The state of Kentucky makes about 95% of the world’s supply of bourbon. Right now the state has nearly two barrels in aging inventory for every one of its 4.4 million residents, the highest inventory level in nearly half a century.
The big issue facing the state’s distillers is what will happen to overseas sales since the European Union, Mexico, and China in June imposed a 25% retaliatory tariff on bourbon. Canada broke ranks and set a 10% tariff.
The state’s association of whiskey makers, the Kentucky Distiller’s Association (KDA), is worried. KDA president Eric Gregory told Fortune, “We are still working to understand the actual impact of those tariffs, and remain hopeful that it’s a short-term issue that will be resolved soon.”
Given the increasing tensions between the United States and China, that may be wishful thinking. The Trump administration has added another $200 billion in tariffs on goods imported from China, and China’s response was to add tariffs of its own on another $60 billion in U.S. goods. The trade war is heating up, not cooling down.
Kentucky distillers produced more than 1.7 million barrels of bourbon last year, only the second time it has reached that level since 1968. There are about 7.5 million barrels in the state’s aging bourbon inventory, the most since 1972, according to the KDA.
Bourbon makers have enjoyed rising sales since 2001 following a nadir in 1999 when the number of barrels of aging whiskey totaled 3.4 million and production had stalled at around 455,000.
The accession of China to the World Trade Association in 2001 turned things around for the distillers. The Chinese cut their tariff on spirits imports from 65% to 10%, according to the Distilled Spirits Council. Including all spirituous liquors (gin, vodka, etc.), U.S. exports to China have risen by 1,200% since 2001, when shipments to the Middle Kingdom were valued at around $959,000. In 2017 the value of exports to China reached $12.8 million. Of that total, $8.9 million came from whiskey sales.
The data reported by the KDA and the Distilled Spirits Council were collected before the tariff wars began. Some distillers expect to begin feeling the effects of the tariffs by the end of the year after overseas shipments made in advance of the tariffs run out. The KDA’s Gregory summarized Kentucky’s problem for Fox News:
It all depends on whether distilleries pass that cost along to consumers or absorb the costs to remain competitive in the marketplace. Either way it goes, those options have the possibility of returning less profit to our distillers, which potentially means fewer investments in Kentucky. We don’t want to go there.