669. Why Is 95 Percent of the World’s Bourbon Made in Kentucky?

if you're in the business of making things because you can start earning back your investment

“right away. But some products require a further investment of time after they've been manufactured.”

It could be years worth of time. Certain cheeses come to mind, wine occasionally, but especially spirits. The most famous example is Scotchewisky, the older, the barrel, the deer, the bottle. And the most famous American example is bourbon. I don't happen to drink much bourbon, but the bourbon industry started to sound interesting when we did a three-part series on the horse industry. That series is called the horse is us, if you'd like to listen. One interesting feature of the

thoroughbred horse market is how concentrated it is in one relatively small area. The blue grass region surrounding Lexington, Kentucky. Can you guess another industry that is concentrated in one small part of Kentucky? Correct, bourbon. So we thought we'd poke around that industry to see

“what we can learn. Just one episode though, not three. We will look at how time functions as an”

investment input and along the way we will ask a lot of questions. Like why is bourbon manufacturing so concentrated in Kentucky? They talk about the limestone, the same thing that makes fast race horses, but do we also detect a note of protectionism? You do have to admit it's a bit convenient. That said, the industry has a problem. We don't have a quality problem. We have a quantity problem. Demand for bourbon is shrinking new tariffs or scrambling global trade and bourbon is getting a

little bit glutty. Currently there are 16 million barrels of bourbon aging in the state of Kentucky.

So, how concerned is the industry? Well, it should be very concerned. The good news is that there will be a lot of well-aged bourbon in the future. Today, on Freakin' OnMix Radio, let's pour

“one out for things that age, well. This is Freakin' OnMix Radio, the podcast that explores the hidden”

side of everything with your host Stephen Dubner. Okay, this show has economics in its name, so let's start with an economist. My name is Ken Troski. I'm a labor economist and chair of the economics department at the University of Kentucky. Troski grew up in Washington state. That is PhD at the University of Chicago and he moved to Kentucky about 20 years ago. 95% of bourbon made in the world is made within a 45-minute drive of the house I live in.

It was Troski we heard from a minute ago saying that there are 16 million barrels of bourbon

aging in Kentucky. That is up from 4 million when Troski arrived. When I got there, bourbon was just starting to recover from a long period of time of when it was in decline. And I was hearing about this bourbon called Papy Van Winkles. I told my wife on time for Christmas. I said, "You know, I'd like to try some." So she went into the local big box liquor store and there were a couple bottles of 20-year-old papy, but it was $120 a bottle, which is maybe

triple what a typical bottle would be. Oh yeah, at least. Okay, $120. So she thinks, "Ahh, it's not worth it." And then she goes home and then she says, "Well, it's a Christmas present. Yeah, yeah, and she goes back and she buys it at $120 a bottle." You try to find a bottle of 20-year-old papy right now. It is probably $2,500, $3,000. And I'm like, "Why didn't you get do?" Papy Van Winkle is one of a couple dozen bourbon brands controlled by Cesarac, which is one

of the biggest spirits producers in the U.S. Some of the other Cesarac bourbons are Buffalo Trace, Blanton's Eagle Rare. Papy Van Winkle is age much longer than most bourbons and is at the high

end of the price scale. You can always tell that a commodity is getting more valuable when

more people start to steal it. Like when thieves rip out the copper wiring at construction sites or go under your car with a saws all to cut out the catalytic converter. During the bourbon boom, 65 cases of 20-year papy Van Winkle were stolen from a warehouse. The black market value was an estimated $100,000. Kentucky had not been a bourbon man when he moved to Kentucky, but by now he could understand the appeal. I drank that stuff. It's really good. After that, you know,

I just started trying other different bourbons. So your curiosity was taste-based. You weren't necessarily thinking about the economics of it. Well, when people come to Kentucky, what are you

to take a good to steal it. So I started learning about the production of this stuff and more about

the market and it is a fascinating market in ways that touch a lot of other types of economics.

“First off, if you want to call it bourbon, you can't sell it for at least two years and most of”

the time it's four to six. I've read that that's a little bit of a myth that there's no actual enforced minimum or is that not true. So I am looking at something in our reader to you. According to the code of federal regulations, the CFR Chapter 27 section 5.143, if you want to call it straight bourbon whiskey, has to be permitted, mash, not less than 51% corn. 160 proof to still the United States stored in new American chart oak barrels at 125 proof for at least two years.

