669. Why Is 95 Percent of the World’s Bourbon Made in Kentucky?

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Most products can be sold pretty much as soon as they're made. And that's important if you are in the business of making things, because you can start earning back your investment right away. But some products require a further investment of time after they've been manufactured. It could be years worth of time. Certain cheeses come to mind. Wine occasionally, but especially spirits. The most famous example is Scotch whiskey. The older, the barrel, the dearer, the bottle. And the most famous American example is bourbon. I don't happen to drink much bourbon, but the bourbon industry started to sound interesting when we did a three part series on the horse industry. That series is called The Horse Is Us, if you'd like to listen. One interesting feature of the thoroughbred horse market is how concentrated it is in one relatively small area, the bluegrass region surrounding Lexington, Kentucky. Can you guess another industry that is concentrated in one small part of Kentucky? Correct. Bourbon. So we thought we'd poke around that industry to see what we can learn. Just one episode though, not three. We will look at how time functions as an investment input. And along the way, we will ask a lot of questions like why is bourbon manufacturing so concentrated in Kentucky? They talk about the limestone, the same thing that makes fast race forces. But do we also detect a note of protectionism? You do have to admit it's a bit convenient. That said, the industry has a problem. We don't have a quality problem. We have a quantity problem. Concerned for bourbon is shrinking, new tariffs are scrambling global trade, and bourbon is getting a little bit...glutty. Currently there are 16 million barrels of bourbon aging in the state of Kentucky. So how concerned is the industry? Well it should be very concerned. The good news is that there will be a lot of well-aged bourbon in the future. Today, on Freakinomics Radio, let's pour one out for things that age well. L'chaim. Okay, this show has economics in its name, so let's start with an economist. My name is Ken Trotsky. I'm a labor economist and chair of the economics department at the University of Kentucky. Trotsky grew up in Washington state. Got his PhD at the University of Chicago and he moved to Kentucky about 20 years ago. 95% of bourbon made in the world is made within a 45-minute drive of the house I live in. It was Trotsky we heard from a minute ago saying that there are 16 million barrels of bourbon aging in Kentucky. That is up from 4 million when Trotsky arrived. When I got there, bourbon was just starting to recover from a long period of time of when it was in decline. And I was hearing about this bourbon called Pappy Van Winkles. I told my wife one time for Christmas, I said, you know, I'd like to try some. So she went into the local big box liquor store and there were a couple bottles of 20-year-old Pappy, but it was $120 a bottle. Which is maybe triple what a typical bottle would be. Oh yeah, at least. Okay, it's $120. So she thinks, ah, it's not worth it. And then she goes home and then she says, well, it's a Christmas present. Yada yada. And she goes back and she buys it at $120 a bottle. You try to find a bottle of 20-year-old Pappy's right now and it's probably $2,500, $3,000. And I'm like, why didn't you get due? Pappy Van Winkle is one of a couple dozen bourbon brands controlled by Czazrak, which is one of the biggest spirits producers in the US. Some of the other Czazrak bourbons are Buffalo Trace, Blanton's, Eagle Rare. Pappy Van Winkle is aged much longer than most bourbons and is at the high end of the price scale. You can always tell that a commodity is getting more valuable when more people start to steal it. Like when thieves rip out the copper wiring at construction sites or go under your car with a sawzall to cut out the catalytic converter. During the bourbon boom, 65 cases of 20-year Pappy Van Winkle were stolen from a warehouse. The black market value was an estimated $100,000. Ken Trotsky had not been a bourbon man when he moved to Kentucky, but by now he could understand the appeal. I drank that stuff. It's really good. After that, you know, I just started trying other different bourbons. So your curiosity was taste-based. You weren't necessarily thinking about the economics of it? Well, when people come to Kentucky, what are you going to do with them? Horses and bourbon. You got to take them to a horse farm. You got to take them to a distillery. So I started learning about the production of this stuff and more about the market. And it is a fascinating market in ways that touch a lot of other types of economics. First off, if you want to call it bourbon, you can't sell it for at least two years. And most of the time, it's four to six. I've read that that's a little bit of a myth that there's no actual enforced minimum, or is that not true? So I am looking at something and I'll read it to you. According to the Code of Federal Regulations, the CFR Chapter 27, Section 5.143, if you want to call it straight bourbon whiskey, has to be fermented mash, not less than 51 percent corn, 160 proof distilled in the United States, stored in new American charred oak barrels at 125 proof for at least two years. So it's got to be stored for two years to be called straight bourbon whiskey. This regulatory code dates back to 1964, when U.S. Congress passed a resolution