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

23:32So I oversee the distilling and aging operations production at Buffalo Trace, at Barton 1792, and at our Collingwood Distillery, which is in Collingwood, Ontario. Where are you from, Danny? Where'd you grow up? I grew up in Los Angeles. And did you set out to be a master distiller? No. In fact, before I distilled, 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 at Davis. Which is a big agriculture school, yeah? Very big ag school. And I went in as a chemical engineer because it was hard and it seemed like a good place to start.

24:17For a particular reason, my friend and I needed to learn how to homebrew. What was that particular reason? My best friend's fake ID 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 homebrew 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 and enology, which is grape growing and winemaking. I ended up taking a preliminary class. I didn't even know Sauvignon Blanc 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.

25:02So 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 Anheuser-Busch 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.

25:48Maybe 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 required 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 charred 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.

26:36And 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 corn lobbies involved? That's what I always wonder. I have read that the barrel makers and the copper industry and maybe the corn industry all really loved 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 there might have been a little bit of not self-dealing necessarily, but people looking out for their own interests.

27:14I 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 corn. Corn. Okay. So first of all, it's my belief that our forefathers came over more familiar with rye whiskey. And as they went west, I'm sure they learned that rye 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.

27:52It's got an enormous amount of flavor that comes from the oil and other components of the corn. Rye is important for flavor. It provides spice and floral notes and pepperiness and 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 in Kentucky, but it does have to be made in the U.S. Even though bourbon does not have to be made in Kentucky to be called bourbon, I see that something like 95 % of all bourbon is made in Kentucky.

28:29Why is that? Well, bourbon originated in Kentucky, 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 caverns, so it's got a lot of calcium in it. It's got a pronounced flavor. It's mineral-y. Those calcium components in particular and other minerals are really important for the enzymatic reactions in the cooking process.

29:09They're also very important for certain yeast functionality. And then when we distill it, 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 and 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 distilled to 160 proof and then diluted it to 125, which is, it cannot be higher going into the barrel.

29:57So 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-ish, retains a lot of flavors. And those flavors are really important in how the whiskey ages. They oxidize slowly over time. They react with different components in the wood, in the distillate. So having those flavors present, they become precursors to what makes really delicious whiskey 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.

30:45So we put them in barrels. But yeah, so they're new charred oak containers. So there's a whole process. I'll be brief on this, but... Don't feel you need to be brief. I, like you, am 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 per 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.

31:25That process is called seasoning. Rain water 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 Sazerac, but it's not under my responsibility.

32:04Now 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.

32:39Is this 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've 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 tasting water. It's the layer below the char that's been cooked that are the extractables that we are looking for. How is that fire being applied?

33:21It'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 blowtorch? It's coming through an assembly 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. There's no sealant of any kind. There's often a little bit of paraffin wax on the outer edge of the head, where the head and the staves connect.

34:00No glue is used. They're all put together without glue. So you char the barrel, and now you've created an environment where the whiskey can age. Okay? So let's talk about now the 125 proof component. Different things are soluble in different liquids. If anybody makes an old-fashioned 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 and a couple drops of water will dissolve very rapidly. You put that same sugar cube in bourbon, it will not dissolve.

34:44So 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 hemicellulose, which is where you get the caramel, butterscotch-type components. And then you've got a group of compounds called lignans, which are really complicated. But that's generally where you get your baking spices, nutmeg and clove and vanilla and cinnamon.

35:30And then you have tannins, which are more water-soluble. They provide mouthfeel and astringency, 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? Can be half full, 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?

36:06You 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 used 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 has got to be pretty expensive. of how much you sell them for, what's it need to be worth for you and for them? Well, think about it this way.

36:40If 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. I think there's a lot of roadside planters anyways. Coming up after the break, who wins a battle between bourbon and buzz balls? This is Freakonomics Radio. I'm Stephen Dubner, and I'm glad you're listening.

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38:59KitKat bar. Have a break. Have a KitKat.

39:06Before the break, the master distiller, Danny Kahn, 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 insisting that his clothes are exquisite 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 now.

