FA Playbook

Want to binge on the booze boom? Invest in liquor funds, farms

Want to cash in on the liquor boom?

Savvy and well-educated investors may consider looking beyond individual liquor brands and companies to creative exchange-traded funds and their agricultural suppliers.

"We believe we're at year five of a 25- to 40-year super-cycle that could see continued growth in consumer demand for whiskey and spirits, much like what has occurred with craft breweries over the past two decades," said David Bolton, president and CEO of Spirited Funds, in a press release citing overall beverage alcohol industry sales of more than $1 trillion per year.

Bolton's company, along with ETF Managers Group, debuted the Spirited Funds/ETFMG Whiskey and Spirits ETF to help investors capitalize on the craze in October. Made up of a small number of companies that derive part of their revenue from the spirits industry, it allows investors to own a diversified piece of brands, such as Pernod Ricard, Diageo and Brown Forman, as well as some foreign companies.

Carla Gottgens | Bloomberg | Getty Images

The big guys aren't the only ones experiencing record sales: There are now 750 micro-distilleries in the United States, compared to 92 in 2010.

To make their hooch, all of these producers need raw agricultural products, such as corn, wheat, barley and rye, and their "commodity-linked nature" helps investors interested in liquor mitigate down markets, Bolton said.

That leaves profit-thirsty investors with a growth opportunity, but not without careful consideration and a creative strategy.

The cumulative amount of crops used in distilled spirits production shot way up compared to the same period last year, according to the Department of the Treasury's Alcohol and Tobacco Tax and Trade Bureau's August report. Wheat and sorghum use nearly quadrupled, to about 598 million pounds.

Malt, barley and rice were up about 3.5 percent to 1.8 billion pounds, while rye was used up about 26 percent to 208 million pounds. Corn was up about 14 percent to nearly 98 billion pounds.

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Despite this, distilled spirits are using an amount of crop that is a drop in the bucket compared to the agricultural industry as a whole, said Jeff Born, a professor of finance at the D'Amore-McKim School of Business.

"Only about 5 percent of all farms are incorporated, and the vast majority are very small, with 10 stockholders or less," he said. "There are virtually no publicly traded firms that actually engage in the production of crops."

Investors interested in farming might invest in a real estate investment trust that purchases farm land and leases it to farmers.

After its merger with American Farmland, the second-largest REIT in farmland investments, Farmland Partners will earn about 75 percent of its rents from acreage "devoted to row crops like those that are used in the distillation process," Born said, but because it's impossible to know where the crops are ultimately headed, it would be difficult to target the spirits industry only this way.

While the funds do not directly trade in booze-making crops specifically or exclusively, ETFs such as Teucrium Wheat, Teucrium Corn Fund, PowerShares DB Agriculture Fund and PowerShares DB Commodity Index Tracking Fund focus on agricultural commodities and are extremely undervalued, offering an opportunity to double your money over five to 10 years, said financial advisor Michael Chadwick of Fiscal Wisdom and Chadwick Financial Advisors.

"We have to keep eating, and everyone loves to drink," he said. "From a macro perspective, the agricultural commodities really make sense." Chadwick warned, however, against "chasing" a hot industry such as spirits and distilleries.

"You're paying premiums compared to buying something that's unloved and undervalued," he said.

There's always the possibility of investing privately in a small farm that supplies the booming liquor trade, and though the "little guys" are experiencing the highest growth currently, due diligence should be extensive, Chadwick said.

"We want to know about that particular farm and who else these distilleries [are] buying from," he said. "What is this farm's competitive advantage?

"There's got to be something that makes the business sustainable."

Potential investors should ask for complete financial statements for the past five years, as well as industry and management data, and future projections for growth. Investors should expect double-digit returns in exchange for the risk, Chadwick said.

Alternatively, another way to "play the distillery boom" is to buy stock in a diversified company such as MGP Ingredients (MGPI), which supplies several aspects of the liquor business, said New York-based hedge fund equity analyst Greg Blotnick.

"The firm has been around since the 1940s and is a leading supplier of premium distilled spirits, starches and specialty proteins," he said. "The business is small — under $1 billion market cap — but could easily double in size in the next three to five years."

In the most recent quarter, earnings per share grew 45 percent year-over-year, and "they still have plenty of growth runway," he said.

— By Kayleigh Kulp, special to CNBC.com