How beer defies the laws of supply and demand

iStockphoto.com

It may not taste like it, but your beer is in peril.

As Prerna pointed out earlier this year, the popularity of corn-based ethanol has already caused a tight market for malt, one of beer’s three critical ingredients, as farmers increasingly forgo the barley crops used to make it in favor of more profitable corn. Now the fickle commodities trading market and bad weather in Europe have converged to trigger a worldwide shortage in hops. The other key ingredient in beer (along with water), hops is a flower that gives beer flavor and aroma. The shortage comes after a decade-long surplus discouraged farmers from planting the crop, which grows on trestles and can take years to mature. Since 1994, the amount of farm acreage planted in hops worldwide has declined by about half. The shortage was also triggered by hail and flooding in Europe in recent months. Together, the two mean the beer industry now faces a 10 to 15 percent shortage.

For beer drinkers, it means only one thing: bigger tabs at the bar. Well, for some beer drinkers anyway. Mega-brewers such as Anhueser-Busch negotiate their hop contracts years in advance and will be unaffected by the shortage. But smaller, so-called “craft” breweries aren’t so lucky. A variety of hops known as Cascade, for instance, the most popular among craft brewers, has more than tripled in price in the last two months, jumping from $4.10 per pound to around $12.35 per pound. Boston Beer, which brews Samuel Adams, says it will raise its prices by 5 percent as a result of increased costs. Other mid-sized and small brewers are almost certain to follow suit.

The irony is that, even as the supply of hops and malt are severely low, demand is at an all-time high, at least in the United States. Craft beers now make up 17 percent of the U.S. market and retailers depend upon them to boost profits. Are the commodities markets drunk?