So it's got to be stored for two years to be called straight bourbon whiskey. This regulatory code dates back to 1964. When U.S. Congress passed a resolution declaring bourbon a distinctive product of the United States, the way that only Scotland can produce Scotch whiskey, or how only the Champagne region of Northern France can produce Champagne, better known in these parts as Champagne. Can Trotsky, once he started paying attention to the

bourbon industry, could see that it presented some unusual economics, especially around pricing. And the pricing is driven by time. Most bourbon is dumped at four years, bottom shelf bourbon probably four, six to eight years is considered a sweet spot. When thinking about pricing the product,

“you have to take into account. I got all this bourbon this right behind me, that's sitting in a warehouse.”

This is a really, really interesting, hard problem to solve. That doesn't mean it's not a competitive market because everybody has to do the same thing. It does raise barriers to entry, but it can't raise that much because when I got to Kentucky, there were probably six distilleries. And now there's over a hundred, and it has come a down, given some of the recent changes in the bourbon industry. When Trotsky says recent changes, he is talking about what is starting to look like a serious

retrenchment in the bourbon industry. The COVID shutdown was good for alcohol sales, a little too good if you talk to public health people. But since 2022, demand for bourbon has been falling.

And that's a problem. If you've already got 16 million additional barrels, aging in their

Rick houses. The biggest bourbon producer, Jim Beam, which is part of the Japanese spirit's company Santori, just announced that it would pause production at its flagship distillery for the next year. And there have been layoffs and consolidation at other big bourbon producers. So let's hear from someone who spends time with these companies. My name is Brad Patrick. I am the executive and residents and lecturer at the University of Kentucky Gatton College of Business and Economics.

As a land grant university, we're here to support the business missions of the bourbon industry.

“Were you from originally, I detect a little bit of Southernness in your accent?”

Yeah, I grew up in eastern Kentucky and also a bit in Indiana. Where in eastern Kentucky were you? It's hard to describe. There's a county called Not County. You know, we in Kentucky like to talk about our counties. Not county is where it is at the foot of ball mountain at the fork of Sandley. That did it for me. Yeah, not too far from possum trot. Patrick is also a bourbon fellow at the James B. Beam Institute for Kentucky spirits, which is also attached to the

University. He teaches conducts research and consults with the bourbon industry. From 2012 to 2021, 22 things have been booming. People have been just jumping into the industry and making things happen. That's where we've been and now we've bumped into a wall here and now people have to rethink what they're doing. There was a Wall Street Journal article in sure. You saw headline America's bourbon boom is over. Now the hangover is here. Walk me through that. This lesson that we bumped into

this wall is one that has happened. The famous ones, you have the whiskey lock, stories from the 1980s when the Scotch industry overproduced and got crazy and jumped on this bandwagon. The bourbon industry itself had that from prohibition to the 1970s. It's just a rush to make more product because consumers were there. And then like in the 1970s for bourbon, the generation that was coming on, did what a drink that he's all brown spirit anymore. And as a

person that studies change in the concept of creative destruction, I always wonder, is anybody wrong

here. It was a bunch of individual bourbon distilleries making what they believe to be good investments in equipment and capital expenses, believing that the consumer was always going to be there. The other complexity with bourbon is you make it and you put it away to sleep for 48 years,

six to ten years. So I think it's a combination of a lot of enthusiasm to get big in the market,

to toss something over the wall and people will buy it. And then just when the market changed,

“you're now left sitting on 16.1 million barrels. Yes, so what's going to happen to those 16 million?”

That's a great question in it. We don't have a quality problem. We have a quantity problem. So we're going to have a glutton available. So the glut is maybe one problem. What about quality? Does the quality of the bourbon just keep increasing the longer you age it or does it start to decline? What you'll find from the bourbon connoisseurs is once you get past 10, you'll start to lose some people with this okiness. Have your okiness. You will get premium stuff and when you

think about a papy van winkle that's 21, 23 years old, there's not a love juice left in that barrel from evaporation and leakage and so forth. So it's a premium product. I think the bourbon industry in

general has been pretty innovative. They've always rushed to some unique consumer aspect. But what

they've just been hit with is a whole bunch of things at once. But the major one being the, I guess

“we're going to call them Gen Z's consumer taste and changing expectations. It's fallen off the table.”

