Friday, November 16, 2007

The Rising Cost of Small Brewing - Part I

I suppose it seems inevitable that we eventually had to run an article about this. But news out of the Pacific Northwest has made this issue a bit more interesting for us. Really, until now, this was just a rising cost issue.

Supply and Demand CurveLower supply (world-wide hop shortages) and rising demand (from increase in high-hop craft brewing, particularly in America) have put price pressures on hops; as a result the prices are skyrocketing. It's simple economics that nobody can really argue with. To make matters worse, barley growers here in the US are switching to subsidized corn crops because ethanol-related demand has increased the attractiveness of corn as a crop(both can be grown in similar land plots, so they are growth substitutes). Thus, we are also seeing a decrease in the supply of barley, and an increase in the demand (again from US craft brewing). This double whammy is raising prices, particularly for small buyers who cannot receive substantial price breaks. News around the industry says that prices for a 6-pack of craft beer will increase by about $1 in January.

The major players (Bud, Miller, Coors, etc.) are not hugely impacted for two reasons: 1) they buy in huge quantities and pay futures prices that moderate their price expectancies and allow for stable prices over lengthy periods of time; 2) they don't use a lot of hops, especially considering how much beer they brew. Throw into the mix the fact that the majors supplement their barley and hops with (comparatively) stable-priced corn and rice adjuncts. It is not expected (to my knowledge) that the majors will be joining the craft brewers in raising prices.

Moreover, the vast majority of Wisconsin's breweries are pretty low on the supply chain (to our knowledge, there are only a handful that brew over 20,000 barrels and only one that brews over 100,000 barrels). They get their hops after all of the bigger breweries get their allotment. Rest assured, even Great Lakes and Bells and Goose Island get their hops before Calumet, Tyranena, and The Great Dane. This is to be expected; hop sellers will prefer large buyers to small buyers - it moves their product and is a substantially lower payment risk. Again, basic economics: rational businesses prefer less risk to more risk, particularly at similar prices and/or when future supplies and demands are unknown or wildly variable.

Thus, the very basic inputs for small Wisconsin breweries are getting much more expensive. So far the breweries have resisted passing these costs on to the consumer. But as raw material prices continue to eat into profit margins, it has to be expected that prices will rise soon. It is looking like that will occur in January. Of course, some breweries will be effected much worse than others. Capital hardly uses any hops at all; Tyranena's flag ship is an India Pale Ale (IPA) that contains a lot of hops; City and Point breweries sell mostly low-hopped beers; Ale Asylum and The Great Dane and Central Waters and others use quite a bit more hops.

We will have more on this story as it develops.

4 comments:

  1. "Tyranena's flag ship is an Imperial Pale Ale (IPA)..."

    ... don't you mean India Pale Ale? :-)

    Hop Whore is the Imperial IPA.

    ReplyDelete
  2. I think you read these things better than we do; thanks for the correction - need a job as an editor ;)

    ReplyDelete
  3. quick note: I live in the Madison area. I love beer and do some home brewing. Ive been reading you for about 3 months now. This blog is great! The variety of topics and your views on the regional beer are exceptional. What a find for me! Thanks & keep it up!

    ReplyDelete
  4. I expect the prices of craft beers to go up and I expect to see less IPAs and other hop monsters on the market at least for a while.

    ReplyDelete

Note: Only a member of this blog may post a comment.