The Spirit of Kentucky: Bourbon is more of a commodity than many realize

jpatton1@herald-leader.comDecember 7, 2013 

BARDSTOWN — Say you want to start your own bourbon label. How would you do it?

A contract craft bottler — such as Strong Spirits in Bards town, which bottles Temptation Bourbon, Redemption Rye and High Rye Bourbon, and many others — can help you "source" bourbon.

The bottler can design a label and walk it through the regulatory process. For $25,000, you could probably get about 100 cases to get on the market.

That's a popular option lately.

Business at Strong Spirits has "grown like crazy," manager Jeff Tatman said. When the company opened three years ago, it bottled a few hundred cases a month. This year, Strong Spirits will average more than 10,000 cases a month.

Or you could make it yourself. You could go to the Distilled Spirits Epicenter in Louisville, attend its five-day Moonshine University for $5,500 and then build a distillery for, say, $1 million. Wait the better part of a year to get your still from Vendome Copper and Brass Works in Louisville, then start cooking mash and barreling "juice." In three or four years, you might have something to sell.

Many craft or startup brands do a little of both.

That's one not-so-little secret of the bourbon world: Companies often buy their bourbon until they have something to sell.

Or maybe they aren't interested in making it at all.

Last summer in Louisville, as Gov. Steve Beshear announced a new distillery for Angel's Envy, he said jokingly: "Ninety-five percent of the bourbon is made in Kentucky, and frankly, the rest is counterfeit."

If you walk down the ever-growing bourbon aisle of your local liquor store, you might wonder: Where did all that bourbon come from?

Bourbon is much more of a commodity than many people realize, with the 13 major distillers (including one in Indiana) constantly rebalancing their inventories with expected needs, whiskey expert Chuck Cowdery said.

That gives rise to a subterranean river of bourbon flowing through Kentucky, and it surfaces in some surprising places.

Secrets galore

"There's big money, and there's secrets," said Bill Owens, founder of the American Distilling Institute. "It's real easy if you have big bucks to make a couple of phone calls and get something on the shelf."

You might work with distilled spirits broker Terry Thome.

Thome, who lives in Chicago and Florida, said he typically buys bourbon 1,000 barrels or more at a time from major distilleries and resells smaller quantities to labels that need product. He will sell a barrel at a time if need be, or a tanker load if that's what you want.

Thome won't name any specific brands but said his clients include about 60 craft distilleries in about 22 states, including Kentucky. Almost all have some distilling capacity; they blend their own product with what they can get from Thome.

But bourbon and other brown spirits are getting harder to find.

"The price has probably doubled in the last year and half," from about $500 a barrel to more than $1,000 now, Thome said. "It's a sellers' market. ... I get a lot of inquiries for all different ages and specifics — made in Kentucky, or Tennessee, or Indiana. They ask for 10- or 12-year-old bourbon, but it's just not available — unless somebody who has some decides to sell."

Kentucky's major distillers sometimes contract to make whiskey for someone else; occasionally they also sell excess bourbon in bulk to control inventory.

But they don't necessarily want to talk about it.

It's an open industry secret that Diageo's popular Bulleit bourbon comes from Four Roses in Lawrenceburg, stemming from the days when they were both briefly under the Seagram Co.'s umbrella. Bulleit's rye comes from the massive MGP Ingredients industrial distillery in Lawrenceburg, Ind., also formerly owned by Seagram's.

Tom Bulleit acknowledges that he doesn't run the stills, but there is nothing generic about his product, which is Bulleit from the beginning, he said.

"The original barrels the whiskey goes into are ours; they are made specifically for us," Bulleit said.

Craft guru Owens said Bulleit "is among the finest in the world" but by his definition, it's not really craft.

But that's OK, he said. "There's room for all of us. We as craft distillers are shooting for that top shelf, too. So watch out."

Cowdery has coined the term "non-distilling producers" for brands with no stills. He and others are skeptical that whiskey made for them is much different from the "house" brands.

"A lot of these non-distilling producers are very, very small. Their business might be based on 20 barrels. A relatively small amount of whiskey thrown into that pool makes a big splash," Cowdery said.

But the truth is this: "Just about everything you can buy from a non-distiller producer you can buy directly from the distiller for half as much. Most are just simply not worth it," Cowdery said. "You're paying for a story and fancy bottle, and maybe not even that. But the whiskey inside is the same."

Hoosier bourbon?