You have your tariff issues. You have health issues. You have competing aspects of THC and cannabis products. And then what you have on the health side of it is our young consumers now are switching to the ready to drink the either alcoholic or non alcoholic cocktails and a can. We're seeing that ready to drink market at 20 plus percent growth. So it's similar what bourbon was doing a few years ago. But we're seeing it mostly in the white spirits. I get it that younger consumers are

less interested in grandpa's old brown drink. On the other hand, young consumers get older and we've got an elder swell now. The older population is the one that's growing the most. So I would think that this could be a boom time for bourbon. So what do you seeing going on among older drinkers in the US? Is it more the health and wellness concerns? Is it GLP ones? Why do you think there's the fall off? I don't know enough about the Olympics and all those other things and how

people are taking that. But I do know that there is probably some price fatigue. There's probably too much variety. There's between 800 and 1000 SKUs out there. That's a lot of choice. Wait, just bourbons. Yeah, in the idea with all the innovation and creative. There's just too many choices. So how concerned is the bourbon industry? Well, it should be very concerned. But we're seeing right now are those that were built for the big contract distillation business. That's make a

spirit so people can take and blend it. That's gone or are going away. So if you're a business that was all set up to be just a contract maker and you borrowed money from a bank. You're probably in the most trouble. We're up to 120 plus distilleries in Kentucky. So that number is going to have to dwindle for good economic reasons. The next group of people are the ones that did it through a private equity aspect. So they have more control over their debt. But they're

going to struggle. The ones that will live will be the distilleries that have a brand. What you're going to find is an appropriate weeding out of businesses. Same thing, the Scotch industry found in the 1980s. They've consolidated down to five major players basically. They were up over

“140. You think the story is at one point. So I think we're seeing some of the same things.”

It seems as the global Scotch market is much bigger than the global bourbon market.

Yeah, that are 40 billion dollar business and the bourbon is going to get you into 10 to 11 billion

Scotch is at a very nice job of establishing themselves as a global business. They've gotten their protections. They have their trade agreements. They've done a nice job of creating who they are. I think they're well established and they have the right infrastructure to do it. And the bourbon industry does not have the infrastructure. What's missing? A lot of things. Okay, let's unpack some of the bourbon industry's infrastructure problems. One thing that

makes it harder for those 16 million aging barrels of bourbon to get into the hands of consumers is how the sale of liquor is regulated in the US. The regulation can only be described as sort of odd. That again is the economist Ken Troski. It's what's called a three tier distribution system. The producer can only produce. They cannot have any financial relationship with the company that then buys it and distributes it to the ultimate seller. And that distributor can have no financial

relationship with the ultimate seller. And this makes sense how other than a historical artifact, my understanding is the reason that they produce the system coming out of prohibition is to limit the impact of the mob on alcohol sales. And so that's why to this day, if you're producing

Well, okay, let me tell you an interesting story about that. Prior to January 2022,

if you're a producer of bourbon, running a gift shop. And you wanted to sell your product in the gift shop, the distributor. They had to take possession of the product when it came out of the bonded warehouses. Complete the paperwork, pay the taxes, and then literally sell it back to the producer so that the producer could sell it in their gift shop. They changed that in January 2022. So now when you walk into the Buffalo Trace would for reserve or whatever gift shop you walk into,

they are selling it directly. Did that lower the prices? Well, let's be careful. So for example, when I go to Buffalo Trace, I can buy a bottle of glands for about $74 at the gift shop.

Anywhere I was in Kentucky, you just walk into a local shop. It's probably $130.

I was in a liquor store in La Jolla, California, and I said, you get a bottle of blends. What do you sell it to me for? $400. That's kind of bonkers. As an economist, how do you feel about this three-tier system for alcohol distribution today? I would think it's just full of inefficiency and middlemen what you call rent seeking. Well, there's a lot of people that make whiskeys and alcohols, and so the production's fairly competitive. The distribution, there are

“two big companies, the Republican Southern, the sales. I think that seems pretty competitive.”

