BeerDorks.com: Reviews, Commentary and Opinions on Midwest Craft Beer and Microbreweries

 
November 8, 2007

Beer Issues:

Liquid Gold

You think gas prices are bad? Get ready for higher prices on your favorite brews.
by Nigel Tanner

"It takes beer to make thirst worthwhile."
Contact Nigel»
The beer industry has been abuzz recently regarding a couple of hot topics, both of which pose a threat to the rapidly growing craft beer sector. The first is the proposed merger of Miller and Coors U.S. operations, which could have potentially devastating long-term effects on the craft beer industry due to possible consolidation and disruption in distribution. A far more pressing topic, one which is threatening the craft beer industry at this very moment, is the drastic increase in the cost of doing business due to a significant spike in prices of beer’s key ingredients: barley and hops. There are some interesting questions that should be explored regarding this situation, which Russ Klisch, co-founder of Milwaukee’s Lakefront Brewery recently described as “the perfect storm” of troubles for craft brewers in comments made to the Milwaukee Journal Sentinel.

Like any hot button issue, a fair amount of information is being reported, though it typically only tells part of the story. Not surprisingly, there’s also a great deal of speculation and flat out false information floating around out there. After doing quite a bit of research on this topic, I’d like to try and break it down for you as best I can and see if we can come up some sort of solution in which all of us beer dorks can help ease the effects of the current crisis.

First of all, why are costs rising so drastically? This can be broken down into three different categories, all of which are integral parts of the brewing process: grain, hops, and packaging/shipping.


Grain prices as a whole are rising in the U.S. as many farmers try to get in on the growing demand for ethanol, a corn-based biofuel that is witnessing a huge boom in popularity as more and more Americans try to wean their dependence off foreign oil. Don’t get me wrong, I support the use of ethanol and other forms of alternative energy that are produced by American farmers, but this has unfortunately led to a major increase in the price of barley, which is used by brewers to make malt. It’s a simple case of supply and demand: the demand for corn is at an all-time high, driving up prices for that product. To meet the demand, many farmers switch from other grain crops like barley, rye, and wheat in order to get in on the action. However, the demand for these other grains didn’t decline, meaning their prices also will rise since the supply is decreasing while the demand remains constant. Added to this are environmental factors. Major drought and heat waves in the central and southern United States, as well as Canada and Australia, combined with flooding rains and hail storms in Europe, have caused a series of poor harvests in these major grain-producing areas. Virtually all of the grains used by American brewers come from these regions.

Like most of the problems associated with the current crisis, I believe that high grain prices will be temporary. First of all, the environmental factors are largely unpredictable. Though clearly there is a case to be made for massive global climate change, that’s a topic for a different discussion. In the short term, weather goes through cycles and this year’s poor harvest could easily turn into a bonanza next year, helping to offset some of the costs. I also believe that the bottom will quickly fall out in regards to ethanol as a major alternative fuel. Much like BETA was a precursor to VHS, DVD, and Blu-Ray and 8-tracks were a precursor to cassettes, CDs, and MP3s, ethanol is only a first step in the evolution of biofuels. The cost of producing ethanol is quite high, and numerous forms of cheaper and more efficient alternative energies are being researched and developed across the globe. I don’t anticipate that the high demand for ethanol will be long-term, and when the corn market begins to sag, farmers will quickly go back to producing whatever crops are needed based on demand in order to make the most money.


The hops price increase is a bit easier to dissect, and has a similar solution to the grain shortage. To put it simply, for the past decade, there was just too much. A worldwide glut of hops drove down prices for a number of years and caused many farmers to abandon the crop. According to the Seattle Post-Intelligencer, worldwide acreage devoted to hops cultivation decreased from 230,000 in 1994 to 113,000 in 2006, a 51 percent reduction. In the Yakima Valley in Washington state, home of 70 percent of domestically-grown hops (overall, about a quarter of the worlds hops are grown in the United States), the Post-Intelligencer cites a decrease from 250 growers in 1978 to 50 presently, though it should be noted that the farms are larger in size now than they were 30 years ago. Again, its supply and demand. The glut of hops drove prices down to a bare minimum, forcing many farmers to look to other crops in order to survive. Once that massive surplus finally was adequately reduced … oops! We’ve just swung over to the opposite end of the spectrum, and prices have soared. In addition, poor harvests due to environmental factors, particularly in hops hotbeds like Britain, the Czech Republic, and Germany, have added to the massive price increase.

Once again, this crisis should be temporary. The environmental factors are likely not permanent, so a return to good harvests could come at any time. As for the loss in acreage, farmers, like everyone else, are at the mercy of the roller coaster nature of the economy. The hops surplus lasted for years and has since crashed, causing a deficiency. Once the market corrects itself, we’ll hopefully find a happy medium where prices ease, though not to the record-low levels they had been for the past decade.

