Beer’s Future

THE
HOP CRISIS

The celebrations of craft
beer producers have a darkening cloud hanging over them. The
talk among brewers and distributors in recent months has
turned from their recent successes to the possibility of a
severe shortage of raw materials for use in the brewing
process. While craft brewers produced a greater number of
so-called fresh hop beers, those brewed with hops fresh from
the field, hop growers and traders were becoming
increasingly concerned about the sorry state of the world’s
hop supply. The first whispers focused on a poor hop harvest
in the Yakima Valley region of the Pacific Northwest and in
the Hallertau region of southern Germany.

Despite recent increases in
American demand for hops, worldwide hop production is
significantly reduced from previous years. Between the late
199Os and early 2OOOs, an excess of hop production caused
price depression. According to a recent seminar developed by
the Brewers Association, overall hop production today is now
ten to fifteen percent below the current demand, which has
caused a tightened market. Worldwide hop acreage has dropped
almost fifty percent in the last ten years, from 2O3,OOO
acres to 113,OOO, as farmers have chosen to plant crops
other than hops. In 1996, the United States boasted 44,161
acres of hops. By 2OO6, that number had dropped to
29,435.

In addition to the loss of
hop acreage, the remaining stocks are subject to poor
weather, fires and other catastrophes. A slight loss of the
existing hop crop can cause reverberations and volatility
throughout the hop marketplace. In Slovenia, which is a
leading grower of the Styrians variety, hop growers may have
lost as much as half of their crop to a hailstorm. A
devastating warehouse fire in Washington State and fires at
two hop-drying kilns caused a twenty percent decline in
available hops.

The result has been a
substantial increase in hop prices on the spot market for
those who did not secure long-term contracts with suppliers.
In the recent past, brewers could pay as little as $1.7O for
a pound of the popular Cascade hops. This price hurt growers
whose costs exceeded the sale price. Prices have now reached
historic levels, with Cascade hops hitting seven dollars per
pound and more, and with other varieties exceeding ten
dollars per pound on the open market. The scarcity of hops
has caused increase competition among world brewers. Many
high alpha acid American grown hops, as well as aroma hops,
are going abroad for brewers in China and Europe that now
can benefit from the American dollar’s dropping
value.

The difficult situation has
resulted in two different reactions depending upon which
side of the crisis you are facing. According to Ralph Olson,
General Manager and Owner of HopUnion LLC, the growers who
remained in the hop growing business are now enjoying their
present situation. Dr. Johann Pichlmaier, President of the
Association of German Hop Growers based in the Hallertau
region of Germany, agrees. “The market is quite tight and
times are good again.”

Things are not so good for
the brewers who now have to meet higher hop prices. Olson
concedes that he foresees that some brewers may have to shut
down due to a lack of available hops. The danger is most
present for those brewers that failed to contract enough
hops before the shortage, according to the Brewers
Association. While larger breweries buy options on raw
materials several years in advance and existing customers
will likely continue to receive their hop orders, smaller
brewers may find their access to specific and favored hop
varieties limited. This may lead some brewers to have to
switch varieties and alter the flavors and aromas of their
beers.

At the Brewers Association
seminar, Olson counseled craft brewers to seek contracts
with hop suppliers to combat against future price increases.
“What we really need is for brewers to understand that it is
okay to have longer than a year’s supply of hops . . . An
extra inventory of hops can come in handy should sales go
better than normal during a given year.” Olson also reported
to brewers that he does not see the situation improving in
the near future. “It is not going to get better soon, but
will be likely just as bad, or worse, for the crops from
2OO8 and 2OO9, in other words, for beers brewed from now
through 2O1O.”

 

THE
MALT CRISIS

In addition to the global
hop shortage, brewers are also starting to get hit with
price increases for malt as well. Barley crops have taken a
hard hit in recent years. In the last two years, North
American brewers and producers have seen a significant
decrease in their supplies as the demand for barley has
risen. Poor global barley yields for two consecutive
harvests have resulted in a barley shortage. Some meager
worldwide harvests, which have largely occurred due to poor
weather conditions, have sent European and Australian
brewers to North American suppliers for barley. Due to high
corn prices and demand, a shift in feed grain has caused
farmers to move away from corn and towards barley and oats,
further stressing the amount of barley available for
malting. Recent poor returns for growers and maltsters has
led to either a move away from barley planting or the use of
barley crops in the production of bio-fuel, which results in
a forecast of further reduction of barley acreage in the
future.

