At my usual bottle shop tonight I examined a 750 ml bottle of Brooklyn Brewery’s latest release of Black Ops, again, for the second week in a row.  There was a certain amount of hype going into the release of this beer, and rightfully so.  The ever respectable Garret Oliver put a considerable amount of TLC into this beer:  11.6%, aged in oak bourbon barrels, and bottle conditioned with champagne yeast.

I first saw Black Ops over a weak ago, but did not purchase it, simply because I am typically not partial to bourbon beers, and I was not keen on dropping $18.00 on a beer I was not guaranteed to fall head over heels for.  This week–however–I caved.  Here is why:

As I stood examining the bottle and reading the label an individual exclaimed incredulously, “That’s a lot of money for a bottle of beer!“  The man was not being rude…he was just quite shocked at the price.  He had been talking wine–not beer–with the store staff.  Nick, the knowledgeable beer geek on staff quickly explained that while there were only 1000 or so cases of black ops produced, his store chain had received only five cases of Black Ops statewide, and here in Toledo, only two cases had made it.  That’s 24 bottles of this one singularly unique beer for one metropolis of 651,000 potential Black Ops consumers.  Besides the finer ingredients and aging, it seems that obscurity (supply and demand) boosted the value of this beer.  After my wife pointed out that I hadn’t bought beer in several weeks, I purchased a bottle that will go into my cellar for a while.  The man behind me was quite interested, and perhaps may dabble in beer.

While Nick satisfied the shopper’s curiosity, as I peeped into his cart and saw several bottles of what appeared to be mid range wine, I considered engaging him in further conservation.  Is $18.00 really a shocking price for a 750 ml bottle of this quality of beer?  The few bottles of wine in his cart easily cost between $15 and $45 per bottle (I strolled down the aisle he had picked them from and eyeballed the price tags), and I doubt they were as obscure as the Black Ops.  I will give him that his wine most has age to weight the value; most likely it was aged three years.  But then again, respectively, my Perseguidor, also aged three years, was just over $20.00 for 750 ml ($10.00/12 ounces).

If Milwaukee’s Best is the moderate standard for determining a costly beer, than perhaps Black Ops is a tad pricey.  But is Boone’s farm the determinate for leveraging the value of a fine wine?  My boss, an experienced wine connoisseur, recently told me that a well rated wine runs a minimum of $75/per bottle; with Boone’s Farm as the standard, that well rated wine or even the $30 bottle in the inquisitive man’s cart is outrageous.  But if we are able to lump beer and wine in the same general family of “alcohol” and use the mid range $30 bottle good wine in his cart as the standard, the Black Ops is actually a bargain. The highly rated wine is $2.96/ounce (mid range about $1.50/ounce) while the highly rated beer is $.71 per ounce.

In perspective, even the pricier craft brews are actually quite inexpensive.

Like many of you, I am not in a position in life to fill my shopping cart each weekend with loads of craft beer.  Yes, it is more expensive than what the majority of American beer drinkers consume, but the trade off is I drink less.  But, compared to other fine beverages, like wine, I am able to drink more and, as per my preferences, I enjoy it more!

So next time you shell out ten or more dollars for that bomber or 750 ml bottle of special release or seasonal beer, I hope you cringe a little bit less as you consider the more costly alternatives in the vast world of alcohol.

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The law of supply and demand seems like a simple concept.  Almost everyone takes the idea for granted, but it’s amazing how little we actually think about it.  In a consumer based economy, this law is a pillar to purchasing.  Simply stated, there is a certain amount of a given commodity; let’s say beer could be the one we’ll talk about.  There is not an infinite supply of a given beer.  Naturally, this is irrelevant if no one wants said beer, but the real sticking point may be seen when a lot of people want the beer.  Ideally, the amount of beer will meet (or come close to meeting) the desire for it.

The reality is that if more people want a given beer than there is of that beer, brewers are in a position to charge, within reason, what they want for the products.  The ideal position for a brewer seems to fall firmly within this sphere of economic situation.  Of course, care must be taken not to extort nor to alienate one’s customer base, so brewers must figure out how to balance the supply and demand of their products.  An increase in output may or may not be the solution for the brewer; aspirations play a major role here.  Let’s assume that the brewer wants to expand.  Where will the money come from?  Well, raising the price of that beer seems to be one of the most direct and viable solutions.  Even when the new production capability is met, the price of that brew is not likely to go down.