A lot of it has to do with the allocation. You want to sell blends. Your distributor has to give it to you. It's only really certain times of the year. And then what the distributor does is say, hey, I'll give you some of this blends that you can sell for a lot of money, but you got to be a good seller of other things. So you got to be a good seller of fireball. The local wine shop right around the corner for me, love it. Been gone there for years. I know the owner, Ale, she's great.

She has stocks in bourbon as well, and she occasionally gets blends. This is given some to me. But her distributor basically told her, I would give you more blends if you sold more fireball. She sells plants and she sells wine. That's her big thing. And her market is a bunch of, I would say the typical customer in there is younger than me, but not that much younger. It's not a fireball crowd you're saying. No, it's not a fireball crowd. And she's like,

that's mental. I'm not going to do that. The one group, of course, that is always hurt by

inefficient regulation, is a consumer. Why am I paying $74 for bottle of blends when I go to Buffalo Trace? And somebody in Lehoia, California, paying $400 for that. And why can't I walk over to Buffalo Trace by ten bottles? They won't sell it to me, but let's ignore that. By ten bottles that give shop, stick it in the back of my car and drive to the liquor store in Lehoia, California say, hey, you're selling it for four. I'll sell it to you for two. Well, make a little

bit of money. That's illegal. Since bourbon doesn't have to be made in Kentucky to be considered bourbon.

“And why does 95% of the bourbon come from Kentucky? I think it's just tradition to grew up. They built”

the facilities. It has to be stored somewhere. You want to talk to a master distiller who knows about these things. After the break, we talk to a master distiller who does indeed know about these things. You have cellulose. Then you have Hemis cellulose. And then you've got a group of compounds called lignins, which are really complicated. I'm Stephen Doverner. This is Freakonomics Radio. We will be right back.

We've been talking about the end product in the bourbon industry, the bottle that winds up on a store shelf. But how is that brown stuff actually made? For that, we need to talk to this person. My name is Danny Khan. My title is Master distiller, distillation, and aging operations director Cesarek. Cesarek was founded in New Orleans in 1869. It still has offices there, but its main operation is now in Louisville, Kentucky. Cesarek is privately owned, makes hundreds of spirits,

including brands of vodka, gin, rum, tequila, and many ribbons. I started with Cesarek as the Master distiller for Barton 1792, which is about an hour away from Buffalo Trace in a town called Bartstein, Kentucky, the bourbon capital of the world, as they certainly like to say. So I oversee the distilling and aging operations production at Buffalo Trace at Barton 1792, and at our calling

“wood distillery, which is in calling wood Ontario. Were you from Danny, where'd you grow?”

I grew up in Los Angeles. And did you set out to be Master distiller? No, in fact, before I distill, I was a brewer, but I will tell you with certainty that no high school counselor ever said how about a career in brewing. But I did go to the University of California, Davis,

because it was hard, and it seemed like a good place to start for a particular reason. My

“friend and I needed to learn how to home brew. What was that particular reason? My best friend's”

fake idea was confiscated. He was very panicky and, you know, he had to go to court. I was panicky too, and I said we have to learn how to make beer. There was a home brew shop in Davis, and started to make beer and absolutely fell in love with the science and the art of it. Turns out that UC Davis has viticulture inology, which is grapefruit and wine making. I ended up taking a preliminary class. I didn't even know 7-year-long was a white wine,

but I studied, and I thrived on creating something that people enjoyed and that it had social impacts and economic impacts and global impacts. So I just fell in love with the science and the business of alcohol production. I eventually evolved into fermentation science, which for me was a cross between chemical engineering and microbiology. You worked in beer making, correct? Yes, I worked at Anhezobush in a variety of locations for many, many years. It was a phenomenal technical

education. I would think it's not so easy to switch from being a master beer person to a master

bourbon person. It was a very logical transition. If you think about whiskey, we make beer first,

then we distill it, and then we age it. So all of that knowledge was a great foundation to go into distillation. Maybe you could give us a quick tutorial in how bourbon goes from being raw materials to the bottle. How much time you got? Is three days enough? No. So five things were hard to be bourbon, 51% or more corn. It has to be made in the USA. It has to be distilled to no more than 160 proof. That's 80% alcohol. It has to be put away into a barrel or a container no more than 125 proof.

