Farm to Flask
Updated: Jun 7, 2019
Microdistilleries Create A New Market for Montana Grains
Across the state, Montanans are enjoying the expanding trend of microdistilleries, or craft distilleries, which are smaller-batch commercial distilleries using seed potatoes, Golden Triangle grains, Flathead Cherries and other locally-grown commodities to craft unique, Montana-made alcoholic spirits.
Microdistilleries are one of the fastest growing sectors in the craft beverage brewing industry across the country. Since 2005, distillery operations have become legal in the state under a variety of permitting procedures. The first modern distillery in Montana, RoughStock Distillery near Bozeman, opened in 2009.
Typically, in Montana, a microdistillery launches and markets its products through a local “tasting room,” where a set amount of alcohol can be served to individual customers during a restricted time period. A limited amount of product can also be purchased in bulk to take away from the premises.
Under current Montana law, distilleries producing over 25,000 gallons of product annually (including contract bottling and national bulk exports) automatically lose their ability to operate a tasting room and, as far many distillery owners are concerned, the ability to market the product directly to potential consumers.
Montana has a system of laws dating back to Prohibition, continuing to the present day, governing the manufacture and sale of alcohol. The state currently regulates all entities that produce, import, distribute, or sell alcoholic beverages in Montana. Bars, restaurants and liquor stores must have special licenses in order to serve a variety of wine, beer and spirits, but individual distilleries and breweries are governed by different sets of state and federal laws and licensure.
In Montana, microdistilleries can provide up to two ounces of proof alcohol to each consumer on its premises in one business day; they are also allowed to sell no more than 1.75 liters per customer for off-premises consumption. Once a distillery produces over 25,000 gallons, it not only loses its classification as a microdistillery under Montana law; it also loses the ability to sell and distribute spirits from any tasting facility on the premises.
A recent bill in the Montana Senate sought to increase the allowed annual output of Montana-manufactured spirits to be better aligned with tax and classification statutes for similar businesses of the same size across the country. The new legislation would allow for the production of up to 200,000 proof gallons (a unit counted as one gallon of liquid that is 50 proof alcohol) and still allow operation of tasting rooms at those distilleries.
“It’s a country-wide standard for a microdistillery,” says Robin Blazer, President of the Montana Distillers Guild. Along with husband Willie, Blazer owns and operates Willie’s Distillery in Ennis. Expanded annual production limits would encourage increased output from Montana’s distilleries, Blazer says, while allowing the businesses to continue to distribute and sell samples of their product in public tasting rooms
Brewing beer or wine at home is legal but distilling spirits without a permit to make beverage alcohol is against Federal law. Distillers must be registered with a number of agencies like the Food and Drug Administration, the U.S. Department of Agriculture and the Department of Environmental Quality, and they are subject to a variety of reviews, including an on-site walk-through, before permitting is considered.
Although the federal permit is available at no cost, getting one requires a hefty amount of paperwork and comes with a variety of requirements and restrictions, including regulations requiring all distilling equipment to be approved for use by state and federal regulatory agencies. The expense of such equipment makes opening a distillery a substantial investment.
Along with attending schools or apprenticeships, distillers must make all their recipes at approved distilling facilities. Such facilities require state and federal approval of equipment and the initial cost for such equipment is usually in the neighborhood of about $1 million.
As daunting as that $1-million price tag is, support can be found in the craft distilling industry across the state and the country. Guild president Robin Blazer explains that the statewide distilling guild and national trade organizations are all fairly well-knit as communities and help one another “in an incredible way.”
“We believe that a rising tide lifts all boats,” Blazer says, “Because that barrier of entry is so high, the natural business climate self-regulates.”
Anyone involved with financing a microdistillery or distillery equipment must pass a vetting process set out by the Department of Revenue, and none of the investors can have any interest in another liquor license in Montana. New distillery businesses are also required to have assets in and above operating costs.
Once financing is secured, the federal permit is free, but filing the required documents requires a “three-inch binder of paperwork,” according to Blazer. In Montana, additional regulatory paperwork is required and the state charges $600 initially and the same annually per year for the state permit. Multiple state and federal taxes are also assessed on the finished products.
An allowed increase to 200,000 proof gallons in the statute would help create tax revenue for the state and greater revenue for the investors and business owners, says Blazer. “Montana’s distillery business is booming,” she adds, “And the tax tier is already set up at the State and Federal level for this change.”
When the current statute limiting production to 25,000 gallons was written in 2005, it predated any actual microdistilleries or craft distillery business in the state, Blazer explains.
Along with other microdistillery owners, she attended a Montana State Senate committee hearing in February 2019 in Helena to give testimony in support of the legislation. The group encouraged members of the committee to consider easing restrictive limits to allow for greater production at Montana distilleries without sacrificing the marketing aspect of the tasting room on the premises.
“The fact that this bill is needed should make us proud of Montana products and Montana manufacturing,” says Senator Kenneth Bogner (R-Miles City), the sponsor of the legislation. “Micro distilleries are one of the fastest growing economic sectors in the U.S. Now we need to get Montana’s product out into those booming marketplaces: cites in the other 50 states and multiple countries.” Senator Bogner cited statistics from the Department of Commerce that showed that production of distilled spirits grew over 900% in the last 13 years in the U.S.
Along with Montana’s microdistilleries, supporters of the recent legislation include the Whitefish Chamber, the Montana Manufacturing Extension Center at Montana State University, along with financial institutions across the state.
“The tasting room is such a successful marketing tool that it has created demand for product that cannot be filled under the current regulations,” Blazer says, adding that the 25,000-gallon restriction limits the ability of craft distilleries to export product out of state.