But the brewer is not the only player in the situation.  Let’s say the distribution network and individual store owners are allowed a discretionary amount of room to further capitalize on a beer’s popularity.  It’s shocking how much can be added when it comes to these various layers of price adjustments.

Nevertheless, people are often willing to pay when the beer is limited or special, and this can play a big role in dictating product prices.  Granted, it sounds like a policy of extortion, but no one is forced to buy any given beer.  Where demand falls, so can price.  The reality remains that we are consumers in a consumer-based economy that has a limited (sometimes very much so) supply of beer.  Whatever the case may be, we are often willing to price that price.  Not that it’s necessarily wrong to do so, I’m just saying that our desire for a given beer helps to dictate what the beer will cost.

But it’s not even that simple.  Supply is not simply related to the amount of beer but also its location.  I live in California, and if I want to buy Three Floyds brew, I can stock-up when I go home to Indiana (and raise demand by doing so).  I can also have my little bro ship some to me.  I’ve got the demand, he’s got the supply.  The problem is that for my supply, I’m going to have to pay for some shipping.  Most people who have purchased beer this way will tell you it isn’t cheap.  What about places where I don’t have a reliable purchaser for my beer?  I’ve still got an option or two, but now I’m really going to have to get creative and pay.

Beer trading can be a very nice way to meet the demand for beers that I can’t get.  But I’m still running into the issue of shipping, thus increasing the cost of the beer I buy.  Trust me, there is a demand for this out there.  Of course, it doesn’t make the beer any cheaper.

I’ve saved the most heinous option for obtaining the hard-to-find beer for last: eBay.  You don’t have to look hard or far on eBay to see that you have the option to get almost any beer that you demand from a very limited supply.  In terms of simple economic ideology, you are going to pay out the ass.  Why?  The lower the supply and the more the demand, the better position the seller.  You can buy Alesmith’s Barrel aged 2007 Decadence for the starting bid of $199.00 or buy it outright for $299.00.  Don’t worry, you get the bonus bottle of 2007 non-barreled for no extra cost.  The original cost for the beer was probably under $20.00.  However, if there wasn’t a demand, this beer would not be nearly the same on price.

There are other factors for consideration, but demand can really play a role in the normal marketplace…even when you don’t consider eBay.

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While it has been argued by certain economists, namely from the Austrian school of economics (I.E. Rothbard, Mises), that inflation should not exist in a free economy, a free economy (minimal government interference in an organic market) is a pipe dream.  Thus, inflation is inevitable.  Just ask your grandparents how much they paid for a Coke when they were kids or reflect on the first time you filled up your tank of gas as a teenager.

So how does inflation affect the price of beer, namely craft beer?

To begin with, inflation has been significantly driving up the cost of beer since this site was launched a bit over a year ago.  You may find yourself cringing as you shell out $12 bucks for that six pack of Dogfish Head, especially when you recall paying around $11 just 2 years ago.  What happened?

Two things:  First, economic pandemonium.  Notice in the first chart below that dollar is down from where it was two years ago, and has been plummeting in recent months.  Now note the second chart below gold is inversely proportionate to the dollar.  Were the dollar back on the Gold Standard, instead of fiat, the two currencies would rise together.  When the dollar falls, prices rise.  If comparatively speaking to the global economy, a dollar is still a dollar but really only buys 1/2 of what it is, a merchant must double the cost of their product to adjust, as do suppliers of raw goods that go into the product, leading to exponential and at time, hyperinflation.  Globally, gold as currency is trustworthy while the dollar (or any fiat currency) is not.

Commodities such as grain, corn, etc. are historically the first to rise (limited quantity) and thus, beer is quite prone to the ills of inflation.  The micro brewer’s product must rise more than the Big Boys because he/she has less purchasing power.  They cannot negotiate as much as a brewer who buys 100 times more malt at each pop.  Also, in order to adjust macro brewers have the option of laying off significant employees to boost revenue.  Who are small boutiques to lay off?  Themselves?

Market collapses have historically permanently affected the cost of goods.  You will never again see a gallon of gas sell for a buck.   On the other hand, a second cause can lead to inflation that may be temporary.  I refer to them as “acts of God,” i.e. hurricanes, floods, or droughts.