And it must go into a new chart oak container. In our case, we use a barrel. I have to say when I read these rules, they sound to me like a 16th century religious proclamation. I'll tell you, this was a law based on prior history. And certainly, I'd like to think that that had everything to do with what makes the best bourbon. And let's put in regulation to continue to make a very notable product.

“Now, to what degree were the core lobbies involved in this? That's what I always wonder.”

I have read that the barrel makers and the copper industry and maybe the core industry, all really love this confluence of rules. You're saying that these rules were derived for the primary purpose of improving or protecting quality. But tell me what you can about how they're might have been a little bit of not self-dealing necessarily, but people looking out for their own interests. I will say that I can defend every single one of those components as to why they

are positive for flavor. Let's do that. That'd be fun. Let's start with the core.

Corn. Okay. So first of all, it's my belief that our forefathers came over more familiar with

Rywhiske. And as they went west, I'm sure they learned that Ry does not grow well. It grows well in the upper plains of Canada. It grows well in Europe. It grows well in the northeastern states. It does not grow well as they moved west. But what does corn? It's plentiful. It's got a lot of starch, which is needed to create sugar, which creates alcohol. It's got an enormous amount of flavor that comes from the oil and other components of the corn. Ry is important for flavor.

Provides spice and floral notes and peppering this in cinnamon, but does not have a ton of extract.

“Okay. Let's keep moving down your list. Made in the USA. What's the importance of that?”

We can control it. If there's a law, it applies to this country. That's a good way to control it. It does not have to be made Kentucky, but it does have to be made in the US. Even though bourbon does not have to be made in Kentucky to be called bourbon, I see that something like 95% of old bourbon is made in Kentucky. Why is that? Well, bourbon originate in Kentucky. He became popular in Kentucky. When you have an infrastructure for a distillery or two,

it makes it easier for others to come in. So we grow a lot of corn and the vast majority of our corn comes from a pretty small radius around the distillery. We talk a lot about the water in Kentucky for distilled spirits. It is truly magical. It comes through limestone cavern. So it's got a lot of calcium in it. It's got a pronounced flavor. It's mineraly. Those calcium components in particular and other minerals are really important for the enzymatic reactions in the cooking process.

those components stay behind. They don't get carried over in the distillate. And that's a really important reason why bourbon in Kentucky is very good. Does that mean that you have

“fantastic bread in pizza there as well? I can speak for my own pizza dough. And I think it's pretty”

damn good. Okay, let's hear about the third bourbon requirement, the distillation. It can be distilled

no more than 160 proof. We typically go to 135 or 140. And in so doing, you retain a whole bunch of flavor. What I like to explain to people if I distill to 160 proof and then diluted it to 125, which is it cannot be higher going into the barrel. So again, 160 to 125 versus 135 to 125, those would be very different flavors. The 160 distilled proof would tend to be lighter, a little more neutral. The lower distilled proof, 135 is retains a lot of flavors. And those flavors

are really important in how the whisky ages. They oxidize slowly over time. They react with different components in the wood and the distillate. So having those flavors present, they become

precursors to what makes really delicious whisky delicious. Okay, the fourth item is a big one.

Bourbon must be aged in new oak barrels that are charred with fire. Now technically it's a container, but rolling boxes is hard. So we put them in barrels. But yes, so there are new chart oak containers.

“So there's a whole process and I'll be brief on this, but don't feel you need to be brief. I like”

you and very interested in this part. Okay, this is super interesting. When a barrel is made, the tree is cut and it's quartered and staves are cut. Those are the pieces that become the individual components of the barrel, the long skinny pieces. Typically, there's 34 to 36 staves for barrel, they're cut. And then we stack them up, jenga style. So there's airflow and we let them sit out in the field for approximately a year. That process is called seasoning. Rainwater will rinse

off certain components called tannins and others and then normal microbiological activity will break things down in the wood that become very important flavors later. Microbiology and fungal activity is super important for really good flavors throughout our history. So we have learned that. Now that's

“not part of the law, but that's what we do. You are making the barrels yourselves. We have a”