There are two other very important factors to consider that are also driving up costs. The first would be economic. I’m not a financial analyst, so I won’t go into detail, but the U.S. dollar is currently extremely weak, particularly against the euro. This means that importing any necessary ingredients from overseas to offset domestic shortages costs much more than it would have a few years ago. This is especially tough considering that Europe is far and away the primary source of imported barley and hops. Secondly, the increase in costs isn’t just limited to the grain and hops used in brewing. The cost of packaging and shipping has also seen a significant spike, as glass, cardboard, and stainless steel used in kegs, along with fuel, have all gone up significantly recently. It truly is the perfect storm.

So, why does this threaten the craft beer industry so much? Shouldn’t it be an industry wide crisis?

To put it simply, since this appears to be a temporary problem, the big guys can absorb the blow without passing the cost on to the consumer. After all, these are multi-billion dollar corporations, so what’s a few bucks here or there? On top of that, the macros use far less barley and hops to make their beers, which is why they taste so horrifically bad. To the Big Three, this is simply a quick sneeze.

For craft brewers, however, these costs are impossible to swallow; they’re far too significant and the revenues are far too small already. Some brewers will be affected more than others, and many will work to find ways to get around the costs by using the ingenuity that made them so successful in the first place. Some of the better known craft brewers like Boston Beer, Goose Island, Rogue, and Sierra Nevada have contracts with distributors of barley and hops, which lock them in at a set price that were agreed upon at the time of the contract. This is a significant bonus to them, though it won’t completely prevent cost increases. According to the Wall Street Journal, Samuel Adams has raised prices just over 3 percent this year, and brewmaster Jim Koch says they’re looking at similar increases next year. For those brewers that don’t have contracts with suppliers, the situation is far more dire. Most estimates foresee an increase in the price of a typical craft six pack anywhere from 50 cents to a dollar in the next few months. Needless to say, this is a significant blow to Joe Sixpack American, who is already struggling to get by in today’s rough economic climate.

In order to avoid raising retail prices too much, some brewers are altering their recipes to adjust to the ever-changing climate. Larry Bell, founder of Bell’s Brewing in Kalamazoo, Michigan, recently told the Wall Street Journal that he’s altered the hops used in his Oberon Ale and Lager of the Lakes due to the fact that he could only secure 60 percent of the Czech Saaz hops that he typically uses. Bell claims that drinkers haven’t noticed a difference in the taste of these brews, though this illustrates what measures brewers may undertake to offset rising costs. That wonderful imperial IPA or Russian imperial stout you love so much may be put on the shelf temporarily as the storm passes. Other “extreme” beers in the works may be put on hold as well, as they tend to be overloaded with the very ingredients that are currently in short supply.

While it’s impossible to know how long the current situation will last, its effects could be devastating. Klisch says he expects Lakefront to be able to weather the storm, but others may not be as fortunate. Newer breweries, small brewpubs, or breweries with limited distribution and revenues may succumb to the rising tide, particularly if it lasts beyond 2008. This will likely lead to a “weeding-out” of the craft beer industry, where the strong survive and the weaker brewers die. Perhaps this is a positive, as there has clearly been a massive boom in microbreweries in recent years. Like anything else, it sometimes takes a crisis to eliminate the weak and get the market back down to a more manageable level. Hopefully that’s as far as this will go, though the potential for a more serious, long-term crisis does still remain.

Ultimately, we don’t yet know how this will affect the craft beer landscape, or how serious a blow it’ll be to our pocketbooks. Ray Daniels, a director at the Brewers Association, the top craft beer organization in the U.S. says this: “Given the shortage of both ingredients, there is likely some potential for price increases … in two or three months, we should have a better idea of where everyone is at.” Not exactly a definitive answer, though it clearly demonstrates the uncertainty of the situation. The only thing we can do as consumers is continue to support our favorite craft breweries and try to understand why the prices at local retailers continue to increase. This isn’t a profit-grab on the part of the breweries; on the contrary, they’re witnessing a continued decrease in revenues despite the increase in retail price.

Like many of you out there, I have a tight budget and can only afford so much, particularly on something as seemingly frivolous as beer. However, I am passionate about the craft beer movement in this country and hope to continue to support it as much as possible. Do what you can, fellow beer dorks, to help our friends in the craft beer industry weather this storm. Whatever you do, don’t look to the Big Three as a temporary substitute, as they are sure to use the current climate as a way of increasing the sales of their pseudo-craft swill, since they can now sell it at a much lower cost than a real craft brew. This too shall pass, and hopefully soon we can all focus on more pressing long-term topics, like MillerCoors.



Drinkin’ And Thinkin’

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