The craft beer industry is still reeling from  2008’s hop shortage.  Well, the hops came back with a vengeance in 2009.  In fact, it was a bumper crop and hops were left on the vines to whither into the ground due to the overabundance. Have we seen hop prices come down?  Just ask your friendly homebrewer.  They are still up there, but given a couple more years of bumper crops and odds are you’ll see some relief in brewers’ faces.

Macro brewers are again more affected by these acts of God, due to purchasing power.  I remember an awful rumor running amok that the Big Boys were purchasing more hops than were necessary for their weak brews for leverage over the Microbrewers.  True or not, the Micro Brewers still have less bargaining power and less storage capability.  Thankfully, some bigger craft brewers like Sam Adams shared their wealth and proved camraderie is strong in the craft scene.

Next time you see a jump in price on the tag of your favorite beer, don’t blame the brewer, blame the system (and perhaps Nixon for taking us off the gold standard, the Federal Reserve for creating trillions of dollars out of thin air, and the Treasury for allowing it all).

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Obviously, the more specialty yeasts or variety of types a brewer uses, the higher the cost of the product. A corresponding lessening of cost is associated with fewer yeast strains.  Our macro brewing friends mostly use one consistent lager strain, so there is lesser cost for those who use this one strain.  Micro brewers, on the other hand, make a variety of styles, include multiple strain styles in a beer, and some even use fresh yeast to bottle carbonate/condition their beer (again, this is extra money for the brewer).

So, where does all this yeast come from?  Large brewers are able to purchase lab equipment, propagating equipment, and storage space for yeast specimens, which they keep in house.  Their ability to do this pays the expensive equipment off over the course of time.  They simply don’t have to keep buying yeast from labs and storage facilities.  This is a major financial advantage to not having to continually purchase yeast.

So, where is the micro and craft brewer in the midst of this?  It is true that some craft/micro brewers operate closely enough to a large brewer or a brew pub that they simply get yeast off the cone of the larger operation.  Simply stated, in the process of fermentation, yeast in a beer settles out to form a yeast cone, and healthy yeast can be taken (mostly from the middle) of this cone.  This yeast is then incorporated into the small brewery’s wort on brew day.  Often, a small brewery will pay for this privilege.  Other times, where a good relationship exists between the little guy and larger guy, the small brewer can get the yeast free of charge.  The major problem with this approach is the concern about quality.  One can never be sure of the brewing practices associated with the other guy.  Essentially, you put your faith and fate into the hands of the other brewer… so this is by no means the dominant method.

Many small brewers have to purchase (pure samples) from yeast labs in order to get the yeast they want. These stocks of yeast are kept and controlled by companies who do the lab work to ensure purity of sample.  Since lab work isn’t cheap, fair amounts of cost can be associated with purchasing yeast time and time again, especially when more than one type of yeast is used in a beer.  One way that small brewers deal with this is to re-pitch yeast from their own cones.  In other words, the yeast that has been produced in one brew is put into the next.  This can be tricky business, since different yeasts have varying amounts of potential for being re-pitched. In the end, the brewer must periodically send yeasts to the lab or conduct in-house tests to ensure yeast health and viability.

More often, though, fresh samples need to be procured.  The yeast arrives in a small amount that is not high enough in volume to ferment the amount of wort that the brewer makes.  As a result, propagation must happen by expanding the yeast cell count.  This is done by adding the initial amount of yeast to a small amount of wort.  Once that is done, the larger amounts of yeast are added to a larger amount of wort…and so on.  Propagation happens until there is enough yeast established to ferment the desired amount of wort.  Even if larger brewers do have to propagate, we’ve already established that their material costs for propagation (grains or otherwise) are less than that of smaller operations.

Is the cost difference for larger vs. smaller breweries significant?  The short answer is that it certainly can be.  Even if the difference is not massive, it is one more point in the brewing process where extra cost is tacked on to the craft brewer.  This, in addition to other factors, adds to the total cost of the beer you see on the shelf.  Hopefully, you are seeing why it’s more expensive to buy better beer.

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As a crop, hops have only really been widely used in beer for a few hundred years.  Some will point to their incipient and early uses, but they are a recent phenomenon in brewing.  Be that as it may, they are certainly now the premiere crop for giving beer aroma, bitterness, fermentation health and life span. Since they are now one of the basic building blocks of beer, let’s see what role they play in the cost of a beer.

