Hops and Asymmetric Prices

Faith Cathcart/The Oregonian

After my rather lengthy disclaimer about how talking about beer is a device through which I discuss economics principles and have some fun in the process, I tenuously dip my toe back into the beeronomics pond...

The always reliable John Foyston has a great article in today's Oregonian on something that I informed my loyal beeronomics devotees of a month and a half ago: the hop shortage is over and in fact we are in a hop glut.

But I am not a reporter. Thankfully, John is and he has uncovered some fascinating aspects of the current situation. One interesting fact is that apparently because the hop shortage convinced breweries that they needed to contract in advance for their hops, there is currently no spot market at all for hops. So excess supplies have no where to go. Amazing.

The big news, which is in Foyston's lede is that this glut of hops should not result in lower beer prices, even though prices rose significantly with hops prices.

This comes as no surprise to an economist. For one reason, the statement above about how all hops were forward contracted means that prices cannot fall due to the glut in supply. Brewers locked in higher prices as an insurance policy to ensure a supply of hops and, well, lost the bet in essence. Foyston himself makes this point.

But the other reason that this economist is not surprised is what I mentioned in that previous post. Across a huge array of industries, price changes tend to be asymmetric. Industries are very quick to raise prices in response to higher costs but very slow to lower them when costs come back down. This does not seem to be true of individual retailers, by the way, so don't blame them, but it is especially true of industries like beer that have complicated wholesale distribution networks.

Here is Sam Peltzman of the University if Chicago writing in the Journal of Political Economy:

Output prices tend to respond faster to input increases than to decreases. This tendency is found in more than two of every three markets examined. It is found as frequently in producer goods markets as in consumer goods markets. In both kinds of markets the asymmetric response to cost shocks is substantial and durable. On average, the immediate response to a positive cost shock is at least twice the response to a negative shock, and that difference is sustained for at least five to eight months. Unlike past studies, which documented similar asymmetries in selected markets (gaso- line, agricultural products, etc.), this one uses large samples of di- verse products: 77 consumer and 165 producer goods.

So it looks like the craft beer industry is no different. So even when forward prices adjust to the increased hop supplies, we shouldn't expect beer prices to follow suit.

One quick note on the ephemeral nature of fresh hop beers, since we are on the subject of hops. I finally got my hands on a bottle of Deschutes Hop Trip which was, by most accounts, one of the real gems of the fresh hop beers this year, so I was excited. Unfortunately it was a total dud. It was brewed a while ago now and the hop essence had completely disappeared from the bottle. The beer was thus an under-hopped disaster. And for $5.50 this is a problem, I expect a superior beer at that price. This, I think, illustrates the difficulty of bringing a fresh hop beer to a mass market in bottles, though in the past few years I have not had the same experience.

Although, strangely enough this is why I like fresh hop beers so much: they are as far away from industrial macro lagers as you can get. They exist only in a moment in time and are connected to the land like wine. So I don't mind suffering the occasional dud. But I do think breweries are going to have to keep track and establish "sell by" dates to limit the number of dud beers sold.

Fresh Hop Ales in the NY Times

A wonderful article by local writer Lucy Burningham.

Matt of Double Mountain gets the hops.

Matt and Charlie brew.

All photos: Lisa Bauso for The New York Times

The nascent Killer Green.

A Clarification

I am not a 'beer economist.' I am not sure what that would be, but I know a whole lot less about the beer industry than other members of the economics department at OSU, for example.

What I am is an economist and the point of the beeronomics posts is not that I am an expert on the economics of beer (whatever that would be), but that economics can be understood through all sorts of real world industries, markets and phenomenon. The point of beeronomics then is to have fun learning about and thinking about economics in less-conventional ways.

I happen to like brewing, consuming and learning about craft beer. And I happen to really like, without exception, everyone involved in craft beer that I have ever had the good fortune to meet. Oregon also happens to be the epicenter of the craft beer renaissance in America. So it seemed to me to be a natural and fun industry to use to explain and discuss economic theories. I can also go off and write purely self-indulgent posts about beer that have little or nothing to do with economics (as long as my editor doesn't notice).

The main motivation behind the creation of this blog was to try to create a place, outside of the classroom, where I could connect with students and others interested in economics. I think economics is interesting and enlightening and that it can also be a lot of fun. The beeronomics posts started as an attempt to demonstrate both aspects.

I say all this because I have been told a few times recently that I have garnered a reputation for being the 'beer economist' and that what I know about is mostly beer. Both assertions are false: I know very little about the beer industry (except the little I have learned through this blog)and I know a lot about many other things. I do, on occasion, refer to my academic research (which has nothing to do with beer) in this blog, but talking about it incessantly would get boring fast.

First and foremost I am a well-trained economist that is curious about many things, interested in the intersection of economics and policy, and someone who enjoys teaching and is excited about his discipline and what it has to offer the neophyte. Oh, and I also enjoy the occasional beer.

With that said, here are some recommendations from recent ventures to the beer store/pub:

Full Sail Vesuvius - beware this is a deceptively big beer, find someone to share the 22oz-er with. An economist would describe a big beer as one that has fairly large diminishing marginal returns.

Bridgeport Stumptown Tart - also surprisingly big and the cherry can become cloying if you drink too much so, again, find a partner for the big bottle.

By the way, I bought a bottle of Sam Adams Cherry Wheat on a lark - big mistake. Yuck. You are so much better off springing for and savoring the Stumptown Tart

Dry-Hopped Mirror Pond on cask at the Deschutes Portland Pub - probably long gone, but man oh man, this uber-classic is stunningly radiant on cask. No diminishing marginal returns here, it was hard to stop drinking.

Contestablility

Hey, The World, the Beeronomics schtick is mine, bug off!

Ahh, just another example of the contestability of markets: I may be a monopiolist, but nothing prevents new competitiors to enter so my market power is basically nill.

Sigh, guess I'll relax, have a beer, and forget about it.