39:46And how much time does Muhammad spend thinking about the brown stuff? Whiskey and bourbon seems to be occupying about 50 percent. And sometimes it feels like 100 percent 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 charred 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.

40:41And 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 and 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 charred barrel versus a second use or second charred barrel. Now, a bourbon defender, when hearing Mohamed's explanation, might say that the reason scotch tastes so good is because those barrels had bourbon in them first. By the way, Mohamed is not a bourbon hater. Not at all. Yeah, like most people, I've visited distilleries.

41:26Whatever my collection is, it's probably 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 a 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.

42:10During the first trade war, we put tariffs on steel and aluminum, and the entire European Union retaliated with a series of tariffs on very strategic products to try and in some way affect certain politicians in those states. One retaliatory tariff was on Harley Davidson's, right? And I assume that was to affect Paul Ryan in Wisconsin. There was a tariff on peanut butter. And Europeans don't even like peanut butter. But there's this 25 % tariff. And that, by the way, led to a collapse in U.S. peanut butter exports to Europe, strangely enough. They also then imposed this retaliatory tariff on American whiskey, which includes Tennessee whiskey and Kentucky bourbon, right?

42:52the broader generic whiskey category coming out of the United States was subject to this 25 % retaliatory tariff. Mohamed 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 the 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 marketing.

43:35The 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 Spirits project. As smooth as Tennessee whiskey and 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? And I don't mean habits in a negative way. I simply mean habit formation and consumption.

44:11And so even small price changes do not necessarily have huge effects on demand. Now, where we have seen retaliation that's been quite effective, and 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, like 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.

44:52Here'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 sin tax 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 distilleries 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.

45:33Andrew Muhammad again. Most products, time is an inconvenience, right? 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? Like, time is an inconvenience. But when it comes to bourbon, time is an actual product attribute that consumers seem to value.

46:12Even beyond the taste of the product itself, the joy of seeing that on our shelves, to tell our friends, that in and of itself gives us satisfaction, which then causes some people to pay the extra$2 ,000, $3 ,000, 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, oversupply 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.

46:52Now, what are you going to do with it, and how are you going to handle it? 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 it 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 the 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?

47:24Tomorrow 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.

48:07In 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. Well, I think Sazerac's done a nice job jumping on the RTDs. What's that, RTDs? The ready-to-drinks, I'm sorry. Yeah, Sazerac has jumped on the RTDs, and they've done a nice 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'd 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.

48:38Our 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 Sazerac bought is called Buzzballs, 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 Kahn, the master distiller at Sazerac, what he thinks of Sazerac's new property. Buzzballs are extraordinarily popular. They're fun.

49:18They'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. And 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. So where are we not represented and where can we get involved? And that's some of the components or pieces behind Buzzballs. I will tell you that my youngest daughter, her friends think I'm a hero because I work for the company that makes and sells buzz balls.

50:07And I take that credit and don't tell them the truth that I have nothing to do with them.

50:14And that concludes our brief guided tour through the economics of the bourbon industry. My thanks to Danny Kahn, Ken Trotsky, Brad Patrick, and Andrew Muhammad. Thanks also to Katya Zyme and to Brendan Simpson for the idea. I'd love to know what you think about the bourbon industry or about this episode. We're always trying to get better. Our email is radio at Freakonomics.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 syrups saying mix this much with your honey to pass these certain tests to get into the United States.

50:53And what about the bees? We heard about colony collapse disorder and thought this is catastrophic. And when we started to 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. Freakonomics Radio is produced by Renbud Radio. You can find our entire archive on any podcast app. It's also at freakonomics.com where we publish transcripts and show notes. This episode was produced by Augusta Chapman and edited by Gabriel Roth. It was mixed by Eleanor Osborne with help from Joseph Webster.

51:31The Freakonomics Radio Network staff also includes Dalvin Abouaji, Ellen Frankman, Elsa Hernandez, Elaria Martenacourt, Jeremy Johnston, Mandy Gorenstein, Peter Madden, Tao Jacobs, and Zach Lipinski. Our theme song is Mr. Fortune by The Hitchhikers, and our composer is Luis Guerra. As always, thanks for listening. I have to say, it sounds like you drink a lot. Thank you very much.

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