Cooper. A Cooper is a person or a company that makes barrels. Are they part of your operation or is that subcontracted? It's part of sassarac, but it's not under my responsibility. Now I've got a very close relationship with the Cooper because if we see problems, we communicate with them on a regular basis. Now what about the forests themselves? Do you control them or you're buying

that from a third party? The Cooper is buying that. We have some of our own property but we're buying

logs on the market and there's a very important quality check and criteria that they go through to make sure that they meet our objectives. So the staves are seasoned for about a year and then they are brought into the Cooperage and they build the barrel. They steam them, they cut them to get the right bevels. Just done by hand or machine. It's very labor intensive but the cutting is mostly done by machines. Then they will build the barrel except for the top head. So you've got all the

staves and then you got a bottom head and a top head and we will provide direct fire. Very intense, very hot for about 30 seconds and that gives us a certain level of char. The char actually absorbs components. Kind of like your water filter at home would do if you have bad taste in water. It's the layer below the char that's been cooked that are the extractables that we are looking for. How's that fire being applied? It's a natural gas. There's sort of a sprinkler nozzle

if you will. So there's flames coming out all directions. It gets direct flame for about 30 seconds and then we quickly extinguish it. And these are the open barrels going down some kind of assembly line or someone coming along to a row of barrels with their blow torch. It's coming through to some of the line. Then the head is put on and the hoops tighten down the barrel. So it's liquid tight. Little water's added. We give it some air pressure. Make sure it doesn't leak and then there's no

sealant of any kind. There's often a little bit of perfume wax on the outer edge of the head where the head and the staves connect. No glue is used. They're all put together how glue. So you char the barrel. And now you've created an environment where the whiskey can age. Okay? So

If anybody makes an old fashion and you add a sugar cube, which I do like to do sometimes,

“I like having little pieces of sugar left and they provide little bursts of brightness and”

crunchiness and it's really quite fun. Anyways, a sugar cube, a couple drops of water, will dissolve very rapidly. You put that same sugar cube in bourbon. It will not dissolve. So certain components in the wood are very soluble in alcohol. And certain components are more soluble in water. So depending on the proof we put the whiskey in the barrel at, we can extract different components. Within a barrel, you have very, very, very,

generally four types of wood components. You have cellulose, which provides a lot of structure,

not a ton of flavor, but a little bit. Then you have hemiscellulose, which is where you get the

caramel butterscotch type components. And then you've got a group of compounds called lignons, which are really complicated. But that's generally where you get your baking spices, nutmeg and clove and vanilla and cinnamon. And then you have tannins, which are more water soluble. They provide mouth feel and the stringency, and they also provide color. All these different components are soluble at different alcohol levels. So that's a way we can manipulate flavor.

It's stuff that's really just below the char. So when you age a barrel, you have losses through evaporation. How significant? Pretty significant. When you open a barrel, how full does it appear to the naked eye? It can be half full, it can be less. For some of our 23-year-old bourbons,

“there's just a little bit left at the bottom. What's the market for used barrels?”

You know, it's a supply and demand issue. Sometimes there's great demand, sometimes it's not so great. What is it these days? It's not so great. Scotch whiskey slowing down a little bit. They're not taking as many barrels as they did a few years ago. Most Scotch whiskey and Irish whiskey and Indian whiskey are put in use barrels. So that is the market. We can sell our barrels for other products. I would think though to ship them to Ireland and Scotland, it's got to be

pretty expensive. How much do you sell them for? What's it need to be worth for you and for them? Well, think about it this way. If we don't sell them, it's a total loss. But suffice it to say that if the Scotch market is not particularly strong, there might be a lot of,

“let's say, roadside planters around Kentucky of old bourbon barrels. There's a lot of roadside planters”

anyway. Coming up after the break, who wins a battle between bourbon and buzzballs? This is Freakonomic radio. I'm Steven Dubner and I'm glad you're listening. Before the break, the master distiller Danny Con told us that the official rules of bourbon are meant to guarantee the quality of the product. But if you think about things from the consumer side, we consumers are highly prone to seeing a naked emperor insistent that his clothes are a twisted and divine

because we don't want to be that one person to say this wasn't worth $8,000. That is Andrew Muhammad. He is an agricultural economist at the University of Tennessee. I've been working on trade issues across all agricultural commodities, including beer wine and spirits for about two decades. And how much time does Muhammad spend thinking about the brown stuff? Whiskey in bourbon seems to be occupying about 50% and sometimes it feels like 100% of my time. So does Muhammad buy the argument

