Bob Dylan, Some Math and … The End of Craft Beer?

There has been a lot of talk lately in the media about crazy hop prices and the end of Craft Beer in the United States. Some have picked out the most sensational details and left out 90% of the story. One national news outlet did so little research they used a handful of grain in the picture accompanying the article when talking about hops. Maybe you saw that one! The fact is that hop price increases hardly mean the end of craft beer.  Hop prices have to increase to keep pace with demand because growers need to add more production capacity. We thought somebody should do the math to hopefully put an end to some of the hop hype and paranoia that seems to be so contagious lately.


WARNING: If you don’t like math, skip the MATH section.

ASSUMPTIONS & THE MATH SECTION
Not many people like to do math for fun, so let’s keep this part short.  We know first hand that some brewers use as many as four pounds per barrel.  There are probably some brewers out there that use even more. Let’s assume 4 pounds per barrel. The Brewers Association says it’s more like 1.5lbs. per barrel so we’re intentionally aiming high. Next, let’s assume a hop price of $10/lb.  That’s much higher than most varieties today, but still a bit less than the scarcest varieties. We’ll use it to show how absurd the hype is about hop prices killing the craft trend. There are two kegs per barrel. Let’s assume a very realistic 100 pints of beer per keg (the actual number is more like 124 if you don’t spill any). At the pub, people pay $4-5/pint. Let’s use $4. This means $800 revenue at the pub per barrel.
So … There are $40 worth of hops that goes into that beer that generates $800 at the pub. IF hop prices double from the $10/lb. we mentioned above to $20/lb., that would mean there’s $80 of hops in that same barrel of beer. IF that entire cost gets passed along every step so the consumer pays the full price of the increase that’s an extra $0.20 per pint of beer at the bar. That’s an increase of 5%.Granted that’s more than reported US inflation. It’s not something that will bring about the Armageddon in the Craft Beer world though!  Granted, the brewery or the bar could charge more of a markup along the way, but $0.20 is probably still a reasonable number to use if hop prices reach $20/lb. Even if you double that number and make it a $0.40 per pint increase, which would mean a 10% increase, it’s not that much.  Of course the numbers for bottles or growlers will be different, but this is a good place to start. 
IT’S NOT THE END OF THE WORLD!
Bruce Willis, tell the team to stand down … We don’t need you just yet. In June of this year, Starbucks raised the price of their coffee by 9% in response to higher coffee prices from farmers around the world due to short supply.  Sounds very similar to what we’re facing in the hop industry!  I don’t recall reading articles suggesting the end of coffee in the past month or so. Have you visited Starbucks any less often during the last 6 weeks because of their price increases? The truth is that the increase in hop prices, just like the increase in coffee prices, is really not so strong as to bring an end to the craft beer trend in the US so long as the quality of the beer we’re drinking stays high.
If paying an extra $0.20-$0.40, or 5-10% more for a beer stops the craft beer trend currently underway, then it’s not a very sustainable trend in the first place and we should all go back to the drinking those watery lite beers your father enjoyed with the big horses pulling sleighs and the pretty mountains in the ads. Even those guys know that’s not going to happen, which is why they’re buying up craft breweries whenever they can.  
Prices of most everything increases with time. Computers are the obvious example to the contrary. In the hop industry, it may seem prices are increasing quickly. They’re not. Prices have been held back, lower than they should be, for a long time. Prices have been subsidized at low levels during times of surplus by grower and merchant equity built up during previous shortages and the high prices that came with them.  The industry invested then so they could produce now. The infrastructure they invested in though is about full.  Prices are rising from the suppressed levels at which they were trapped during times of surplus production capacity to where they really need to be to sustain the industry.  Growers are starting to understand where prices need to be to really cover the cost of expansion and production. This is the first time without an acute shortage that a fair price has been paid for hops . . . EVER
The way the hop market typically works is as follows:  The time when there is demand for hops and prices are high finances the development necessary to get through the times when there is less demand. Usually prices skyrocket during times of shortage in a matter of weeks and then plummet shortly thereafter. This new sustainable demand caused by increasing demand for craft beer and aroma hops is causing a slow and steady increase in prices. Unfortunately, that’s how the hop market works. For the most part, growers and merchants are not gouging. Everybody is being cautious. Everybody in the industry is trying to manage a growing demand and the cash necessary to finance very expensive infrastructure without being caught overextended in case the music stops … like in musical chairs.  From the outside, it may seem like a broken system, but it is working, just like Adam Smith said it should.  
 
A hop price increase to sustainable levels is actually a good thing. It will enable commercial hop growers to continue producing the quality hops that brewers need to make all the great beers we love so much.  If we really enjoy them, it’s a good idea if the prices for all the ingredients are sustainable so we can keep the wheels on the bus and enjoy the ride for a while to come.  Some of those same big guys I mentioned earlier unfortunately don’t think that way, which is why hops have been so cheap for so long. As Dylan said back in 64, “The Times, They Are A-Changin’”
AROMA HOP PRICES WILL STOP CLIMBING
Prices won’t continue to rise forever. As I mentioned, hop prices have to increase now to keep pace with the growing craft industry, but that doesn’t mean they’re going to keep increasing.  Imagine it like a set of stairs.  Hops prices need to take a big step up to support the level to which the industry must grow. All the baby steps have been taken or are being taken now. It’s come to the point where a big step is necessary. That additional capacity will handle a LOT more hop demand, probably enough for the craft beer industry to reach the 20% of US beer sales that everybody likes to talk about.  That’s the hundreds of millions of dollars in investment we referenced in our earlier post:

Greedy Growers and Dirty Dealers

Once the industry gets to that new level of potential production capacity, prices for contracted hops should be relatively stable for a long time.

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