Bourbon Economics

[cowdery]

In the Single Barrel thread, the question was asked "how can they make any money selling this stuff?" I can assure you that they do. This may provide some insights.

Corn closed on the Chicago Board of Trade yesterday at just under $2.50 a bushel, where it has been stuck for some time. Wheat closed at just under $4.00 a bushel. Rye and malted barley aren't traded at the CBOT, but let's assume they're $4+ a bushel. Since bourbon is mostly corn, let's arbitrarily say the cost of bourbon grain is $3.00 a bushel. In a typical modern distillery, one bushel of grain yields 4.5 to 5 gallons of entry proof whiskey. Considering lower proof at sale and loss through evaporation, the yield in sellable whiskey is at the low end of that scale, let's say 4.5 gallons. That means the cost of the primary raw material for making whiskey is about 66 cents per gallon.

Bottom line. The grain cost in a bottle of whiskey (any bottle of whiskey) is about 13 cents.

When your raw materials cost next to nothing, you can spend a lot adding value (i.e., labor) and still make plenty of profit.

The other big factor in the retail cost of whiskey and all other distilled spirits is taxes. The Distilled Spirits Institute estimates that 51 percent of the retail price of a bottle of any distilled spirits product represents taxes.

[boone]

Not long ago...I watched a worker lining up several batches of bourbon in big plastic holding tanks on wheels...Getting ready to be shipped...straight from the bottling tank...Someone, was buying this bourbon...and bottling it...Must be a small operation, cause it was cut and ready to bottle...(When they use the term bottling tank that means it's ready to be bottled)...

I asked this person..."Not a authority"..."just a worker"...How much does something like that tank of bourbon cost?...He said he figured it one time...About 15-17 dollars per gallon...Whether he is right or wrong I don't know for sure...but I have know him for a very long time...I would consult him on anything bourbon related ...

That is cut...and ready...It's probably cheaper, if it were barrel proof...That's another question that I should ask him...

Our government makes a bunch...I don't know the exact figures "right now" but as of last year Heaven Hill pays 2.5-3.0 Million dollars a week in federal tax...That amout of money was just unbelievable...I went back and asked to make sure I got the figures correct...I thought maybe it was a month not weekly...During the festival, they ask me that question quite often...

I think that, somewhere, in these forums, someone broke down the costs of making the product...

Bettye Jo

[bandit]

In addition to the cost of raw materials and the cost of production, packaging and shipping, you need to include a cost of aging the bourbon.

{puts on his business analyst hat}

Warehousing costs include the cost to operate the warehouse, as well as the time value of money tied up in inventory over the 5 or so average years of aging.

Carrying cost and inventory cost (valued at the cost of manufacture) is a bit tricky, because it is determined by the cost of capital for the particular company. If the company is private and cash flush, they usually think of it as an investment with a cost equivalent to the return on investment they would have gotten for the tied up cash in the investment market. Public companies usually think of it as a strict cost of capital based on how much they are paying for credit.

In either case, the cost of carrying inventory is related to the cost of tying up cash for that period of time.

I would think for the bourbon industry that's not an insignificant cost.

{takes off analyst hat}

-AJ

[cowdery]

In the past, Heaven Hill and other distillers attacked the carrying cost issue by selling the whiskey to distributors the day it went into the barrel, then charged the distributors a fee for warehousing it. That way, the distributor absorbed the carrying cost as well as any price volatility risk.

Heaven Hill and some others still do some of this with some of their inventory, but not on the same scale as in the past.

[bandit]

That's really interesting. Of course, this increases the carrying cost, since the distiller would be carrying at his cost, while the distributor would be carrying at what he paid. (Which would be higher!)

I would think there are other motivations here than just to shed carrying costs and insulate from price volatility.

Weren't distributers also bottling their own brand names? Then, I would think they would want to buy the stock so they could control the supply, even though, in the end, it would cost them more.

What do you think was going on there?

Maybe the distiller's were treated as a commodity supplier of white dog whiskey in barrels, and the bottler/distributer was the one with the brand. Then, as long as you knew your mashbill you could go to any distiller....

-AJ

[cowdery]

Yes, when this was a more common practice the distributors typically owned the brands and, yes, they were essentially buying a commodity, but it wasn't custom distilled (i.e., "as long as you knew your mashbill you could go to any distiller..."). In fact, at the old distillery (the one that burned down) Heaven Hill only used two mashbills, a straight bourbon and a straight rye.

[bourbondoc]

Interesting thread, but my focus on bourbon economics is always "How can I afford more bourbon?". Sorry, I couldn't help myself.
Jeff Johnson