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Beer prices chugging upward

by Kate Radway
July 30, 2008


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Looking to drown your economic sorrows in a tall, frothy pint of beer? With food, gas and energy prices soaring to all-time highs it sounds like a good way to relax and forget about the financial problems plaguing Americans across the U.S.

Unfortunately, beer prices are on the rise, as well, due to increased input costs for brewers; a worldwide hops shortage; and the soaring price of barley.

Industry experts don’t expect beer prices to drop for at least two years if at all.

“Year-to-date beer prices have gone up 2.7 percent,” said Paul Gatza, director of the Brewers Association, in Boulder, Colorado.

“What we are seeing is under that [2.7 percent] figure would be your light beers and over that figure would be super premium beers like Blue Moon by Coors and Leinenkugel by Miller,” Gatza said.

According to data provided by Chicago-based research firm Information Resources Inc. the price of super premium beers is up 6.6 percent nationally over last year and 5.6 percent in the Great Lakes region.

“What we have seen in the past year is that malt prices have gone up 30 to 100 percent depending on the malt variety. And for hops we’ve seen the price go up five-fold in a year,” said Gatza. “There just aren’t enough hops worldwide to go around.”

According to Hopunion LLC, a collection of hop growers located in Yakima, Wash., a pound of hops that sold for an average of $3.00 to $7.00 a few years ago today sells for $18 to $35, depending on the variety.

Brewers of all sizes have been affected by the increase. Just last week St. Louis-based Anheuser-Busch Companies announced it would be raising prices for Budweiser and Bud Light come September. The company said an increase of 3 to 5 percent was needed to stay ahead of rising production costs.

Ralph Olson, the general manager of Hopunion, said the hops shortage has been building for years and that things looked so bleak last September that some even forecasted an end for small, independent breweries.

Since 1994 worldwide hops acreage has fallen from 234,000 to 118,000 in 2007. And while the 1990s were characterized by an “excess glut” of hops according to Olson, the remaining excess finally sold out last year.

The overload of hops on the market in the 1990s meant many growers were selling at or below the cost of production, and Olson believes it led many to abandon the crop all together.

“People are not going to get out of something if the prices are doing well; but they were selling below their costs, they were going bankrupt,” said Olson. “So they took that land and sold it, put it in housing, bought other crops.”

With fewer hops on the market and a struggling U.S. economy, Olson said international clients are clamoring to buy up the supply that is available.

“You have a lot of international breweries that are willing to pay those prices and they want every hop they can get. The biggest thing we are fighting is the weak U.S. dollar against the strong euro,” said Olson.

Keith Lemcke, vice-president and marketing manager of Chicago’s Siebel Institute of Technology and World Brewing Academy, said smaller brewers will probably suffer more from the rising cost of hops and barley than larger breweries because they are less likely to have entered into “forward contracting” with suppliers.

In forward contracting, brewers specify how much and what kind of hops and barley they want for the next year and what they are willing to pay for it. Lemcke said that even if prices rise over the course of the year the contract nearly guarantees you pay the price you set earlier—barring extraordinary climate circumstances. Without a contract brewers are left to pay “spot prices,” which are often higher and subject to market forces.

“Since you don’t have an agreement the hops supplier can sort of dictate the terms of whatever you are going to purchase from them,” said Lemcke.

In response to the worldwide shortage, demand for hops is skyrocketing; and both Olson and Gatza said they’ve seen new hops acreage going in over the last year.

“A lot of small local hops operations are going up in areas that haven’t traditionally been used for hop growing. I’ve heard about small farmers in North Dakota, Maine, New York, Colorado and even Arkansas who are starting to look at small commercial operations,” said Gatza.

So when can brewers expect to see the price of hops drop? Olsen thinks it won’t be until 2009, at least.

“Hops take a couple of years to get any yield. So even though there are a lot of acres that have gone to counter this, the production isn’t going to be there this year. The good news is that next year all those acres are in, and its more mature.”

Americans don’t seem to be deterred by higher prices. Beer sales are up 4.2 percent over the last year to $7.76 billion. The overall increase is bolstered by the continued strength of the super premium beer market, which saw an increase of 18.3 percent in the number of cases sold and a 26 percent increase in total dollar sales since July 2007.

“If you are a beer lover and a beer enthusiast you are actually already used to spending a little bit more for your beer in the first place,” said Lemcke.

“If [the increase] is a dollar a six pack, guys who really like differentiated beer will say ‘Oh it’s only a dollar or two a six pack.’ I think the people that count on discounted beer are going to be the ones that are more disappointed,” said Lemcke.