COGNAC, France, Dec 6, 2007 (AFP) - With demand for cognac exploding to record levels, but the 2007 grape harvest small, the region fears possible shortages in the years to come as well as a price increase.

In the 12 months up to October 31 2007, a record 163 million bottles of cognac were sold, according to the national Cognac Board, the BNIC (Bureau national interprofessionnel du cognac), an increase of 8.5 percent on last year, and the most ever sold in that period since the production area was officially recognised in 1936.

"Today there is enough stock to supply at the current rate of sales. But if the rapid growth experienced over the past two years continues, then there will be shortages in the near future," said Cyril Camus, CEO of Camus, one of the five biggest producers. The other four are Hennessy, Courvoisier, Martell and Remy Martin.

BNIC figures show sales have risen by about 40 percent since 2001. This follows several difficult years after the collapse in the early 1990s of the Japanese economy, at the time one of cognac's principal export markets.

The main problem today, said Alain Philippe, BNIC director, is that cognac stocks were allowed to run down too far after Japanese demand dried up.

"After the crash in Japan we found ourselves with too much stock, and it was expensive to keep, so we sold the young cognacs to the US, and lowered the amount we distilled annually. Sadly we were too careful for too long," he said.

Given that current demand is strong in several markets, notably Asia - China in particular - America and Europe, the latest boom in sales, which covers both younger VS cognacs and older XO varieties, is not expected to slow any time soon.

In cognac terminology, a Very Special (VS) cognac denotes a minimum of two years aging, Very Superior Old Pale (VSOP) four years minimum, and Extra Old (XO) a minimum of six.

Low stocks and high demand are naturally driving wholesale prices higher.

The structure of the cognac market, however, is such that the majority of growers of the main raw material, the ugni blanc grape, are in fixed price contract agreements with the major cognac houses, which command about 80 percent of the market.

The main houses either buy wine from the growers, and then distill it, or buy distilled alcohol, and then age it in oak casks for anything from two to 20, 30 or more years.

In the contractual market, prices have risen only by an estimated 10 percent, affording consumers some protection. Prices however paid to independent growers, about 20 percent of the supply market, have risen dramatically.

"The price paid to non-contracted growers for cognacs of 10 years and older, has gone up 350 percent in 18 months," Camus said. "Many companies are now hoarding stocks and restraining sales of younger cognacs," so as to have enough for older cognacs in a few years, he added.

For one independent grower/distiller, Christophe Forget, with 22 hectares in the Petit Champagne area, the demand has meant a happy increase in prices of his non-contracted, 10-year-old cognac of up to 3,000 euros per hectolitre.

That is well above the 1,800 euros he was getting last year.

There is also a squeeze on younger cognacs, partly due to it being kept for aging, but also due to demand by US consumers, who drink it with tonic or other mixers.

Meukow, an independent, family-run, cognac merchant, said they recently lost a 120,000-dollar contract, because they could not supply enough VS level cognac to America.

The situation of too many buyers chasing too few goods was further exacerbated this year by weather problems, which resulted in a loss of up to 25 percent of the grape harvest. Official yields, which are normally used to limit overproduction, were set at 10.6 hectolitres, but many did not make the target.

"We only managed to produce 9.5 hectolitres due to the weather and resulting mildew," said Olivier Paultes of Frapin, one of the few cognac houses left that grows its own grapes.

The BNIC is hoping market tensions will be reduced next year, thanks to an increase in the number of stills ? the equipment used for turning wine into pure alcohol - built earlier in the year, when there were hopes of a bigger harvest.

Philippe Tizon, director of one of the biggest still suppliers in the region, Chalvignac Prulho, says the last time he saw such a demand for new stills was in the 1970's. "This year we have installed between 45 and 50 new stills," he said.

Whether Mother Nature chooses to stump up enough raw material next year has yet to be seen. So Cognac lovers beware.