The first thing to remember is that hops only grow well in certain climate types.  Since that is the case, land space for hop vs. other crops is somewhat competitive.  It may interest the reader to know that the U.S. and Germany together account for about 70% of the hop production worldwide.  They are roughly 50/50 on amounts (although the U.S. is massively larger than Germany).  The remaining 30% of the world hops are split among other nations with no country accounting for even 10% of world production.  (Essentially, the market is cornered between Germany and the US.)  While this might mean cheaper prices for U.S. or German brewers (even though this is not always that case), it also means that a bad year of hops crops, like the most recent two years in Germany, can be very detrimental to world hops levels.  Thus, prices can sky rocket in a hurry, even limiting the amount that brewers can utilize.  Simple economics dictate that supply and demand have correlative effects.  Less hops equals higher prices.  So, the field itself can dictate cost.

Unfortunately, some larger breweries are in the position to demand and dictate their own hop levels and squeeze out some of the smaller guys, who may not be able to obtain any of a hop variety they want or may even have to pay more for what they get.  Even in good years, hops can be costly if you are one of the smaller guys.  Why?

There are various ways to utilize hops.  I think it goes without saying that larger quantities can reduce the purchasing price of most items.  Hops are not immune to this principle.  Who is in the position to buy tons and tons of hops?  Not small brewers.  So from an immediate purchasing power stand point, smaller brewers are at the disadvantage of having to pay more on the dollar per hop price.  So, let’s assume that they use the same amount of hops per barrel than do larger breweries; their cost is immediately higher.

But craft and micro brewers don’t use the same amount of hops that the big guys do.  In fact, they are making beers that have more hop aroma and bitterness.  Why?  Because they believe that the character added by using more hops is imperative to making good beer.  IPAs, pale ales, and even small brewery lagers utilize much higher hop levels than macro beer makers.  Not only do they use more hops, but some even use hops in a different way.

Hops can be added into a beer as a liquid extract, powder, pelletized form or whole flowers.  Some of these are cheaper than others.  (Guess which one the big guys use.)  To be honest, even most craft and micro brewers use hop pellets because of the shelf-life.  Yet, when special aroma types or beer are brewed, they might switch to whole flowers because their delicate aromas are often lost when they are pelletized.  Of course, the pellets still work for the job, and this is actually a matter of conviction.

Another point of conviction that many craft brewers hold and the big guys don’t is that idea that it matters which hops one uses for bitterness.  Some brewers simply use the highest Alpha Acid hops (highest bittering capabilities).  The more bittering capability of a hop, the further it stretches and the cheaper it is. This is not good enough for some brewers.  Even if the hop is only for bitterness, they are convinced that it does add overall quality and character to their beer (this is not true of all brewers).  As a result, they might use a lower Alpha Acid hop in lieu of a higher one, causing them to use more hops.  More hops equal more money.

But hops aren’t only for bitterness.  Beers like IPAs require a significant amount of aroma hops.  The big guys may or may not make IPAs. When they don’t, they don’t have that cost figured into their brewing costs.  Where they do, they use much less aroma hops than craft and micro guys.  Think about it.  A macro brewery lager has some bittering hops and might have a minimal amount of aroma hops (even though some “triple hop”…give me a break).  A micro brewery bitters their beer with their more expensive hops, using more with which to bitter.  Then they take their more expensive hops and add a plentiful amount for the aroma of their beer.  Who in their right mind would say that this wouldn’t affect (sometimes drastically) the price of a beer?

I hope this is starting to paint a picture as to why craft beer costs more.

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We’ve written this elsewhere, so I won’t linger too long.  This intro is more of a segway to our current situation.  Maybe this article will seem frenetic and metier in nature, but I want to make clear that beer is not an easy commodity to make.

Have you ever heard those souls who claim that craft or import beer is artificially inflated?  Essentially, the claimant appeals to the snobbery of the drinker.  In addition, there is an underlying assumption that all beers are created equal. Fortunately, no poor fool has been so imprudent to mention the above ideas around me in a long time. Most of what I have to say in this post is information oriented, so don’t worry that this is a demagogue against a particular party.  In fact, it’s simply a rational explanation of why some beers are superior in quality and more costly than others.