Need for Expansion
Currently, Montana tap houses at craft beer breweries can operate tasting rooms until reaching a limit of 60,000 barrels of beer annually. Blazer explains that 200,000 proof gallons equals roughly 53,000 barrels of beer in production and would make the distilleries output licensure nearly equivalent to the craft breweries.
Matt Leow, the Executive Director of the Montana Brewers Association, says he supports the legislation to expand production at microdistilleries while still allowing on-site sales. “We support it because it is consistent with our vision of encouraging growth in Montana’s craft beverage manufacturing industry,” he says. “Just like brewers, Montana’s craft distillers are producing a Montana-made, value-added product, and that’s something we should all get behind.”
Montana produced about 29 million bushels of barley in 2017, according to the U.S. Department of Agriculture, and a good percentage of that grain was a malt varietal used for alcohol production. According to a report from the Montana Department of Commerce in 2014, nearly 50 breweries in Montana consumed 20 percent of all the malting barley produced in the state that year.
Annually, a good portion of Montana’s grains is being used for creating craft beverages in the state and beyond. Microdistilleries create yet another market for Montana grains.
“Montana raises some of the best grain in the world,” says Jeff Droge, a fifth-generation farmer from just outside of Manhattan. Droge and his family grow the potatoes and cereal grain used to craft the spirits at Dry Hills Distillery in Four Corners.
“My family has spent 115 years farming the same dirt,” Droge says. “The family farm is a struggling operation. Wheat prices, grain prices are low, and input costs are on the rise.”
When the Droge family started the business in 2015, they were certified seed-potato growers who took a joke about turning waste potatoes to vodka to heart. Droge says they diversified their family operation outside the base commodity trade, using the product they had on hand. They attended Moonshine University in Kentucky and worked with Headframe Spirits in Butte to craft the first rounds of their distilled product from farm-raised potatoes.
“We took a very perishable item and transformed it into a non-perishable state through the distilling method,” Droge says. “We saw this as an opportunity to create a manufacturing business and turn that farm commodity into a bulk distillate that we could then sell on the wholesale market.”
They developed the initial business plan for Dry Hills Distillery without considering a tasting room but quickly learned that their business model fell short. “We realized that a tasting room was an essential marketing tool to promote the product to the consumer,” Droge explains. “We like the fact that we’re not just a made-in-Montana brand; we’re a grown-in-Montana brand, and we wanted to be able to tell that entire process to the people who want to visit Montana. We feel that’s a great story to tell. Without the tasting room platform, it becomes very difficult for us to be able to tell that story.”
Droge says that since opening the new branch of his family’s agricultural business, they have only grown. “We’re in the business of taking a high-volume, low-value perishable product and turning it into smaller volume, high-value non-perishable product,” he explains. “Such a product can be shipped around Montana, can be shipped around the country and can be shipped around the world. We’ve seen a lot of success in this area which has developed into relationships from coast to coast. We have clients in Oregon, Texas, Louisiana, all the way to Florida, all of whom do a really nice job of promoting Montana agriculture. With the current limitations on production that we are seeing today, we’re basically asking a business like mine to start at square one.”
In order to grow their production, the distillery could either open a new facility, which Droge says is not economically feasible for his family business or close the tasting room and continue with production.
“This would mean a loss of jobs, loss of revenue and loss of potential income to the state of Montana,” Droge says. “The worst of this for me personally would be the loss of jobs. That would be seven people that rely on me for paying their rent.”
According to the Montana Alcohol Beverage Control division, all microdistilleries in the state self-reported production in the last year at under 25,000 gallon capacity but growing; 18 microdistilleries reported less than 4,000 gallons in production; four microdistilleries produced up to 14,999 gallons, and three are in their first year of being licensed.
Microdistilleries in Montana have an unexpected ally in the form of the conservative lobbying group Americans for Prosperity, the organization backed by billionaire brothers Charles and David Koch. Generally, AFP generally opposes state or federal regulations on the liquor industry to maximize growth potential in the private sector. Lobbying arms of the Koch organization have supported efforts to privatize liquor stores in the state of Pennsylvania and to ease distilling regulations around the country.
Montana lobbyist David Herbst of AFP says the change in the microdistillery legislation would create jobs and boost tourism in the state.
Along with the federal government, states are charged with regulating the sale of alcohol to address public health concerns regarding the harmful consequences of overconsumption. With effects such as drunk driving and addiction, alcohol consumption is a valid public health concern as shown in multitudes of studies leading to legislation and regulations in Montana and across the U.S.
No opponents to the proposed legislation to expand production at microdistilleries were present at the recent hearing in Helena to find cause for protesting the legislation on public health or any other grounds. Regulations on tasting rooms will not change with the increased annual output in the proposed legislation, as it is implied that higher production would account for exporting product rather than increasing local consumption.
While more businesses continue to utilize Montana’s bounty for the craft beverage industry, the demand for craft-distilled spirits around the country is showing no signs of slowing. Using current data from the U.S. Treasury, some investment firms are projecting that craft spirits will go from a one percent share of volume sales in 2014 to nearly ten percent in 2020 across the nation.
Microdistilleries in Montana could be poised to capture a large potential market share with the expanded ability to produce more volume. The increase could also be attractive for businesses looking to start new enterprises or relocate to Montana to enter the craft distilling industry. Montana distilleries have access to grain and water, necessary bases other states have to import to manufacture craft beverages.
On March 23, 2019, the Montana State Senate bill to revise the definition of a microdistillery in Montana in regards to production units passed the State House of Representatives and was transmitted to the Governor to be signed into law.
Products from Montana hold a lot of lore for people around the world. Within the state, Montanans will seek out locally-made items when they know the source of production is right down the road and thus helping to boost the local economy.
With microdistilleries across the state utilizing local grains and produce to craft shelf-stable products that can be shipped around the world, the possibilities for growth in the market continue to hold much promise for businesses and investors.