that bourbon regulation is all about making the bourbon great? Or is there, as there is in many old industries, some soft protectionism in there to help out the incumbent distillers. And that whole new chart oak container story does make for good marketing. Yeah, I mean, you do have to admit it's a bit convenient, right? If you think about the fact that we actually export these barrels for Canadian whiskey production Irish whiskey production, some of the finest scotch in the world,

there's very expensive Japanese whiskey that use barrels from Kentucky and Tennessee and so to make the argument that of a quality distinction would be very convenient marketing. As an economist, this seems to me like a policy that led to an increase in demand in a policy to sustain demand. I can see that I'm sure there's a distinction in terms of taste when one

uses a newly chart barrel versus a second use or a second chart barrel. Now, a bourbon defender

those barrels had bourbon in them first. By the way, Muhammad is not a bourbon hater, not at all.

“Yeah, like most people, I've visited distilleries. Whatever my collection is, it's probably”

a pathetic compared to a true bourbon connoisseur, but I do try to buy reasonably priced bottles just to share with friends and to save on the shelf. I'm only willing to go so far for that as an economist, it's also made me cheap. You can actually find very good quality stuff in the 50 to $60 range. I've spent as much as maybe $250 on the bottle. I feel like I've overpaid. As we heard earlier, the bourbon economy is shrinking because of flagging demand among U.S.

Drinkers. One solution is to try to sell more of it overseas, but bourbon has gotten caught up in Donald Trump's tariff policies. They're in the first trade war. We put tariffs on steel and aluminum in the entire European Union retaliated with a series of tariffs on various strategic products to try and some way affect certain politicians in no state. One retaliatory tariff was on Harley-Davidson's, right? I assume that was to affect Paul Ryan and Wisconsin. There was a

tariff on peanut butter and Europeans don't even like peanut butter, but there's this 25 percent

tariff and that by the way led to a collapse than U.S. peanut butter exports to Europe strangely enough. They also then impose this retaliatory tariff on American whiskey, which includes Tennessee whiskey and Kentucky bourbon, right? The broader generic whiskey category coming out of the United States was subject to this 25 percent retaliatory tariff. Muhammad says that some whiskey companies

“responded to tariffs not by raising prices, but by cutting them. Why would they do that?”

Because once you lose market share in a distilled spirit sector, it's very hard to get it back. When someone finds a new favorite bourbon, they spend less on what they used to spend money on, no company wants to risk that. But tariffs can be a problem when overseas growth is part of your business plan. The Kentucky bourbon and Tennessee whiskey industry has done exceptional global market aid. The biggest Tennessee whiskey by far is Jack Daniels, which is owned by Brown

Foreman. Chris Stapleton's song, Tennessee Whiskey. I've heard that song "The World Over." There were even people humming that song in Kenya when I visited on this distilled spirit project. That smoke is Tennessee whiskey as sweet as strawberry wine. Everybody knows that song. When it comes to distilled spirits, particularly say Tennessee whiskey and Kentucky bourbon, these are products where people have developed serious habits, right? Not only habits in a negative way,

I simply mean habit formation and consumption, and so even small price changes do not necessarily have huge effects on demand. Now, where we have seen retaliation, it's been quite effective in that's in Canada. They simply took American products off the shelves. If you just leave spirits up to tariffs, we're talking about global corporations that can internally manage that. When you have these smaller craft distillers, they may not be able to.

There are other things that governments do to make things more complicated for the bourbon industry, barrel taxes. The state of Kentucky has for decades levied an annual tax on aging bourbon, just as it's sitting there in its barrel. Here's Brad Patrick again from the University of

“Kentucky Business School. From a tax perspective, when you look at our history, I think what you'll”

see is this evil sinful spirit that can be consumed appropriately and fairly had a syntax with it. And even today, if the bourbon producers fight it too much, you lose a little bit of the crowd there.

In 2025, bourbon distillaries in Kentucky paid out $75 million in barrel taxes.