declaring bourbon a distinctive product of the United States, the way that only Scotland can produce Scotch whiskey or how only the Champagne region of northern France can produce Champagne, better known in these parts as champagne. Ken Trotsky, once he started paying attention to the bourbon industry, could see that it presented some unusual economics, especially around pricing, and the pricing is driven by time. Most bourbon is dumped at four years, bottom shelf bourbon probably four, six to eight years is considered a sweet spot. When thinking about pricing the product, you have to take into account, I got all this bourbon that's right behind me that's sitting in a warehouse. This is a really, really interesting hard problem to solve. It doesn't mean it's not a competitive market because everybody has to do the same thing. It does raise barriers to entry, but it can't raise that much because when I got to Kentucky, there were probably six distilleries and now there's over a hundred. It has come and down given some of the recent changes in the bourbon industry. When Trotsky says recent changes, he is talking about what is starting to look like a serious retrenchment in the bourbon industry. The COVID shutdown was good for alcohol sales, a little too good if you talk to public health people, but since 2022 demand for bourbon has been falling. And that's a problem if you've already got 16 million additional barrels aging in their rickhouses. The biggest bourbon producer, Jim Beam, which is part of the Japanese spirits company, Suntory, just announced that it would pause production at its flagship distillery for the next year. There have been layoffs and consolidation at other big bourbon producers. So let's hear from someone who spends time with these companies. My name is Brad Patrick. I am the executive in residence and lecturer at the University of Kentucky Gatton College of Business and Economics as a land grant university. We're here to support the business missions of the bourbon industry. Where are you from originally? I detect a little bit of southerness in your accent. Yeah, I grew up in Eastern Kentucky and also a bit in Indiana. Where in Eastern Kentucky were you? It's hard to describe. There's a county called Knot County. You know, we in Kentucky like to talk about our counties. Knot County is where it is at the foot of Ball Mountain at the fork of Sandalic. How's that for my neighborhood? That did it for me. Yeah. Yeah, not too far from Possum Trot. Patrick is also a bourbon fellow at the James B. Beam Institute for Kentucky Spirits, which is also attached to the university. He teaches, conducts research and consults with the bourbon industry. From 2012 to 2021-22, things have been booming. People have been just jumping into the industry and making things happen. That's where we've been. And now we've bumped into a wall here and now people have to rethink what they're doing. There was a Wall Street Journal article. I'm sure you saw, headlined, America's Bourbon Boom is over. Now the hangover is here. Walk me through that. This lesson that we've bumped into this wall is one that has happened. Famous ones, you have the whiskey lock stories from the 1980s when the Scotch industry overproduced and got crazy and jumped on this bandwagon. The bourbon industry itself had that from prohibition to the 1970s. It's just a rush to make more product because consumers were there. And then like in the 1970s for bourbon, the generation that was coming on didn't want to drink daddy's old brown spirit anymore. Because a person that studies change and the concept of creative destruction, I always wonder, is anybody wrong here? It was a bunch of individual bourbon distilleries making what they believe to be good investments in equipment and capital expenses, believing that the consumer was always going to be there. The other complexity with bourbon is you make it and you put it away to sleep for four to eight years, minimum two, but you start getting your quality at four, your sweet spots in your six to eight, six to ten years. So I think it's a combination of a lot of enthusiasm to get big in the market, to toss something over the wall and people will buy it. And then just when the market changed, you're now left sitting on 16.1 million barrels. Yeah. So what's going to happen to those 16 million? That's a great question, isn't it? We don't have a quality problem. We have a quantity problem. So we're going to have a glut of it available. So the glut is maybe one problem. What about quality? Does the quality of the bourbon just keep increasing the longer you age it or does it start to decline? What you'll find from the bourbon connoisseurs is once you get past 10, you'll start to lose some people with this oakiness, a heavier oakiness. You will get premium stuff. And when you think about a Papi Van Winkle that's 21, 23 years old, there's not a lot of juice left in that barrel from evaporation and leakage and so forth. So it's a premium product. I think the bourbon industry in general has been pretty innovative. They've always rushed to some unique consumer aspect. But what they've just been hit with is a whole bunch of things at once. But the major one being the, I guess we're going to call them Gen Z's consumer taste and changing expectations, it's falling off the table. You have your tariff issues. You have the health issues. You have competing aspects of THC and cannabis products. And then what you have on the health side of it is our