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Published in Food/Agribusiness
Gov. Gretchen Whitmer and state Rep. Pat Outman (center) at a bill signing in Traverse City on July 5. Gov. Gretchen Whitmer and state Rep. Pat Outman (center) at a bill signing in Traverse City on July 5. COURTESY PHOTO

New law slashes state markup for Michigan distillers that source grain from within state

BY Elyse Wild Tuesday, July 05, 2022 03:52pm

Small distilleries and grain farmers in Michigan are poised to benefit from a new state law that incentivizes the use of Michigan-grown grains when producing liquor.

Gov. Gretchen Whitmer today signed a bill into law that will cut in half the state markup for small distillers that source at least 40 percent of their grain from within the state. House Bill 4842 — sponsored by state Rep. Pat Outman, R-, Six Lakes — takes effect on Jan. 1, 2023 and cuts the state’s markup on these producers’ liquor in half to 32.5 percent.

After it was introduced in May of 2021, Outman’s bill gained widespread support in the House and Senate last month.

Jon O’Connor, president of the Michigan Craft Distillers Association and co-owner of Long Road Distillers LLC, worked with the Legislature for more than five years to create an incentive for distillers that benefits both the craft beverage industry and the agriculture sector.

“We’re just thrilled beyond belief that we’ve gotten to this point,” O’Connor said recently after the bill cleared the Legislature. 

As one of 17 control states in the nation, the Michigan Liquor Control Commission sets prices of wholesale distilled spirits sold through specially designated distributors. The prices must return a gross profit to the MLCC of 51 to 65 percent, per the Michigan Liquor Control Code. 

O’Connor emphasizes that this model creates an uneven playing field for small distilleries that bear the substantial cost of producing on a smaller scale.

“The consumer ends up paying more per bottle because if you’re operating on a small scale, your efficiencies aren’t as great selling products at a higher cost,” O’Connor said. “By lowering the markup, it allows access to grain and encourages farmers to grow things that are value-added to them.”

With more than 300 types of crops produced, Michigan ranks as the second most agriculturally diverse state in the country.

“It is a huge loss when distillers decide to buy their grains elsewhere,” O’Connor said.

For grain producers, the incentives from the bill promote healthier farming practices and crop rotation for the primary grains used in distilling: corn, wheat and rye. 

Kevin Slagh, owner and head maltster at Emergent Malt LLC in Zealand, says the new law creates an opportunity for farmers to work with distilleries to grow specific varieties of grains they know will result in high-quality products up to distillers’ standards. Rye, for instance, has little demand outside of distilling, and Michigan farmers typically use it as a cover crop. This drives distillers to purchase higher-quality rye from out of state.

Slagh says the new law creates an opportunity for Michigan farmers to capitalize on rye as a viable product rather than just a cover crop.

“If they can promote good varieties [of rye] for distilling, it becomes a good product for farmers to grow and sell,”  Slagh told MiBiz.

Michigan is home to 88 craft distilleries and ranks ninth in the nation for total number of distilleries, according to the American Craft Spirits Association. Slagh estimates that he supplies around 10 distilleries in the state.  

“Distilleries use a lot of raw grains,” Slagh said. “Raw grains should be even more feasible than malted products for distilleries to get from Michigan from a logistics point.”

Tracking the product

Despite support from most lawmakers and the Whitmer administration, the Michigan Liquor Control Commission opposed the bill. The agency raised concerns during legislative hearings that it and the Michigan Department of Agriculture and Rural Development (MDARD) cannot verify whether spirits products contain at least 40 percent base distillate from Michigan grain.

MDARD will provide certification to qualified small distillers on a per-product basis. O'Connor emphasizes that this is no different than the existing process to certify that distilleries are following state and federal regulations in process and production. The law stipulates that any distiller providing false information to MDARD is subject to a misdemeanor and can face imprisonment of up to one year and/or a fine of $3,000.

“Truth and transparency is a big thing for us,” O’Connor said. “We want to advocate for people to do this correctly.”

In a statement following the bill’s signing in Traverse City, Grand Traverse Distillery LLC owner Kent Rabish called it the “single largest help for craft distillers” since his company started production in 2007.

O’Connor said the policy change will place his company’s products “at a price that’s competitive because I can make all the product I want in the world, but if it doesn’t end up on the shelf at a competitive price, then no one’s going to buy it.”

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