A significant portion of the bourbon and probably all of the rye that makes its way into the bulk whiskey river comes from MGP Ingredients' distillery, formerly known as Lawrenceburg Distillers Indiana.

How big is the bulk market?

"If I had to guess, 10 million proof gallons," said David Dykstra, vice president of alcohol sales for MGP. "The overall bourbon market is probably 80 million proof gallons. We are not the only ones in the bulk bourbon market. All the distillers at some point trade bourbon amongst themselves — some are long, some are short, so they trade amongst themselves. We are always out in the market, trying to sell bourbon."

MGP doesn't sell any brands of its own, but as the popularity of rye whiskey has soared in the past few years, the Indiana distillery's rye has been a red-hot commodity in the trade. MGP does not disclose its client list, but Bulleit and Templeton rye are both widely reported to come from there.

Both are critically acclaimed.

"Along comes the craft distilling industry, some people find out about LDI, and it's fabulous," Owens said. "Now it's like $1,200 a barrel for the secondary market. ... They see the future, and the future is craft."

MGP embraces that role.

The company supplies to more than 20 "substantial" brands, Dykstra said, and many smaller ones. It has a lot to offer: 12 whiskey mash bills, including five bourbons, according to the product list on its website.

Five brands might start with the same high-rye base, but it can be customized in a variety of ways to make it come out differently for each one, he said.

Dykstra makes the case that MGP helps the small players and the big ones alike: It gives small brands the ability to compete with the majors.

"The premise of what we do ... is we are very good distillers. We make consistent, high-quality products day in and day out for our customers," Dykstra said. "I understand people may find it offensive that it's not made by some little distillery out in Iowa, for example, but really we are making the product for them under their specifications. But we can control the costs and quality. These micro-distillers, most of them, do not have the quality capability that we do. The difference between us and the Sazeracs and Heaven Hills is we make multiple products for different people."

Craft to craft

As the popularity of bourbon, rye and other American whiskeys grows, the supply from major distillers who used to have excess whiskey has evaporated.

Prices are now sometimes triple what they were a few years ago, said bourbon broker Richard Wolf, who represents sellers. Some distillers no longer will sell bulk spirits, he said.

"The demand is significant, and the supply is virtually nonexistent," Wolf said. "Contract relationships are virtually impossible to get now, and a lot of the ones that have been in place historically have been dissolved.

"I get calls every day, from all over the world, from people looking for a tanker load of product or X numbers of barrels because their relationship has been terminated. You would certainly recognize some of them, but I'm not at liberty to share that information."

Some craft distillers are even hitting up others.

"I get calls every week from folks trying to source our products in bulk, and we don't do that," said Clay Smith, head distiller for Corsair Artisan Distillery's Bowling Green distillery. Corsair makes everything except the neutral spirit for its gin, absinthe and vodkas.

Smith said the problem with sourcing can be the lack of transparency.

"There are folks out there being up front about it, and then there are some who aren't — who are making every attempt to pass it off as their own product," Smith said. "Even five or six years ago, when we were the 15th distillery in Kentucky, you could go to any bourbon aisle and see 70 to 80 products, and there were only 14 other distilleries in the state. A lot of them have a back story you can't trace. But they have nice pictures of pot stills on the label."

Call for definitions

Ardent whiskey fans have long argued that the industry should set up some straightforward definitions that consumers can understand.

"There's nothing inherently wrong with buying whiskey from another company and selling it at all. What's wrong is doing it and pretending you made it yourself," said Steve Ury, a Los Angeles-area labor lawyer who writes about whiskey and food for his blog, SKU's Recent Eats.

The problem, he said, is that people end up thinking small and craft is better.

"But it's really not true. ... The big distillers make some really fantastic bourbon — no small craft operation is doing anything near the quality of Four Roses, or Heaven Hill or Buffalo Trace," he said.

Ury has compiled on his site "The Complete List of American Whiskey Distilleries & Brands," verified as well as he could by his own detective work, sorting out who makes what, in case confused drinkers want or need a reference.

But he wonders: Why can't things just be right there on the label?

"Why not just be honest? he asked. "Say, 'We bought this, thought it was great.' In Scotland, that's a huge market: Independent bottlers buy and all they do is put their label on, and have to say where it was made. That's a legitimate way to sell whiskey in Scotland. I don't understand why (American brands) can't do the same thing. Be proud of your product for what it is, not for something you want it to be to appeal to consumers."

Janet Patton: (859) 231-3264. Twitter: @janetpattonhl.

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