young consumers now are switching to the ready to drinks, the either alcoholic or non-alcoholic cocktails in a can. We're seeing that ready to drink market at 20 plus percent growth. So it's similar to what bourbon was doing a few years ago. But we're seeing it mostly in the white spirits. I get it that younger consumers are less interested in grandpa's old brown drink. On the other hand, young consumers get older and we've got an elder swell now. The older population is the one that's growing the most. So I would think that this could be a boom time for bourbon. So what are you seeing going on among older drinkers in the U.S.? Is it more the health and wellness concerns? Is it GLP ones? Why do you think there's the fall off? I don't know enough about the ozempics and all those other things and how people are taking that. But I do know that there is probably some price fatigue. There's probably too much variety. There's between 800 and 1000 SKUs out there. That's a lot of choice. Wait, just bourbons. Yeah. In the idea of with all the innovation and creativity, there's just too many choices. So how concerned is the bourbon industry? Well, it should be very concerned. What we're seeing right now are those that were built for the big contract distillation business. That's make a spirit so people can take and blend it. That's gone or going away. So if you're a business that was all set up to be just a contract maker and you borrowed money from a bank, you're probably in the most trouble. We're up to 120 plus distilleries in Kentucky. So that number is going to have to dwindle for good economic reasons. Your next group of people are the ones that did it through a private equity aspect. So they have more control over their debt, but they're going to struggle. The ones that will live will be the distilleries that have a brand. What you're going to find is an appropriate weeding out of businesses. Same thing the Scotch industry found in the 1980s. They've consolidated down to five major players basically. They were up over 140, I think, distilleries at one point. So I think we're seeing some of the same things. It seems as though the global Scotch market is much bigger than the global bourbon market. Yeah. That's a $40 billion business and the bourbon is going to get you in the 10 to 11 billion. Scotch is at a very nice job of establishing themselves as a global business. They've gotten their protections. They have their trade agreements. They've done a nice job of creating who they are. I think they're well established and they have the right infrastructure to do it. And the bourbon industry does not have the infrastructure. What's missing? A lot of things. Okay. Let's unpack some of the bourbon industry's infrastructure problems. One thing that makes it harder for those 16 million aging barrels of bourbon to get into the hands of consumers is how the sale of liquor is regulated in the US. The regulation can only be described as sort of odd. That again is the economist Ken Trotsky. It's what's called a three-tier distribution system. The producer can only produce. They cannot have any financial relationship with the company that then buys it and distributes it to the ultimate seller. And that distributor can have no financial relationship with the ultimate seller. And this makes sense. How? Other than a historical artifact. My understanding is the reason that they produce the system coming out of prohibition is to limit the impact of the mob on alcohol sales. And so that's why to this day, if you're producing spirits, you can't sell it directly to consumers, maybe at your distillery, I guess. Well, okay. Let me tell you an interesting story about that. Prior to January 2022, if you're a producer of bourbon running a gift shop and you wanted to sell your product in the gift shop, the distributor, they had to take possession of the product when it came out of the bonded warehouses, complete the paperwork, pay the taxes and then literally sell it back to the producer so that the producer could sell it in their gift shop. They changed that in January 2022. So now when you walk into the Buffalo Trace Woodford Reserve or whatever gift shop you walk into, they are selling it directly. Did that lower the prices? Well, let's be careful. So for example, when I go to Buffalo Trace, I can buy a bottle of Glantons for about $74 at the gift shop. Anywhere else in Kentucky, you just walk into a local shop. It's probably $130. I was in a liquor store in La Jolla, California. And I said, you got a bottle of Glantons. What do you sell it to me for? $100. That's kind of bonkers. As an economist, how do you feel about this three-tier system for alcohol distribution today? I would think it's just full of inefficiency in middlemen, what you call rent-seeking. Well, there's a lot of people that make whiskeys and alcohols and so the production's fairly competitive. The distribution, there are two big companies, the Republic and Southern. The sales, I think that seems pretty competitive. A lot of it has to do with the allocation. You want to sell Blantons. Your distributor has to give it to you. It's only released certain times of the year. And then what the distributor does is say, hey, I'll give you some of this Blantons that you can sell for a lot of money, but you got to be a good seller of other things. So you got to be a good seller of Fireball. The local wine shop right around the corner for me, love it. Been going there for years. I know the owner, Ally, she's