Barley’s Traverse: Some barely is grown specifically for malting; other barley is meant for animal feed. It should be noted that there is an obvious qualitative difference in the brewing barley from the very beginning.  So, some barely is “beer grade” while other barley is not.

Yet, even among brewing barley there is a qualitative difference.  The so-called two row barley and six row varieties have differences.  Generally speaking, the two row version is the preferred barley of more scrupulous brewer.  The “rows” mentioned speak to the kernels of the barley.  Two row has more plump kernels of grain.  It offers larger starch percentages (ultimately, sugar in the brewing process) than the six row.  Therefore, the ratio of starches (and other barley parts) to tannin (which creates harshness in the taste) is lower for two row in comparison with six row.  Knowing this, it easier to see that six row is cheaper than two row.

Guess which variety many of the larger brewers use in their product.  This might explain why they also use non-barley sugar (cheaper sugars) to increase their fermentables.  In addition, they use adjuncts to smooth out the harsher products.  So, there literally is a kernel of truth to the argument that craft brewers use better barley products.  Be that as it may, both types of grain are suitable for brewing purposes.  Don’t be deceived, most craft brewers use all good malt (barley derived) sugar, while the non-craft brewers largely do not, and that accounts for some of the price difference.

The harvesting process affects the general cost of barley.  After the barley has barely left the field, it has to be dried and malted.  The barley is dried to particular levels in order to render the grains dormant.  After the grain has gone dormant, it is sent to the malting house where it is wetted and fooled into thinking that is becoming a viable plant.  The grain begins to grow and establish new starch reserves that are intended to make the plant grow.  When a sufficient amount of starch storage has occurred, the maltster cuts the process short by drying and heating the grain to various levels.  This solidifies the starch on a molecular level, but it also renders the grain more frail, an important factor for the brewer.  At any rate, the moisture level of the grain is now much lower, creating a more stable product with a longer shelf life.

Some barley is heated to maintain maximum starch content.  Other barley is meant to be kilned at higher temps.  The cost and energy associated with kilning grains to higher degrees is significant.  Craft brewers use these “kilned”-types while big brewers uses a very minimal amount of these so-called “specialty” grains. Doesn’t this seem like a good reason to assume that craft beer will cost more?  Also, guess who gets a break based on the fact that they are buying more grains?

I do want to mention briefly that most of the starch in really dark grains is gone by the end of the malting process.  Therefore, the craft brewer still has to account for the alcohol requirements of a beer via starches found in the base malts.  The craft brewer is in it for flavor, mouth-feel, taste and quality.  There is devotion to the craft.  Because of convictions about brewing, these brewers assume much more of the cost.

Finally, the brewer is ready to use that low-moisture, high starch barley.  Craft brewers make bigger beers that require more of the grain that they pay a higher price to get.  No problem, they happily run the grain they’ve procured through their mills (to crack the grain) and wet the grain with water that is hot enough to convert those starches (poly-saccharides/complex sugars) into maltose, which is their fermentable sugar. It’s worth mentioning that mashing and milling are not automated and require laborers to accomplish the task.  The continued cost of labor is not recouped in the same way that a machine expense is.  But who can afford the automated equipment? (I think you know who can.)

In addition to costs directly associated to the barley, of course factors like buying power have an effect on prices, since this may constitute an ability to determine prices. One only need look at companies like Walmart, which can dictate that they will only buy a company’s product if the price is better than that given to a competitor.  I saw this firsthand when I worked at Kraft foods, so I can’t be convinced that it isn’t true. This principle applies to the barley market.  (As a sidenote, something similar also happened with AB buying up tons of hops in the not too distant past.  There are thousand ways to raise your smaller competitors’ prices.)

Okay, so craft brewers are using better and more barley for which they pay more, not only due to quality but also buying power.  Furthermore, they are not able to buy grain by the rail car since they don’t have on-site silos, which significantly increases their prices due to factors of volume.

Trust me when I say this is an oversimplified explanation of the field to fermenter process.  I did not want to bog anyone down with too much information.  However, I think this is a sufficient understanding to debunk some common perceptions that are in place about craft brewing.  We’ll write more on hops, yeast, and labor later.  I hope this is informative for those who think there is no difference between what Miller is doing and what a thousand craft brewers are doing.  PLEASE SUPPORT YOUR CRAFT AND LOCAL BREWER. Seriously, I’m just trying to fight for the small guy.

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