Selling Futures

[HBD]

Okay, in California I understand that I can't sell to the public. How is it that I would be able to sell whiskey futures? Is there something I'm missing. Can someone better explain this to me.

Rinna

[will]

In financial markets, futures are an instrument (contract) that requires the holder to purchase a given product at a specified time, and at a specified price. I pay you $1.00 today for a contract that gives me both the right and the obligation to purchase 100 bushels of corn on October 10th at $0.50 per bushel, or $50.00 for the lot. Later, if my buddy Bob thinks corn will reach 60 cents per bushel, or $60 for the lot, he may be interested in buying my contract for $2.00. I double my money, and he saves $8.00.

Whiskey futures are generally not as highly leveraged as commodities like corn.

You can make a contract with someone to underwrite the whole cost (or more) of production for a barrel (or more) of your whiskey, and you agree to cause that product to be bottled and sold legally at some agreed date in the future, and the profits shared. Let's say the cost of production is $400 for the juice, and $300 for the barrel. The contents are about 50 gallons of 120 proof. Some years from now, the volume will be something like 40 or 45 gallons. You and your barrel contract owner agree that the stuff tastes good when proofed to 86, so you add about 16 gallons to the 40 in the barrel, for a total of 56 gallons of bottling strength...making about 280 bottles. If these bottles sell at wholesale for $10+bottle cost, then your net revenue will be $2800, or about four times the contract price. You charge something for your warehousing and marketing services, and perhaps your contract holder gets back $1400. With his profits, your contract holder goes down to the Bottle Shoppe and buys as many bottles as he can carry. He can legally own the empty barrel too, or you can agree to re-use it.

So, you see, the holder of the contract never "owned" the whiskey until he purchased the finished product at retail. Until that time, he owned an agreement and perhaps the barrel, depending upon the wording of your contract.

[HBD]

Thanks for the info.

So basically, the 'futures' contract holder owns monetary interest in the whiskey and doesn't actually own the whiskey until he buys it at retail. In this case, there would have to be a retail store who has previously agreed to stock and resell the whiskey to the 'futures' holder. Is that correct?

[grehorst]

Has anyone here actually set up a futures program? I'd really like to have a conversation with anyone who has- we looked into it and it appears to be a very tricky process to do legally....

[Odyssey Spirits]

Pretty sure that Rusty Figgins of Ellensburg Distillery was working on such a program - so you may contact him for more info. http://www.theellensburgdistillery.com/12.html

We're investigaging something this effect, though will be structuring is a bit different due to Washington forbidding craft distilleries from doing "contract distilling".

[DB Holding]

I posted something very similar to this a few weeks ago, before I saw this post, and got back this response.

I don't have any personal experience with this, but I can say that it would work like any other sort of investment offering when it comes to soliciting investors. In other words, unless your futures offering is a "registered" securities offering, you will be restricted from offering the investment publicly.

Just my 2-cents...

Anyone "registered" their spirits futures?

I would really like to hear more about this topic.

[cowdery]

You have to be very careful with terminology. If you use terms for securities-type products like "futures" that are regulated by the Securities and Exchange Commission (SEC) or other regulators of financial products you are going to have to jump through a lot of hoops.

But there are things you can do to get some money now for a promise of something later, which I assume is what you're trying to accomplish.

I think it was Peach Street in Colorado that did a pre-sale of their bourbon. It was someone in Colorado.

Dan Garrison has his Old 300 club.

Historically, distillery warehouse receipts were bought and sold. A warehouse receipt conveyed actual ownership of whiskey in storage, i.e., whiskey that was in barrels and aging. I'm not exactly sure why that went away, probably a combination of tighter regulation and a shift from a lot of distilleries producing commodity whiskey to a few distilleries producing proprietary brands.

I know a specialty liquor store here in Chicago that was struggling and persuaded enough supporters to simply make a cash deposit of $100 against future purchases and he didn't have to do any fancy legal stuff to make that happen. In effect he sold store credits.

One thing I have observed about this craft distillery phenomenon is that the people who do it right inspire incredible support and loyalty from their community. There have to be some ways, within the law, to monetize that enthusiasm.

Another observation is that just because something hasn't been done that doesn't necessarily mean it can't be done.

[DB Holding]

We don't want to deal with the SEC, just looking to offset the cost of aging a spirit.

[Chris Martin]

Three posts up was my response to DB Holding's original thread.

Now, I don't have any experience with selling Whiskey futures, but I fail to see how selling an interest in a speculative commodity future would not be considered a security as far as State and Federal securities regulators are concerned.

Is it really as simple as "getting money now for the promise of something later"? As I see it, not exactly. There is no way to guarantee the future value of the aging whiskey. And even if there was, wouldn't this be something akin to a simple loan, i.e. you give me money today and I pay it back to you with interest later? And even a simple loan is considered a "security" to State and Fed regulators.

Of course there are exemptions from having to "register" a security before selling it to an investor... if anyone is doing this on a "community" level -- selling futures to their supportive community -- I can see how it would make it easier to avoid having to jump through hoops with securities laws. Keeping it a relatively "private" transaction amongst people who know one another should pretty much keep you in the clear.

As for the Garrison Old 300 club, that's an interesting concept. Not the same as selling futures, but a creative way to offset costs -- withhold a "barrel deposit" while aging. Of course, you could get into trouble if you can't pay it back...

[coop]

You have to be very careful with terminology. If you use terms for securities-type products like "futures" that are regulated by the Securities and Exchange Commission (SEC) or other regulators of financial products you are going to have to jump through a lot of hoops.

But there are things you can do to get some money now for a promise of something later, which I assume is what you're trying to accomplish.

I think it was Peach Street in Colorado that did a pre-sale of their bourbon. It was someone in Colorado.

Dan Garrison has his Old 300 club.

Historically, distillery warehouse receipts were bought and sold. A warehouse receipt conveyed actual ownership of whiskey in storage, i.e., whiskey that was in barrels and aging. I'm not exactly sure why that went away, probably a combination of tighter regulation and a shift from a lot of distilleries producing commodity whiskey to a few distilleries producing proprietary brands.

I know a specialty liquor store here in Chicago that was struggling and persuaded enough supporters to simply make a cash deposit of $100 against future purchases and he didn't have to do any fancy legal stuff to make that happen. In effect he sold store credits.

One thing I have observed about this craft distillery phenomenon is that the people who do it right inspire incredible support and loyalty from their community. There have to be some ways, within the law, to monetize that enthusiasm.

Another observation is that just because something hasn't been done that doesn't necessarily mean it can't be done.

Hello Cowdery, the pre sales in Colorado was done by me here at Colorado Gold Distillery. What we did was allow people to purchase as many bottles as they wanted out of a certain numbered barrel. We had them pay 50% down like it was on lay away and we contacted them when the barrel was ready to bottle. They came in and picked up their numbered bottle, paid the balance and went on about there way. On our first run we pre sold one complete barrel before it was bottled. Good cash flow and allowed us to put up more. Coop

[cowdery]

Hello Cowdery, the pre sales in Colorado was done by me here at Colorado Gold Distillery. What we did was allow people to purchase as many bottles as they wanted out of a certain numbered barrel. We had them pay 50% down like it was on lay away and we contacted them when the barrel was ready to bottle. They came in and picked up their numbered bottle, paid the balance and went on about there way. On our first run we pre sold one complete barrel before it was bottled. Good cash flow and allowed us to put up more. Coop

Yes, that's what I recalled. Sorry for the misidentification.