great. She has stocks and bourbon as well and she occasionally gets Blantons as given some to me, but her distributor basically told her, I would give you more Blantons if you sold more Fireball. She sells plants and she sells wine. That's her big thing. And her market is a bunch of, I would say the typical customer in there is younger than me, but not that much younger. It's not a Fireball crowd, you're saying? No, it's not a Fireball crowd. And she's like, that's mental. I'm not going to do that. The one group, of course, that is always hurt by inefficient regulation is a consumer. Why am I paying $74 for a bottle of Blantons when I go to Buffalo Trace and somebody in La Jolla, California paying $400 for that? And why can't I walk over to Buffalo Trace, buy 10 bottles? They won't sell it to me, but let's ignore that. Buy 10 bottles at the gift shop, stick it in the back of my car and drive to the liquor store in La Jolla, California and say, Hey, you're selling it for four. I'll sell it to you for two. Well, I'll make a little bit of money. That's illegal. Since bourbon doesn't have to be made in Kentucky to be considered bourbon, why does 95% of the bourbon come from Kentucky? I think it's just tradition. They grew up, they built the facilities. It has to be stored somewhere. You want to talk to a master distiller who knows about these things. After the break, we talk to a master distiller who does indeed know about these things. You have cellulose, then you have hemicellulose, then you've got a group of compounds called lignins, which are really complicated. I'm Stephen Dovner. This is Freakonomics Radio. We will be right back. Still got that tab open from six months ago. Virgin Atlantic holidays can help. This is your sign to road trip through Nevada like the movies promised or order a Virgin Margarita extra salt on the rim in Mexico or step off your pair into the bluest of blue water in the Maldives. Span holiday weekend, save up to 300 pounds. Book in store over the phone or online at Virgin Atlantic holidays. Select routes for T's and C's visit virginatlantic.com. At or protected. We've been talking about the end product in the bourbon industry, the bottle that winds up on a store shelf. But how is that brown stuff actually made? For that, we need to talk to this person. My name is Danny Kahn. My title is Master Distiller, Distillation and Aging Operations Director, Sazerak. Sazerak was founded in New Orleans in 1869. It still has offices there, but its main operation is now in Louisville, Kentucky. Sazerak is privately owned and makes hundreds of spirits, including brands of vodka, gin, rum, tequila, and many bourbons. I started with Sazerak as the Master Distiller for Barton 1792, which is about an hour away from Buffalo Trace in a town called Bardstown, Kentucky, the bourbon capital of the world, as they certainly like to say. So I oversee the distilling and aging operations production at Buffalo Trace at Barton 1792 and at our Collingwood Distillery, which is in Collingwood, Ontario. Where are you from, Danny? Where'd you grow up? I grew up in Los Angeles. Did you set out to be a Master Distiller? No. I set out to be a Master Distiller in Sazerak before I distilled. I was a brewer, but I will tell you with certainty that no high school counselor ever said, how about a career in brewing? But I did go to the University of California at Davis. Which is a big agriculture school, yeah. Very big ag school. And I went in as a chemical engineer because it was hard and it seemed like a good place to start. For a particular reason, my friend and I needed to learn how to home brew. What was that particular reason? My best friend's fake ID was confiscated. He was very panicky and he had to go to court. I was panicky too and I said, we have to learn how to make beer. There was a home brew shop in Davis and started to make beer and absolutely fell in love with the science and the art of it. Turns out that UC Davis has viticulture and enology, which is grape growing and wine making. I ended up taking a preliminary class. I didn't even know Sauvignon Blanc was a white wine. But I studied and I thrived on creating something that people enjoyed and that it had social impacts and economic impacts and global impacts. So I just fell in love with the science and the business of alcohol production. I eventually evolved into fermentation science, which for me was a cross between chemical engineering and microbiology. You worked in beer making, correct? Yes. I worked at Anhaser Bush in a variety of locations for many, many years. It was a phenomenal technical education. I would think it's not so easy to switch from being a master beer person to a master bourbon person. It was a very logical transition. If you think about whiskey, we make beer first, then we distill it and then we age it. So all of that knowledge was a great foundation to go into distillation. Maybe you could give us a quick tutorial in how bourbon goes from being raw materials to the bottle. How much time you got? Is three days enough? No. So five things required to be bourbon, 51% or more corn. It has to be made in the USA. It has to be distilled to no more than 160 proof, that's 80% alcohol. It has to be put away into a barrel or a container, no more than 125 proof. And it must go into a new charred oak container. In our case, we use a barrel. I have to say, when I read these rules, they sound to me like a 16th century religious proclamation. I'll tell you, this was a law