But that tax is being phased out. It's set to be eliminated by 2043. So, the bourbon makers will just need to be patient. On the other hand, they're good at that. Patience is also part of their business plan, Andrew Muhammad again. Most products time isn't inconvenient. I tolerate time for quality. So, if I want a tailored made suit and the tailor says it's going to take me a month, I'll tolerate that month for the quality of suit I'm going to get. But if I meet a tailor,

who's just as good and who can do it in two weeks, I wouldn't say no, I'll take the month, because I get to somehow brag about this suit took four months instead of two weeks to put together. Right? Time isn't inconvenient. But when it comes to bourbon, time is an actual product attribute that consumers seem to value. Even beyond the taste of the product itself,

which then causes some people to pay the extra two, three or $4,000 for it. But that secondary market has been softening. This makes sense. Overall demand for bourbon has been

falling and with 16 million barrels aging in Kentucky over supply could be a problem.

I went back to Brad Patrick and asked what he thinks the bourbon industry will look like in five or ten years. You're going to have a large quantity of high quality

“bourbon spirits out there. Now, what are you going to do with it and how are you going to handle?”

That is a great question. There's going to be an answer that we don't even realize today. I'm not sure what it's going to be. But I'm guessing it's more fun for you to explore as a kind of intellectual puzzle than the people who are really in trouble in the industry. Right. I'll be accused of not having skin in the game. If I look at 2015 to 2020 timeframe, when people were building like crazy

and putting barrels out, they were looking for that India market and the China market.

There still may be a play there. Who knows tomorrow the tariffs may be gone? What I've been advising distilleries is don't invest a whole lot in infrastructure yet, but at least invest in some awareness. So if you're sitting on a bunch, I would explore where maybe you can slip into some countries. Versus a whole global market and find the way to play that out. So I too am a fan, or at least a kind of observer of creative destruction. And there are many, many, many examples

through history where, you know, the incumbents are frustrated, angry sometimes, and what they don't understand is that there will be things created in the wake of that destruction that lead to even more jobs and different creativity and different products and goods and services and so on. In this case, I'm seeing the destruction. I'm not seeing the creative.

“What's the creative coming out of this? That's a great question. Why I think Sazarex on a”

night's job? Jumping on the RTDs? What's that RTDs? They're ready to drink. I'm sorry. Sazarex has jumped on the RTDs and they've done a night's job. They purchased a business. It's growing 20, 25% right now. So if you're a distillery that has the bottling and canning equipment to do that, I think it's to be a reasonable thing to jump on. I think that'll Peter out eventually, where we're seeing the most success right now is the tourism aspect.

Our tourism here for the Bourbon Trail is very, very popular. The organizations that have a plan to connect to that and into other lifestyle and luxury and events and things like that, I think that is an angle that you're going to see the innovation on. The ready-to-drink business that Sazarex bought is called Busballs. Colorful canned cocktails that look a little bit like Christmas ornaments. You'll see them at

house parties on the beach, on TikTok. I asked Danny Con, the master distiller at Sazarex, what he thinks of Sazarex's new property. Busballs are extraordinarily popular. They're fun. They're a unique shape. They're brilliant colors. There's a tremendous market for them. They're growing internationally. Very, very aggressively. We have efforts to grow them in a lot of countries. They are not what the core bourbon geek wants and that's a good thing because there are many

different market segments. I do not think we're in a position to say, this is bourbon. You will like it. The alcohol pie is not growing aggressively. Where are we not represented and where can we get involved? That's some of the components or pieces behind Busballs. I will tell you that my Angustauder, her friends think I'm a hero because I work for the company that makes and sells busballs. And I take that credit and don't tell them the truth that I've nothing to do with them.

And that concludes our reef guided tour through the economics of the bourbon industry. My thanks to Danny Con, Ken Troski, Brad Patrick and Andrew Muhammad. Thanks also to Kati Design and to Brendan Simpson for the idea. I'd love to know what you think about the bourbon industry.

We're about this episode. We're always trying to get better. Our email is radio at

freconomics.com. Coming up next time on the show. Are you sure that that squeeze bottle of honey in your cupboard is actually honey? They're openly advertising designer serops saying next this

“much with your honey to pass these certain tests to get Indianized states. And what about the bees?”

We heard about colony collapse disorder and thought of this is catastrophic. And when we started and look at the data, there was no effect. The surprising economics of the honey industry that's next time on the show until then take care of yourself. And if you can, someone else too. Freconomics radio is produced by Renbud Radio. You can find our entire archive

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I have to say, it sounds like you drink a lot. Thank you very much.

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