Saturday, December 1, 2007

The Beer Man Cometh

Unless you've been living in a keg - and who could blame you? - for the last few months, you've heard about the impending world-wide hop and barely shortage. We all knew it was coming. Well, it's here.

The latest newsletter from one of my favorite craft breweries, Left Hand Brewing (makers of the scrumptious Milk Stout and seasonal Snowbound Ale), just landed in my Email. Within is an interesting, well-written article from Joe Schiraldi, VP of Brewing Operations. It's so good, and the subject matter so important, that I'm reprinting it (without permission at the moment, but I am sending an Email to them asking for it) right here and now. Be sure to visit their site and sign up for the newsletter if you haven't done so yet!

So start saving those pennies fellow Beer Confessional Goers because the price of beer is about to skyrocket. Without further ado...

Many of you have probably heard by now of the sudden upheaval in the price and supply of hops and malting barley. This is certainly going to have an enormous effect on our industry and the beers we have all come to enjoy. I would like to take some time to write about a couple of things, in particular why we find ourselves in this predicament and what Left Hand is doing to mitigate the problem. First, how did this all come about?

Regarding hops, it is important to understand that this problem has been developing over the course of the last twenty years. In the most basic analysis, it can be understood as lack of acreage.

Alpha acid is the compound hops contain that lends the bitterness to beer. Over the years, hop varieties that contain a high percentage of alpha acid have been in demand. At the same time, the major brewers have been making less bitter beers. I know it's hard to tell but AB etc. use a tremendous amount of hops. Because of the increased bittering capacity per acre and a reduction in alpha demand in the world hop market there was an over abundance of hop production in the mid 1990's. This resulted in falling prices and excess hops.

To preserve the brewing value of the excess, hop extracts were produced which can be stored for long periods of time. As the prices fell it became difficult for growers to stay in business. As there were less and less growers the extract began to sell off which further reduced hop prices. Over the next several years more and more growers sold their family farms to developers or began to sell other crops that had a more solid financial bounty.

The expected yield for this year's crop did not meet expectations. This was mostly due to damaging weather in the form of flooding and hail in the hop growing regions of Europe. Unfortunately, in the years preceding this, the excess extract has since been sold off. This brings us to where we are now. Quite simply there are not enough hops to meet the world's demands. The shortage is estimated at 10- 15%. We now see a huge spike in the price of hops. In some instances as much as 400% for certain varieties. Many breweries contract their hops one to two years out. Many small brewpubs and breweries didn't. They relied on a spot market for their hop needs. The spot market no longer exists. It is a very real fact that many businesses will close because you can't make beer without hops and they can't get any hops at any price. So what does this mean to the craft industry?

Quite simply, almost nothing good will come of this. Big brewers in a panic began purchasing vast quantities of hops with cash on the barrel- head for up to five years out. This added more fuel to a frenzied market. In addition, we will see a favoring of high alpha varieties over aroma hops. This in my opinion will make less varieties of hops available to craft brewers. On a more optimistic note, I hope this event causes a maturing of the hop industry. I do believe that increased cooperation and communication between brewers and growers in the form of long term contracts breeds an industry that benefits all and reflects fair pricing to everyone.

It will take several years before this crisis is behind us. It takes that long to reap the benefits of newly planted acres. In addition, growers are planting conservatively to avoid repeating the cycle again.

Things are only slightly better in the world malting barley market. The problem here is also two- fold. Basically, there are all kinds of barley grown in the world. The best that is grown each year on our little planet is malting barley used in making beer. It is grown mostly in North America, Europe and Australia. Europe and Australia have both seen poor harvests two years in a row. Australia has been fighting a terrible drought for years and Europe saw excessive rains. The North American crop is of fair quality and is perceived to be a more stable source for brewers. World interest in North American barley has spurred price increases. World conditions have resulted in a diminished volume as well less than ideal quality. Typically, when the quality goes down you have to use more of it to make beer. It's what I like to call the Malacci crunch or "gettin' ham and egged". The quality sucks, your usage goes up and we get to pay more per pound for the privilege.

Adding further stress to the market is the booming food as fuel thing. Why grow barley when you can get a subsidy check to grow corn for ethanol? This feeds big revenue into the animal feed market since corn is being diverted. The market for alternative feed grains is lucrative right now. These two things put the squeeze on the malting barley supply. The result is higher prices. For us about 72%. So where does this put Left Hand you ask?

I keep saying to myself, "Yeah this sucks but it could be worse." Luckily, we have always contracted our hops. Sure my price has gone up but I am not battling a last minute scramble to secure my hop supply for next year. I guess I am taking comfort in the fact that I actually do have hops. Some are not so fortunate. I am currently working with my suppliers on several levels. First, to secure my supply with a contract for the next three to five years. Secondly, I am working with my suppliers to change my hop needs to reflect the different portfolio of hops that I believe will be available to me in the coming years. As far as malting barley is concerned there is very little I can do to avoid paying prevailing market price or futures prices for barley. We are getting ours from North America and I have enjoyed the quality of grain we have been seeing. I hope that next year's barley is not markedly inferior. The last time we saw really bad barley was back in the late 90's to early 2000's if I remember correctly. I'll keep my fingers crossed. Anyway, the price of beer is going to go up. I try to appease my uneasy spirit with this little quip adapted from the Fabulous Furry Freak Brothers, " Beer will get you through times with no money better than money will get you through times with no beer." Cheers!

Gee, what a nice Christmas present for all of us on this first Day of December, huh?