based on prior history. And certainly, I'd like to think that that had everything to do with what makes the best bourbon. And let's put in regulation to continue to make a very notable product. Now to what degree were the corn lobbies involved? That's what I always wonder. I have read that the barrel makers and the copper industry and maybe the corn industry all really love this confluence of rules. You're saying that these rules were derived for the primary purpose of improving or protecting quality, but tell me what you can about how there might have been a little bit of not self-dealing necessarily, but people looking out for their own interests. I will say that I can defend every single one of those components as to why they are positive for flavor. Let's do that. That'd be fun. Let's start with the corn. Corn. Okay, so first of all, it's my belief that our forefathers came over more familiar with rye whiskey. And as they went west, I'm sure they learned that rye does not grow well. It grows well in the upper plains of Canada. It grows well in Europe. It grows well in the northeastern states. It does not grow well as they moved west, but what does? Corn. It's plentiful. It's got a lot of starch, which is needed to create sugar, which creates alcohol. It's got an enormous amount of flavor that comes from the oil and other components of the corn. Rye is important for flavor. It's spice and floral notes and pepperiness and cinnamon, but does not have a ton of extract. Okay, let's keep moving down your list. Made in the USA, what's the importance of that? We can control it. If there's a law, it applies to this country. That's a good way to control it. It does not have to be made in Kentucky, but it does have to be made in the US. Even though bourbon does not have to be made in Kentucky to be called bourbon, I see that something like 95% of all bourbon is made in Kentucky. Why is that? Well, bourbon originating in Kentucky became popular in Kentucky. When you have an infrastructure for a distillery or two, it makes it easier for others to come in. So we grow a lot of corn, and the vast majority of our corn comes from a pretty small radius around the distillery. We talk a lot about the water in Kentucky. For distilled spirits, it is truly magical. It comes through limestone cavern, so it's got a lot of calcium in it. It's got a pronounced flavor. It's mineral-y. Those calcium components in particular and other minerals are really important for the enzymatic reactions in the cooking process. They're also very important for certain yeast functionality. And then when we distill it, those components stay behind. They don't get carried over in the distillate. And that's a really important reason why bourbon in Kentucky is very good. Does that mean that you have fantastic bread and pizza there as well? I can speak for my own pizza dough, and I think it's pretty damn good. Okay. Let's hear about the third bourbon requirement, the distillation. It can be distilled no more than 160 proof. We typically go to 135 or 140. And in so doing, you retain a whole bunch of flavor. What I like to explain to people, if I distill to 160 proof and then diluted it to 125, which is, it cannot be higher going into the barrel. So again, 160 to 125 versus 135 to 125, those would be very different flavors. The 160 distilled proof would tend to be lighter, a little more neutral. The lower distilled proof, 135-ish, retains a lot of flavors. And those flavors are really important in how the whiskey ages. They oxidize slowly over time. They react with different components in the wood and the distillate. So having those flavors present, they become precursors to what makes really delicious whiskey delicious. Okay. The fourth item is a big one. Bourbon must be aged in new oak barrels that are charred with fire. Now, technically it's a container, but rolling boxes is hard. So we put them in barrels. But yes, so they're new charred oak containers. So there's a whole process, and I'll be brief on this, but... Don't feel you need to be brief. I, like you, am very interested in this part. Okay. This is super interesting. When a barrel is made, the tree is cut and it's quartered and staves are cut. Those are the pieces that become the individual components of the barrel, the long, skinny pieces. Typically, there's 34 to 36 staves per barrel. They're cut, and then we stack them up, Jenga style. So there's airflow, and we let them sit out in the field for approximately a year. That process is called seasoning. Rainwater will rinse off certain components called tannins and others, and then normal microbiological activity will break things down in the wood that become very important flavors later. Cucumber and fungal activity is super important for really good flavors throughout our history. So we have learned that. Now, that's not part of the law, but that's what we do. You are making the barrels yourselves? We have a cooper. A cooper is a person or a company that makes barrels. Are they part of your operation or is that subcontracted? It's part of Sazrak, but it's not under my responsibility. Now, I've got a very close relationship with the cooper because if we see problems, we communicate with them on a regular basis. What about the forests themselves? Do you control them or are you buying that from a third party? The cooper is buying that. We have some of our own property, but we're buying logs on the market. And there's a very important quality check and criteria that they