There might be a bubble brewing in bourbon

bourbon iceReuters/John Sommers II

There might be a bubble in the bourbon industry.

RBC Capital Markets analysts shared the chart below showing that an influx of new producers could be setting up a slump in bourbon prices, as well as providing sometimes subpar versions of the American whiskey.

In a note on Thursday, Nik Modi and his team published the chart below to show that the number of craft distillers has been on the rise for the last few years.

A recent study that included American Craft Spirits Association showed that the number of distillers has compounded at a 42% annual growth rate since 2010.

From just 204 craft spirits distillers across America in 2010, the number grew to 1,315 this year through August. Screen Shot 2016 10 28 at 12.27.45 PMRBC Capital Markets

Modi and team said the industry’s fast growth and the possibility of mergers and acquisitions are among the things that led to the boom in such a short time. In 2014, Japanese liquor giant Suntory bought the maker of Jim Beam for $13.6 billion.

“However, it is important to keep in mind that to be classified as a straight bourbon, the product must be aged for a minimum of four years,” the analysts wrote. “This has led new entrants looking to take advantage of the category’s growth to take two approaches: 1) enter the market with an un-aged product; or 2) wait a few years and launch bourbon (once it hits the 4-year mark).

“The former approach is immediately price dilutive on the broader category, and the latter approach could lead to an influx of supply over the next few years, forcing overall category prices lower (the exact opposite of the scarcity value driving overall bourbon prices today).”

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