Saturday, November 6, 2021

With Whiskey, Time Is Money


E. H. Taylor, Whiskey Mogul
In the early days of American distilling, and in most distilling cultures throughout history, the proposition was simple. You got some fruit or grain, fermented it, distilled it, and then either consumed it or sold it. The whole process took maybe a week. Looked at from a business perspective, that's how long your capital was tied-up. You spent some money and within a few days you recovered your investment plus profit.

Something happened in a few places to upset that happy paradigm. Aging happened. Instead of a return on investment in a few days, it was going to take years. Years! How is that supposed to work?

In the United States, deliberately aging whiskey in new, charred oak barrels began about 200 years ago. We don't know exactly when but that's a conclusion based on what was being advertised at various times. Even after aged spirits became common, 'common' spirits (the unaged stuff) remained popular. 

But as aged spirits became the norm, producers struggled to meet market demand. It wasn't easy to sell aged whiskey consistently for enough to finance its long maturation period. Aged whiskey had to compete with compound whiskey, a cheap knock-off that used artificial flavoring and coloring to imitate the flavor of wood-aged spirit. The market was chaotic and distillers easily became overextended. Unable to meet their obligations, many were forced to sell their businesses for whatever they could get. Often the new owner fared no better. Distilleries changing hands frequently.

Edmund Haynes Taylor (1830-1923) is a significant figure in American whiskey history for many reasons. He started or operated at least seven different distilleries, helped transform whiskey-making from an adjunct of farming into an industry, pioneered modern brand marketing, and was a leading advocate for federal government oversight of whiskey production and labeling. 

He was also the mayor of Frankfort and an award-winning cattle breeder. Busy guy.

But his most enduring contributions to the industry may be in the matter of financing. Taylor began his business career in a bank owned by his uncle and namesake. While opening a branch in Versailles, he got to know distillers Oscar Pepper and Dr. James C. Crow. After Crow's death in 1856, some whiskey distilled by Crow was still in barrels and his former assistant knew how to make more, so Pepper and Taylor hatched a plan to capitalize on the reputation of Crow's barrel-aged whiskey. The Old Crow brand was born. 

In 1860, Taylor and his bank organized Gaines, Berry and Co., Distillers, later reorganized as W. A. Gaines & Co., to make and sell Old Crow Whiskey.

Taylor's financing innovations, however, were not a perfect solution. Taylor himself became overextended to a customer named George Stagg and lost control of his largest distillery, today's Buffalo Trace.

After Prohibition was repealed in 1933, money was again a problem. Families like the Beams, successful whiskey-makers before the drought, had to look outside the family and beyond the Commonwealth for money. The Beams found it in Chicago, in investors Harry Blum, Harry Homel and Oliver Jacobson. Homel and Jacobson were investment bankers. They had an innovative idea of how to finance aging stock. Don't. Instead, sell it right away, like distillers did before aging, except sell it to your distributors. They'll buy the new make whiskey and pay you to age and eventually bottle it for them. Everyone expects the whiskey will become more valuable as it ages. This system spread out that risk. The distillery could put its capital into making more whiskey immediately.

The idea worked well for Beam. In a few years, Blum bought Homel and Jacobson out. They took their money, and their idea, down the road to Heaven Hill. It worked there too.

In the early days of craft distilling, many struggled with this same dilemma. Some still do. 

Today, companies such as IJW Whiskey, CaskX and others are offering innovations of their own. Just like those Beam and Heaven Hill distributors, now you can place a bet on whiskey appreciation, not the sensory kind, the financial kind. This particular model is new and still unproven. Most of the whiskey in these schemes is from relatively new producers with no track record. Still, we saw just a few years ago what can happen to bulk whiskey prices when the market gets tight. With tariff relief, a new export boom could be right around the corner.

Or not. But that's the adventure, right?

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