go through to make sure that they meet our objectives. So the staves are seasoned for about a year, and then they are brought into the cooperage and they build the barrel. They steam them, they cut them to get the right bevels. Just done by hand or machine? It's very labor intensive, but the cutting is mostly done by machines. Then they will build the barrel except for the top head. So you've got all the staves, and then you've got a bottom head and a top head. And we will provide direct fire, very intense, very hot for about 30 seconds. And that gives us a certain level of char. The char actually absorbs components, kind of like your water filter at home would do if you have bad taste in water. It's the layer below the char that's been cooked that are the extractables that we are looking for. How is that fire being applied? It's a natural gas. There's sort of a sprinkler nozzle, if you will. So there's flames coming out all directions. It gets direct flame for about 30 seconds, and then we quickly extinguish it. And these are the open barrels going down some kind of assembly line or someone coming along to a row of barrels with their blow torch? It's coming through an assembly line. The head is put on and the hoops tighten down the barrel so it's liquid tight. Little water is added. We give it some air pressure, make sure it doesn't leak. And then there's no sealant of any kind. There is often a little bit of paraffin wax on the outer edge of the head where the head and the staves connect. No glue is used. They're all put together with no glue. So you char the barrel. And now you've created an environment where the whiskey can age. OK, so let's talk about now the 125 proof component. Different things are soluble in different liquids. If anybody makes an old fashioned and you add a sugar cube, which I do like to do sometimes. I like having little pieces of sugar left and they provide little bursts of brightness and crunchiness and it's really quite fun. Anyways, a sugar cube and a couple drops of water will dissolve very rapidly. You put that same sugar cube in bourbon, it will not dissolve. So certain components in the wood are very soluble in alcohol and certain components are more soluble in water. So depending on the proof we put the whiskey in the barrel at, we can extract different components. Within a barrel, you have very, very, very generally for types of wood components. You have cellulose, which provides a lot of structure, not a ton of flavor, but a little bit. Then you have hemicellulose, which is where you get the caramel butterscotch type components. Then you've got a group of compounds called lignins, which are really complicated. But that's generally where you get your baking spices, nutmeg and clove and vanilla and cinnamon. And then you have tannins, which are more water soluble. They provide mouthfeel and astringency and they also provide color. All these different components are soluble at different alcohol levels. So that's a way we can manipulate flavor. It's stuff that's really just below the char. So when you age a barrel, you have losses through evaporation. How significant? Pretty significant. When you open a barrel, how full does it appear to the naked eye? It can be half full, it can be less. For some of our 23-year-old bourbons, there's just a little bit left at the bottom. What's the market for used barrels? You know, it's a supply and demand issue. Sometimes there's great demand. Sometimes it's not so great. What is it these days? It's not so great. Scotch whiskey slowing down a little bit. They're not taking as many barrels as they did a few years ago. Most Scotch whiskey and Irish whiskey and Indian whiskey are put in used barrels. So that is the market. We can sell our barrels for other products. I would think, though, to ship them to Ireland and Scotland has got to be pretty expensive. How much you sell them for? What's it need to be worth for you and for them? Well, think about it this way. If we don't sell them, it's a total loss. But suffice it to say that if the Scotch market is not particularly strong, there might be a lot of, let's say, roadside planters around Kentucky of old bourbon barrels. I think there's a lot of roadside planters, anyways. Coming up after the break, who wins a battle between bourbon and buzz balls? This is Freakin'omics Radio. I'm Stephen Dovner, and I am glad you're listening. Your next holiday starts here with Virgin Atlantic holidays. This is your sign to bounce between islands on a long tailboat in Thailand or eat a bagel the size of your face in New York or rain forest trek to hidden waterfalls in the Caribbean. This bank holiday weekend, save up to 300 pounds, book in store over the phone or online at Virgin Atlantic holidays. Select routes for T's and C's visit VirginAtlantic.com. Atle protected. Before the break, the master distiller, Danny Kahn, told us that the official rules of bourbon are meant to guarantee the quality of the product. But if you think about things from the consumer side, we consumers are highly prone to seeing a naked emperor insisting that his clothes are exquisite and divine because we don't want to be that one person to say this wasn't worth eight thousand dollars. That is Andrew Muhammad. He is an agricultural economist at the University of Tennessee. I've been working on trade issues across all agricultural commodities, including beer, wine and spirits for about two decades now. And how much time does Muhammad spend thinking about the