Sunday, 6 July 2008

Price Increases Brewing for Craft Beer

Beer drinkers are already feeling the effects of the surge in commodities prices, as increased ingredient prices for brewers trickle down to the consumer, according to a Wall Street Journal report from late last year:
Consumers could pay 50 cents to $1 per six pack more in the coming months for many small-batch "craft beers," as brewers pass on rising hops and barley costs from an unpalatable brew of poor harvests, the weak dollar and farmers' shift to more profitable crops. Other makers of craft beers, the fastest-growing segment of the U.S. brewing industry, say they may eat the higher ingredient costs, which will pare their profits.

According to the report, "cost pressures could slow the expansion of American craft brewers," who will be hardest hit for several reasons:

Craft-beer makers also are battling other cost increases, including higher prices for glass, cardboard, gasoline and the stainless steel used to make beer kegs. "People are very concerned," says Kim Jordan, co-founder of Colorado's New Belgium Brewing Co., which makes Fat Tire Amber Ale, a top-selling craft beer. "It significantly affects profitability..."

Big American brewers like Anheuser-Busch Cos. and SABMiller PLC's Miller Brewing Co. also face cost increases, but the impact isn't nearly as great for them. They use much less hops and barley in most of their beers, which is why they are lighter in taste and calories. A barrel of craft brew Sierra Nevada Pale Ale, for example, has about twice the malt and as many as five times the hops of a mass-market brew, like Budweiser or Miller High Life.

Large beer makers are also better able to secure long-term contracts to mitigate the impact of rising ingredient costs.
Brewers including are scrambling to adjust recipes to keep costs down, but what lessons should be learned for the next time? Small craft brewers have not been locking in their hops prices in advance on the futures market and lack the clout to negotiate for much lower prices. If there were hops futures options available, could small brewers hedge with an options position? It would certainly be worth it, if it prevented styles from going extinct due to increased ingredient costs. How should small brewers prepare for the next spike in commodities prices?

Thanks to Howard for the news tip.

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