Year-on-Year Bourbon Production Is Down 28% and That's Good News

 

Typical warehouse shot but I took this one myself.
Pretty sure it's Barton 1792.

Janet Patton and the Kentucky Herald-Leader are indispensable if you want to stay current with the American whiskey industry. Today's headline: "Bourbon production is down 55 million proof gallons nationwide this year."

To wrap our heads around this news, let's start with an analogy. This is an oversimplification but bear with me. 

If Ford makes 500,000 F-150 trucks over a six-month period, that's because they expect to sell 500,000 F-150 trucks over the following six months. If they need more, they'll make more. If they have too many, they won't make so many next time.

It's like that in most businesses. If my store buys 200 Labuses, it's because I expect to sell 200 Labuses. Maybe I'll sell them in a month or two, or maybe in a day or two, but I expect a quick turnover. Time is money and that is never more true than when you are sitting on excess inventory.

Bourbon* is different.

Because most bourbon is sold at between four and eight years old, distillery production planners must predict demand 5 to 10 years from now. When you look at a year-to-date production figure of 142 million proof gallons, when it was nearly 200 million during the same period last year, you have to remember there are about 850 million proof gallons currently in aging warehouses, of varying ages, most of it less than eight years old.

That's just Kentucky. Tennessee doesn't report warehouse inventories the way Kentucky does, but you can add another 250 million for Tennessee, and a couple million more for every other state. (I'm converting barrels to gallons in a slapdash way, but the numbers are right enough to make the point.)

Because a 4-year-old isn't that much different from a 5-year-old, producers have a lot of flexibility in terms of what they choose to bottle and sell, up to a point. Production at the distilling end of the business is very different from production at the bottling and sales end of the business.

Although it's not as straightforward as the truck analogy, bourbon distillers expect to sell most of their current inventory over the next few years, replacing it as they go. Knowing how much to make during your current production season is, therefore, a complicated question. Each distillery knows how much they're making, and how much they have in inventory, but they don't necessarily know how much everybody else is making or how much they have in inventory. 

While some producers are transparent about how much they produce, most are not, so the data from Treasury is crucial. It is linked to excise tax payments, so it tends to be accurate.

The rest is analysis, crunching data you have and extrapolating the rest to reach conclusions. 

In August of 2024, when that previous milestone was reached, Bernstein, an analyst, issued a report. It said the 2022 inventory of 12.6 million barrels represented about 8.5 years of demand and was a 150 percent increase over the previous decade. They estimated that, depending on demand, the excess over the next five years could be as little as 500,000 barrels or as much as 1.3 million.

An old adage says that when you are up to your ass in alligators the first thing to do is stop draining the swamp.

So, the fact that bourbon distillers have cut production drastically is good news. It means they are taking steps to prevent a glut. This is unlike 50 years ago, when sales collapsed but producers kept filling the warehouses anyway. They expected an imminent turnaround and didn't want to underproduce, so they overproduced big time. 

Big picture and long-term, bourbon still has huge growth potential but it won't be realized until the trade war ends. In the meantime, you know what to do to bring down those inventory levels.

* Everything said here about bourbon applies equally to Tennessee whiskey, rye whiskey, wheat whiskey, etc. I could say "American whiskey," but it seems clearer to just say "bourbon" with the understanding that all the other types of American-made straight whiskey are included under that umbrella.