Brewers have already seen
the price of several varieties of base malt increase 5 to 1O
cents per pound. Despite these increases and dire warnings,
Ian Ward, President for Sales and Marketing at the Brewers
Supply Group, counsels that the situation is likely to
improve in the next season. “Most maltsters have by now
purchased all the barley requirements they are likely to
need since they have had to make contracts for malt with
brewers,” he said at the recent Brewers Association
seminar.

“As the inquiries from
maltsters have fallen, farmers who have grain left to sell
have found themselves having to be somewhat less
bullish.  What this means for the brewer is that prices
are not likely to rise further in 2OO8 based on barley
cost.” There is, of course, always the possibility of price
increases looming, warns Ward.  “The upward trend in
oil prices and currency may play a role in spot purchase
malt, especially from overseas.  What is important now
is what futures are trading for in the 2OO8 crop and how the
growing season plays out from April next year.”

 

SO
WHAT DOES THIS ALL MEAN?

The increases will
certainly affect smaller producers and those brewers who did
not secure the necessary contracts in advance. But while hop
and malt prices have increased on the spot market in recent
months, many brewers have contracts for their raw materials
that will serve them for several months if not years to
come. There is no agreement how the prices, or the
perception of price increases, will affect six pack and keg
prices and when the effects will be seen. It is possible
that some small producers may use the perception of the raw
material cost increases as cover for a desire to increase
the prices of their products. In the dozen or more informal
conversations I have had with brewers over the last few
weeks, not one has expected to keep his prices stagnant.
Most expect to implement a price increase of anywhere from
fifty cents to one dollar per six-pack by spring
2OO8.

 

THE
BIRTH OF A CRAFT CONGLOMERATE

After years of working
together in a sales and marketing joint venture called the
Craft Brands Alliance (CBA), the Widmer Brothers Brewing
Company and the Redhook Ale Brewery have announced their
intention to merge into one company. The new brewery, which
will be called the Craft Brewers Alliance, will create one
of the nation’s largest craft breweries. Kurt Widmer will
serve as the company’s chairman of the board and Paul
Shipman will serve as chairman emeritus, effectively
starting his retirement from the beer trade. Redhook’s
current president and chief operating officer Dave Mickelson
and Terry Michaelson, president of the Craft Brands
Alliance, will serve as co-CEOs of the new company. The deal
with also include Widmer’s forty-percent share of the Goose
Island Brewing Company of Chicago, Illinois.

“I believe that the merger
will allow us even greater opportunity to deliver unique and
great-tasting beers for our customers,” said Kurt Widmer,
president and brewmaster of Widmer Brothers. “The two
companies have a common goal – we both strive to brew the
best possible beer for our customers.” “Our combination of
talented people, high-quality beers and first-class brewing
operations presents tremendous advantages for the combined
company,” said Paul Shipman, founder and chief executive
officer of Redhook. “The two breweries have worked well
together over the past few years, and I’m confident that we
will be even stronger as one company.”

Relations have not always
been so rosy between the two companies. In a 2OO6 filing
with the Securities and Exchange Commission, Redhook
complained that its brands were getting shortchanged in the
sales and marketing alliance it forged with Widmer in 2OO4.
In that filing, Redhook said, “The Company believes its
third quarter sales in CBA territory have declined due to
CBA’s unsuccessful execution of its sales and marketing
strategy for Redhook’s core and emerging products. During
this same period, CBA has been very successful selling the
Widmer and Kona products.”

While the two breweries
have agreed to merge, the deal remains subject to
shareholder and regulatory approval, which includes the
voice of Anheuser-Busch, which owns a significant percentage
of both Redhook and Widmer. The breweries hope to complete
the merger by first quarter of 2OO8 and expect to maintain
both the Redhook and Widmer brands in the marketplace. The
all stock transaction will result in Widmer shareholders and
existing Redhook shareholders each holding approximately
fifty-percent of the outstanding shares in the new
company.

Widmer has by far been the
more successful of the two breweries, growing from 199,OOO
barrels in 2OO4 to 269,OOO barrels in 2OO6. Redhook produced
271,6OO in 2OO6, on weak to stagnant sales. After releasing
news of the merger, Redhook announced a decline in profits
for the first three quarters of 2OO7. As a private company,
Widmer does not release sales figures.

 

AFTERMATH
OF THE DEAL

After years of toiling as
the little kids, it is now clear that craft brewers must
view themselves as nearing adulthood. With the renewed
interest of domestic macro-breweries and the merging and
distribution alliances of larger craft breweries, regional
breweries will have to consider their strategic visions for
the future. What was once for many just about the beer and
fun is now about serious business.