that it will be nurturing outstanding whiskies on your behalf, ready to bottle with a personalised label when the time comes – and without any of the stress involved in dealing with an unscrupulous operator.
You can find out more about the Society's 50th Anniversary Cask Club at https://smws.com/50-cask-club/