brown stuff? Whiskey and bourbon seems to be occupying about 50 percent. And sometimes it feels like 100 percent of my time. So does Muhammad buy the argument that bourbon regulation is all about making the bourbon great? Or is there, as there is in many old industries, some soft protectionism in there to help out the incumbent distillers? And that whole new Chard Oak container story does make for good marketing. Yeah, I mean, you do have to admit it's a bit convenient, right? If you think about the fact that we actually export these barrels for Canadian whiskey production, Irish whiskey production, some of the finest scotch in the world, there's very expensive Japanese whiskey that use barrels from Kentucky and Tennessee. And so to make the argument that of a quality distinction would be very convenient marketing as an economist. This seems to me like a policy that led to an increase in demand and a policy to sustain demand. I'll concede that I'm sure there's a distinction in terms of taste when one uses a newly charred barrel versus a second use or a second charred barrel. Now, a bourbon defender when hearing Muhammad's explanation might say that the reason scotch tastes so good is because those barrels had bourbon in them first. By the way, Muhammad is not a bourbon hater, not at all. Yeah, like most people, I've visited distilleries. Whatever my collection is, it's probably pathetic compared to a true bourbon connoisseur, but I do try to buy reasonably priced bottles just to share with friends and to save on the shelf. I'm only willing to go so far for that as an economist. It's also made me cheap. You can actually find very good quality stuff in the fifty to sixty dollar range. I've spent as much as maybe two hundred fifty dollars on the bottle. I feel like I've overpaid. As we heard earlier, the bourbon economy is shrinking because of flagging demand among U.S. drinkers. One solution is to try to sell more of it overseas, but bourbon has gotten caught up in Donald Trump's tariff policies. During the first trade war, we put tariffs on steel and aluminum. In the entire European Union retaliated with a series of tariffs on very strategic products to try and in some way affect certain politicians in those states. One retaliatory tariff was on Harley-Davidson's, right? I assume that was to affect Paul Ryan in Wisconsin. There was a tariff on peanut butter in Europeans don't even like peanut butter, but there's this twenty five percent tariff. And that, by the way, led to a collapse in U.S. peanut butter exports to Europe. Strangely enough, they also then impose this retaliatory tariff on American whiskey, which includes Tennessee whiskey and Kentucky bourbon, right? The broader generic whiskey category coming out of the United States was subject to this twenty five percent retaliatory tariff. Muhammad says that some whiskey companies responded to tariffs, not by raising prices, but by cutting them. Why would they do that? Because once you lose market share in the distilled spirit sector, it's very hard to get it back when someone finds a new favorite bourbon. They spend less on what they used to spend money on. No company wants to risk that. But tariffs can be a problem when overseas growth is part of your business plan. The Kentucky bourbon and Tennessee whiskey industry has done exceptional global marketing. The biggest Tennessee whiskey by far is Jack Daniels, which is owned by Brown Foreman. Chris Stapleton's song Tennessee Whiskey. I've heard that song the world over. There were even people humming that song in Kenya when I visited on this distilled spirits project. As smooth as Tennessee whiskey and sweet as strawberry wine. Everybody knows that song. When it comes to distilled spirits, particularly say Tennessee whiskey and Kentucky bourbon, these are products where people have developed serious habits, right? Now, I don't mean habits in a negative way. I simply mean habit formation in consumption. And so even small price changes do not necessarily have huge effects on demand. Now, where we have seen retaliation, it's been quite effective. And that's in Canada. They simply took American products off the shelves. If you just leave spirits up to tariffs, we're talking about global corporations that can internally manage that. When you have these smaller craft distillers, they may not be able to. There are other things that governments do to make things more complicated for the bourbon industry, like barrel taxes. The state of Kentucky has for decades levied an annual tax on aging bourbon, just as it's sitting there in its barrel. Here's Brad Patrick again from the University of Kentucky Business School. From a tax perspective, when you look at our history, I think what you'll see is this evil, sinful spirit that can be consumed appropriately and fairly had a syntax with it. And even today, if the bourbon producers fight it too much, you lose a little bit of the crowd there. In 2025, bourbon distilleries in Kentucky paid out seventy five million dollars in barrel taxes. But that tax is being phased out. It's set to be eliminated by 2043. So the bourbon makers will just need to be patient. On the other hand, they're good at that. Patience is also part of their business plan. Andrew Muhammad again. Most products time is an inconvenience. Right. I tolerate time for quality. So if I want a tailored made suit and the tailor says it's going to take me a month, I'll tolerate that month for the quality of suit I'm going to get. But if