Overproduction issues in whiskey
Michael R. Veach | Kentucky Bourbon Hall Of Fame Historian and Author | May 13, 2019 | Photos Courtesy of Rosemary Miller
I am always being asked if there is really a Bourbon shortage, and if so then why don’t they make more? There is a short answer and there is a long answer to these questions. The short answer is yes there is and yes they are making more. The long answer is much more complicated.
The problem with making whiskey is that you really need a crystal ball to see into the future to know how much whiskey to make. Because of the aging process, the distiller needs to estimate how many cases of whiskey he will sell, not tomorrow, but 4, 6, 8, 10 or more years from now. Once they have decided on the number they have to figure out how many barrels are needed to make that many cases and then figure out the angel’s share for the number of years the brand ages and increase the number of barrels accordingly. The next step is to hope that you did not overestimate and become stuck with barrels you don’t need.
The distilleries have had many problems with overproduction. Historically, the times of overproduction lead to declining whiskey prices and the loss of profit, causing many smaller distilleries to close. The prime example of this was in the 1950s when Schenley over produced when the owner, Rosenstiel, thought the Korean War would shut down production of beverage alcohol and was only saved by the increase in the bonding period from eight to twenty years. If the bonding period had remained at eight years, Schenley would have had to pay the taxes on thousands of barrels of whiskey that could not be sold. It would have bankrupted the company. Even though the increase in the bonding time saved Schenley, it doomed many of the small distilleries.
In reaction to the overproduction, Schenley closed all of their small distilleries. Next they had so much aging whiskey they were able to keep the price of Bourbon low by flooding the market with low priced bottles of Bourbon and Rye. The smaller distilleries could not raise prices as the expenses of making whiskey rose, and eventually had to get out of the business. This usually meant selling out to a larger firm who would close the small distillery. All of this was compounding the fact that low prices gave Bourbon and Rye a reputation as being bottom shelf, cheap whiskey. Good whiskey was considered to be Scotch, Irish and Canadian whiskey.
Also at this time Kentucky Governor “Happy” Chandler placed a yearly inventory tax on aging whiskey barrels. Kentucky is the only State to do this on whiskey aging in the warehouse. Other states do not count aging barrels as inventory because it is still in the process of being made, not a finished product. This means the more barrels in the warehouses, the higher the yearly tax to Kentucky. This tax caused distilleries to raise the barrel entry proof from 110 to 125 proof in order to reduce the number of barrels being taxed. This is another reason why distillers do not want to overproduce their whiskey.
The final reason most distillers are conservative in the estimated sales is that they were burned heavily by decreasing sales in the 1960s, 70s and 80s. Every year sales declined below what they estimated they should sell in a year. Inventory in the warehouses grew as left over barrels were carried over to the next year. Many brands with no age statement had some whiskey that was 8, 10, 12 or more years in the bottle. The distillers would mix a few barrels of the excess barrels into the normal brands to keep whiskey from getting too woody and astringent. This meant that whiskey that may have cost them $50 a gallon to make was being sold in bottles that sold for $10 a gallon. Once again many distilleries were forced to sell out and close their doors.
Now there is a whiskey shortage and it will take many years to get out of it. Sales do keep increasing over the estimates made but there is still a very real fear by the distilleries of overproduction. The one thing that will ease the shortage is the increased number of distilleries being opened. There will be a balance of demand and production in the future, but it is still several years in the future.