Matthew Curtis looks into the beer industry inflation, and what we can expect as brewers and consumers.
The Inflation Equation — How Rising Costs Are Increasing Pressure Within the Beer Supply Chain
If you’ve checked your bank statement recently, you’ll be acutely aware of how inflation is affecting our individual finances. Sure, thanks to high interest rates your savings account or pension might look to be in rude health. But your mortgage payment, or that credit card statement? Ouch. Inflation has us gripped by the scruff of our necks, and it doesn’t look like things will improve in a significant way any time soon.
May 2023 saw the core Consumer Price Index (CPIH) inflation rate hit 6.5%, the highest it has been since November 1991. Food has been hit particularly hard – and this includes beer – with the average level of inflation within the sector hitting 19.1% in March 2023, according to data firm Statista. Although that had come down to 14.8% by July, this is still a higher level than it has been in decades, and as prices go up at every point within the supply chain, its consumers who are bearing the brunt of these increases.
What’s causing these rises? The Russian invasion of Ukraine is often cited as an obvious cause. Following the Covid related lockdowns of 2020-21, demand for oil and gas rose as life returned to normal. At the same time Russia limited its supply of natural gas to Europe, pushing up the wholesale cost, causing a snowball effect on western economies.
Agricultural systems are inherently reliant on energy in order to produce crops, and so have farmers’ costs spiralled out of control as they work their way up the supply chain. Ukraine is also a major producer of grain – 97% of its annual cereal crop consists of winter wheat – and its supply has also been disrupted due to the tragic conflict that has befallen it.
It might be a good time to ask how a war occurring several hundred miles away affects beer prices in the UK… Although this disruption predominantly affects food crops, and not brewers barley – largely cultivated in the UK, Belgium and Germany among others – the wholesale market feels the impact keenly. Quite simply, farmers will typically sell their grain to the highest payer, and if there’s a shortage of food, or animal feed supply, this is where they will look to do so, rather than opt to accept the often slim margins associated with the beer supply chain.
This does not mean that there is a direct shortage of grain within brewing. Many maltsters and large breweries contract their ingredients up to three or four years in advance, sometimes for longer, in order to give growers the confidence to create the supply in the first place. There is a wider issue here regarding the distribution of beer ingredients, and how – in the UK – this is largely controlled by a handful of large suppliers, but we’ll come to that in a moment.
First, let’s tackle some of the driving factors in terms of the rising cost of beer. In terms of both inflation and price rises throughout the supply chain, beer is caught up in a swirling tornado (that’s also on fire), as brewing businesses have seen every single cost rise. Ingredients are the nub of the wedge, with some breweries and suppliers like Geterbrewed informing me that ingredients such as malt and hops have seen price increases of between 30-50%, sometimes more, far outpacing the rise of inflation.
When you factor in that everything else has increased in price; you begin to see the scale of the problem affecting the brewing industry: cardboard, glass and aluminium, cleaning materials, chemicals and process aids, staff costs, brewing equipment and its maintenance. Even food grade carbon dioxide – a vital requirement in all brewing, including the production of cask ale – is feeling the pinch. Its largest UK supplier, a fertiliser company based in Billingham, County Durham, paused supply in the summer of 2022, and again in the spring of 2023. It’s even reduced the amount it can supply after shutting down one of its plants, previously accounting for around 60% of CO2 production in the UK, now producing around a third. You might have guessed by now this didn’t do its wholesale price any favours.
As an extra kick in the nuts – thanks Rishi – beer duty (the amount of tax paid by breweries per litre of alcohol produced) was also increased at the start of August 2023. In fact, not only did it increase, but the entire duty system was changed, giving beer makers an extra headache on top of managing their already red-ink stained ledger. The duty increase was also somewhat misleading, due to the introduction of what has been coined ‘draught relief’. Essentially, alcohol producers, including breweries, can declare a 20 litre container or above as for sale specifically in on-premise retailers, such as pubs, and receive a reduction of 9.2% on their duty bill.
Except, inflation on beer was higher than that, so the price hasn’t gone down at all. Even more misleading was a press release from the government itself saying that consumers are going to be paying less tax on their beer! For those that don’t know how the UK beer duty system works; only the alcohol producer actually pays duty on what they produce. Still, this means that either the producer or the consumer has to absorb the cost, and I, like you, probably don’t want to pay much more for our beer than I already do.
There is perhaps a deeper issue within the supply chain, however, one beyond simple issues of supply and demand, or the whims of inflation. Breweries have long been encouraged by their suppliers to contract their ingredients in advance. This is very difficult for the smallest breweries to do, as they typically don’t have the cash flow projections to allow them to commit that amount of money several years in advance. As these breweries scale up however, they will likely take out contracts on their hops and grain.
This is important for their suppliers. Maltsters need to get farmers to commit to growing the high quality, and often difficult to farm varieties required by the brewing industry, and contracts ensure this happens. If it didn’t these farmers may look towards other more profitable crops such as oil seed rape or sugarbeet. It’s the same for hops, with breweries having to contract proprietary varieties years in advance to ensure they manage to get some.
The issue is compounded by the fact that there are not a great many wholesalers, with the supply of hops and grain for brewing controlled by a handful of very large companies, potentially creating what could be considered to be a monopoly. Douglas Mackinnon, formerly the Executive Director of Hop Growers of America, writes The Mackinnon Report, an eye-opening newsletter that reveals in great detail how some of the largest hop merchants operate. Reading some of his recent notes, it really does feel like the hop industry is something of a house of cards, with the supply of hops potentially far outstripping current demand. As the growth of the beer industry falters, volumes level out or – at worst – decrease, what will happen to all of those hops contracted to be grown in three or four years?
Interestingly, while prices from UK malt suppliers have also increased beyond the point of inflation, the increases from Belgian suppliers such as Dingemans have not seen the same level of increase. This may well be a Brexit-related issue (yet another headache for brewery owners to figure out) but the fact is there’s not a lot of choice for breweries on where to procure the necessary ingredients they require to operate their businesses. Someone, somewhere is making a good profit, and at the far end of the supply chain it is us, the consumer, who really loses out.
Perhaps what the UK brewing ingredient supply chain really needs is a little bit of disruption. A few small scale producers entering the market could really make a difference to the potential costs of ingredients. We’ve seen this happen in the US with the emergence of more than 150 “craft maltsters”, and while some of these are very small and mostly supply local markets, others are scaling up so that they can compete on a national level.
It seems unlikely, however, that we will see this in the UK on the same scale as in the US, as economies of scale make small batch ingredient production even more expensive than what is currently available. Although, there are glimmers of this happening, with the likes of Crafty Maltsters operating in Fife, and Hukins Hops in Kent, demonstrating that there is definitely demand for high quality ingredients from small, independent suppliers. Perhaps this is a future trend worth keeping a very close eye on.
In the meantime, however, it feels as though the supply chain will feel the brunt of inflation as it continues to push the cost of ingredients ever higher. Fingers crossed that there’s a shift coming in the market’s future sometime soon – one that might just give the industry the breathing room it so desperately needs to properly thrive.
— Matthew Curtis