I meet a tailor who's just as good and who can do it in two weeks, I wouldn't say no, I'll take the month because I get to somehow brag about this suit took four months instead of two weeks to put together. Right. Time is an inconvenience. But when it comes to bourbon, time is an actual product attribute that consumers seem to value even beyond the taste of the product itself. The joy of seeing that on our shelves to tell our friends that in and of itself gives us satisfaction, which then causes some people to pay the extra two, three or four thousand dollars for it. But that secondary market has been softening. This makes sense. Overall demand for bourbon has been falling and with 16 million barrels aging in Kentucky over supply could be a problem. I went back to Brad Patrick and asked what he thinks the bourbon industry will look like in five or 10 years. You're going to have a large quantity of high quality bourbon spirits out there. Now, what are you going to do with it and how are you going to handle that? Is a great question. There's going to be an answer that we don't even realize today. I'm not sure what it's going to be, but I'm guessing it's more fun for you to explore it as a kind of intellectual puzzle than the people who are really in trouble in the industry. Right. I'll be accused of not having skin in the game. If I look at the 2015 to 2020 timeframe, when people were building like crazy and putting barrels out, they were looking for that India market and the China market. There still may be a play there. Who knows tomorrow the tariffs may be gone. What I've been advising distilleries is don't invest a whole lot in infrastructure yet, but at least invest in some awareness. So if you're sitting on a bunch, I would explore where maybe you can slip into some countries versus a whole global market and find the way to play that out. So I too am a fan or at least a kind of observer of creative destruction. And there are many, many, many examples through history where, you know, the incumbents are frustrated, angry sometimes. And what they don't understand is that there will be things created in the wake of that destruction that lead to even more jobs and different creativity and different products and goods and services and so on. In this case, I'm seeing the destruction. I'm not seeing the creative. What's the creative coming out of this? That's a great question. Well, I think Sazarex on a night's job jumping on the RTDs. What's that RTDs? They're ready to drink. So I'm sorry. Yeah, Sazarex has jumped on the RTDs and they've done a night's job. They purchased a business. It's growing 20, 25% right now. So if you're a distillery that has the bottling and canning equipment to do that, I think it's to be a reasonable thing to jump on. I think that'll peter out eventually where we're seeing the most success right now is the tourism aspect. Our tourism here for the Bourbon Trail is very, very popular. The organizations that have a plan to connect to that and into other lifestyle and luxury and events and things like that. I think that is an angle that you're going to see the innovation on. The ready to drink business that Sazarex bought is called Buzzballs, colorful canned cocktails that look a little bit like Christmas ornaments. You'll see them at house parties on the beach, on TikTok. I asked Danny Khan, the master distiller at Sazarex, what he thinks of Sazarex's new property. Buzzballs are extraordinarily popular. They're fun. They're a unique shape. They're brilliant colors. There's a tremendous market for them. They're growing internationally, very, very aggressively. We have efforts to grow them in a lot of countries. They are not what the core Bourbon geek wants. And that's a good thing because there are many different market segments. And I do not think we're in a position to say, this is Bourbon. You will like it. The alcohol pie is not growing aggressively. So where are we not represented and where can we get involved? And that's some of the components or pieces behind Buzzballs. I will tell you that my youngest daughter, her friends then come a hero because I work for the company that makes and sells Buzzballs. And I take that credit and don't tell them the truth that I have nothing to do with them. And that concludes our brief guided tour through the economics of the Bourbon industry. My thanks to Danny Khan, Ken Trotsky, Brad Patrick and Andrew Muhammad. Thanks also to Katya Zaym and to Brendan Simpson for the idea. I'd love to know what you think about the bourbon industry or about this episode. We're always trying to get better. Our email is radio at Freakonomics.com. Coming up next time on the show, are you sure that that squeeze bottle of honey in your cupboard is actually honey? They're openly advertising designer syrups saying, mix this much with your honey to pass these certain tests to get into the United States. And what about the bees? We heard about colony collapse disorder and thought this is catastrophic. And when we started to look at the data, there's no effect. The surprising economics of the honey industry that's next time on the show until then take care of yourself. And if you can, someone else do. Freakonomics Radio is produced by Renbud Radio. You can find our entire archive on any podcast app. It's also at Freakonomics.com where we publish transcripts and show notes. This episode was produced by Augusta Chapman and edited by Gabriel Roth. 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