E-Malt.com News article: US: Higher costs of commodities affecting mostly small, not big brewers

Beer lovers could be tapped to dig deeper into their wallets at the store this fall as production costs increase and breweries struggle to stay afloat, Uticaod.com reported on July, 27.

An unstable agricultural market mixed with increases in transportation and energy costs have left brewers with a choice: increase prices or absorb the cost and wait out the storm.

“Cost of production is up, and the cost of raw materials is up,” said Fred Matt, president and chief operating officer for F.X. Matt Brewing Co., in Utica.

The cost of hops and barley, the two main ingredients in the golden beverage, has increased.

“The price of hops seems to be fairly volatile depending on what’s planted on the West Coast and in Europe and how their harvests are going,” said hops specialist Steve Miller from Cornell Cooperative Extension of Madison County.

Many brewers are dependent upon hops and barley producers from outside of the U.S., including Canada, Australia and Europe.

Flooding this spring lowered the quality of barley crops in Canada and Australia.

Brewers reliant on those markets are forced to look elsewhere, and with a decrease in supply, prices increase. This happened on a large scale in 2008 when barley and hops prices in the United States increased about 34 percent, according to the U.S. Department of Agriculture.

For example, the Matt brewery gets the majority of its barley from Canada and the Dakotas, Matt said. It uses two-row malt, made from barley, for which Matt said he hasn’t yet seen an increase but is expecting one in October.

“We’re probably going to see a 25 to 30 percent increase,” he said.

Matt further projected a 10 to 25 percent increase in hops prices.

“This is where you see that we’re in a worldwide economy,” Matt said.

The rise in production costs will not likely have an effect on larger brewers until 2012 because they have longer contracts with hops and barley producers.

Brewers such as Anheuser-Busch buy as much produce in advance as possible or have hedged pricing, making them less susceptible to market changes, said Eric Shepard, executive editor of Beer Marketer’s Insights, Inc.

The majority of the pressure is on the smaller brewers, he said.

Craft brewers, such as F.X. Matt, likely will take more of a hit because they buy hops and barley in smaller quantities and generally have shorter contracts with producers, Matt said.

Craft brewers also are affected more because they generally purchase more specialty malts than larger companies.

Another issue facing brewers is high energy costs.

Anything shipped to and out of the breweries has an energy surcharge on it to compensate for increased fuel prices, Matt said.

One possible solution is for breweries to purchase local hops and barley; however, that is not an option.

Though New York was historically one of the foremost hops producers in the country, the industry fell in the 1800s after blight damaged crops, and Prohibition, Miller said.

A recent hops resurgence in the state might eventually allow brewers to rely solely on local produce. Current farms, however, are not yet large enough to guarantee larger breweries the quantity they need, Miller said.

The majority of the barley produced in the state is used by dairy and field crop producers, said Jeff Miller, an educator at Cornell Cooperative Extension Oneida County.

Barley used for livestock feed is different from that used for malt because malt barley is used for flavor where as feed barley is used for protein, Jeff Miller said.

Though the state is a large barley producer, it is of no help to the beer industry.

With costs to brewers expected to increase this fall and into 2012, many are debating whether to increase prices.

Empire Brewery Co. in Syracuse plans to absorb as much of the costs as possible, said Tim Butler, director of brewing operations.

Similarly, Brewery Ommegang in Cooperstown also is planning to absorb costs. The brewery contracts its grains for a year so is not subject to daily fluctuations, Brewmaster Phil Leinhart said.

“Barley malt is the basis of just about all beer,” he said. “It is a concern, but the best thing to do there is to contract as far out as you can.”

F.X. Matt is looking to see what other brewers plan to do before making a decision. If others increase their prices, then brewers such as Matt will follow.

“We will take one in October if the market moves,” he said, though he hopes it can wait until January or February to avoid further increases throughout the year.

If the company decides to increase its pricing, consumers likely will see F.X. Matt products on average to increase 50 cents per six-pack and a $1 per 12 pack, Matt said.

In spite of looming production cost increases, beer sales for Matt have been growing, something he hopes will not be stunted if the company has to raise prices.

“Beer is relatively cheap compared to other commodities out there,” Matt said.

For example, he said, a bottle of water is $1.50 compared to a $7.99 six pack of Saranac.

“And water is a lot cheaper to make than beer.”


29 July, 2011