Why Is Bourbon So Crazy Expensive and When Will the Bubble Burst?

Forget Pappy. Pappy is old news. There’s a new Most Expensive Bourbon on the block. In fact, there are several of them. They’re delicious and rare and have good stories. The movement of their prices in secondary markets says a lot about how bourbon is doing in times of COVID and what some people assumed would be an inevitable bursting of the bourbon bubble.

The Bourbon Bubble

The bubble clearly has not burst, though a recent study of bourbon as an “alternative investment” in Unbridled Spirit: Illicit Markets for Bourbon Whiskey economists Conor Lennon and Tom Shohi indicate the rate of inflation for American whiskey has slowed. Pappy remains, of course, the benchmark against which all other bourbons are measured. Every year Buffalo Trace releases another batch of approximately 7000 cases into a market frothy with anticipation. Every year the price goes up and people tut-tut that it can’t last forever. The nominal price of Family Reserve 23 Year Old Bourbon is about $300 a bottle. But even with a soft economy and COVID, on the secondary market, the price continues to rise at a rate that recalls Venezuelan hyperinflation. The secondary market price, depending on how connected you are and where you catch it in the grey market supply chain, is around $3500 a bottle.

“The prices go up and they’ve never come down,” says the operator of a Kentucky-based whiskey business who both buys and sells large lots on the secondary market. He would prefer his name not be used, so we will call him Victor, and he has gone from doubt to true belief in the secondary market’s staying power. “Look at scotch,” Victor explains. “Look at the course of the scotch market for the last 30 or 40 years. You see how the scotch industry has created a niche where collecting bottles is an adult variant on collecting comic books.”

Colonel E.H.Taylor

Harlan Wheatly photo credit Buffalo Trace

The driver of the scotchification of Bourbon is not perennials like Pappy, but in the freaks and one-and-done outliers that are increasingly driving secondary markets. “Rockstar products that are pushing the needle,” is how A.J. Heindel, who operates Unicorn Auctions, describes them. “Growth is about as strong as it’s ever been.” The king of that particular hill – for now – is another Buffalo Trace product: Colonel E.H. Taylor Warehouse C Tornado Survivor Kentucky Bourbon Whiskey. “Tornado” to its friends, is the fortuitous product of a 2006 storm that blew the roof off one of Buffalo Trace’s rick houses. It looked, at the time, like a major disaster, potentially rendering hundreds of barrels of whiskey worthless by exposing them to the elements. “My first concern was safety,” says Harlan Wheatley, Buffalo Trace’s Master Distiller. “We had to make sure the ricks weren’t going to collapse.”

While the engineers worked things out, the whiskey roasted unprotected in the Kentucky sun. Eventually, Wheatley’s crew threw a series of tarps over the building to protect the barrels, but for the next several months the wind blew freely through the roofless warehouse. One observer says you could smell the whiskey evaporating from a quarter-mile off.  Six months later, during a routine quality check, it occurred to Buffalo Trace’s tasters that the exposure to the elements hadn’t, in fact, destroyed the whiskey. Instead, it seemed to have given the whiskey a special character. Sensing opportunity, Buffalo Trace designated Bourbon from the top two tiers of the roofless rickhouse – reportedly just under 100 barrels – to be sold under a special designation. It is widely reported that the barrels were less than 40% full, the unblocked wind having accelerated the angel’s share.

Tornado Bottle photo credit Buffalo Trace

The distillery declines to say how much Tornado they bottled, but some reasonable rumor-mongering and back-of-the-envelope math indicates they ended up with between 1000 and 1200 cases. Buffalo Trace released Tornado at about the same price point as its regular EH Taylor: $69.00. The climb up the secondary market started almost immediately. The reviews were terrific, the story was interesting, the supplies were finite. A few years later it’s selling for close to twice what Pappy Van Winkle gets, $7000 a bottle. “We’re flattered,” says Wheatley, “but it doesn’t change how we do business.”

In fact, it did. The surprisingly pleasant result of what was generally assumed to be a destructive aging process was one of the reasons why Buffalo Trace started its Warehouse X project, testing all kinds of unorthodox theories to see if they turn out distinctive whiskeys.

Limited Releases

Buffalo Trace Barrel Pick Warehouse photo credit Tom Johnson

It’s hard not to notice that the very top of the secondary market is increasingly ruled not by trophy brands like Pappy, but by very limited releases that, like Tornado, won’t have a next year. And that the rising cost of those top-of-the-charts bottles is attracting people who buy and sell whiskey intending to trade, rather than drink. “Typically, the most frequent approach of a major investor is they will leverage their investment in other products to pay for the consumables they actually drink.” Says Heindel. “They designate a brand or two for consumption and then use the rest of their enterprise to fund that.”

Others engage with almost no interest in the whiskey as anything but an “alternative asset.” With the prime rate hovering around 3.5%, the current annual 9% return on bourbon reported in Unbridled Spirit looks pretty good. And, it’s worth noting, whiskey is a lot more fun to invest in than corporate bonds.  “When focusing on bourbon's investment potential,” wrote the authors of “Unbridled Spirit”, who ignored repeated requests for interviews, “we see that bourbon's real arithmetic return is higher than a variety of stocks, bonds, and other commodities over our sample period.”

The Secondary Markets

Michter's 25 Year Bourbon

The limited editions, while perhaps not built deliberately for the return-oriented secondary market, certainly fuel it. The top of that for-profit (as opposed to for-consumption) secondary is dominated by two distilleries adept at marketing ultra-limited editions, Buffalo Trace and Michter’s. Buffalo Trace has Tornado, Old Fashioned Copper, and Taylor Cured Oak, a throwback to the days before barrel staves were kiln-dried, all selling at Pappy-or-above prices. Michter’s has bottled a variety of “expressions”, as they call them, reaching far back into what is arguably Bourbon’s Golden Age, for sale in – you guessed it – very limited and collectible editions.

“Everyone is gaming the system,” says Victor. “Sellers have more avenues to sell than ever before. There are more buyers than ever before. And now the distilleries are in on the joke. They explicitly produce highly collectible one-off editions as a marketing tool, coming up with some weird, select-stock editions.” Of course, no matter how skilled the marketers, bad whiskey doesn’t command thousand-dollar prices. Check the reviews of the one-offs by Buffalo Trace, Michter’s, and the others at the top of the price ladder; there’s no question they’re releasing damned fine whiskey. But it is whiskey that not that many years ago would have disappeared quietly into brands that, like Pappy, release new stocks every year. Wheatly puts it like this: “We make a specific recipe today that can end up in several different products,” he explains, going into no detail. “We are very fortunate to have some outstanding whiskeys to choose from.”

Tornado may be the archetype, but the secondary markets have taught distilleries not to drop their special editions at anything close to the same retail price as their other whiskies.  “The secondary markets have been of great use to distillers,” says Victor. “They bat their eyes at it, but the fact is its pushing prices higher.”