Beer prices barrel higher

By Barbara Hagenbaugh, USA TODAY

WASHINGTON, D.C. — Americans hosting Fourth of July barbecues will pay more cold cash for the cold ones this year as beer joins the list of foods and beverages whose prices are jumping, in part because of the booming ethanol market.

Retail prices for beer at supermarkets and other stores were up 3% in May from a year earlier, the biggest increase in 2½ years, according to the latest data from the Labor Department. That's higher than the inflation rate for the overall economy, and a bigger gain than in prices of liquor and wine bought to be consumed at home.

Those going out will also pay more for beer. Prices for beer poured away from home were up 3.8% in May from a year earlier.

The gains are in part a result of rising costs for malting barley, one of the main ingredients in beer. But a variety of other costs are increasing for brewers, including for other grains, glass, cardboard, energy, transportation, insurance and labor.

"Across the board, we're facing significant price increases," says Martin Kelly, president and CEO of Magic Hat, a brewery in South Burlington, Vt., that produces beer sold in 17 states and Washington, D.C. Even the cost of the six-pack containers that hold the bottles have increased in price, he says.

Kelly says a major price increase has come from malt made from barley. Malt costs have risen 9% in the past year, he says.

Nationwide, average barley prices have risen 17% since the beginning of the year to the highest in 11 years. The increase is partly because farmers are devoting less acreage to the grain in favor of more lucrative crops, especially corn.

Prices for corn have jumped in response to strong demand for the grain to produce ethanol, a fuel alternative blended with gasoline.

For about 15 years, Louis Arnold, 71, planted 600 acres of barley on his farm in Esmond, N.D. But for the past two years, he has planted only 300 acres of the grain, devoting more land to corn and soybeans on his 3,500-acre farm. Not only are potential profits higher for corn and soybeans, but he has been plagued by a variety of barley diseases.

"Barley is fifth fiddle right now," says Arnold, who is chairman of the North Dakota Barley Council.

Farmers planted the third-smallest barley crop this year even though they increased acreage from 2006. Corn plantings, meanwhile, are up 19% this year to the highest since 1944, the U.S. Department of Agriculture said Friday.

Grain prices rising

Barley has also become more expensive because now that more corn is being sold to make ethanol, there is less corn available to be fed to animals. That is leading to greater demand for other feed grains, including barley, for livestock.

Barley "prices are going up right along with corn and wheat," says Tom Jackson, agricultural economist at consulting firm Global Insight. Brewers use a variety of grains in beer production, including rice, wheat and corn. Prices for all those grains have risen.

Relief is unlikely to come soon as grain prices are anticipated to continue to rise in response to strong demand for corn to produce ethanol. "It's on an upward trend," Wells Fargo agricultural economist Michael Swanson says.

There also have been "dramatic increases in virtually every commodity and other (production costs) related to making beer in the past few years," Coors Brewing (TAP) spokeswoman Aimee Valdez says.

Coors contracts with farmers who grow a proprietary barley developed by the brewer, so it does not see as much swing in barley costs, Valdez says. But other costs, such as for aluminum, energy, paper, freight and labor, have all risen. Coors has raised prices less than 2% in 2006 and again in 2007.

Jean-François van Boxmeer, CEO of Amsterdam-based Heineken, told analysts in February that his company expects costs for inputs such as raw materials, energy, transportation and packaging to rise 7% to 8% in 2007.

The higher costs are coming as brewers are better able to raise prices to at least partially offset the increases. Heineken, for example, raised prices 2.5% on average in the USA in February after years "of a rather difficult pricing environment," van Boxmeer said.

Fierce competition worldwide

For companies, the greater pricing power is a welcome relief after beer prices declined in the 1990s, JPMorgan beverage analyst John Faucher notes. Since then, there has been an increase in the population of eligible drinkers, and consumers have shown a growing appetite for microbrews and imports.

"You have had a massive shift up in what consumers are willing to pay for beer," Faucher says.

But many companies, such as Coors, say higher prices aren't fully covering their increased costs. The competition is just too fierce to raise prices too much.

Magic Hat has raised prices on average less than 2% in the first five months of 2007 compared with the same period in 2006, helping to offset some of the higher costs. Higher sales have also helped to maintain profits — the brewer has seen sales rise 30% on average in the past three years, and sales are on track to see similar gains this year.

"For ourselves, and I would suspect for some of the other craft breweries, the biggest benefit we have is that sales are pretty good right now," Kelly says.

U.S. adults age 21 and older on average drank more than 30 gallons of beer in all of 2006, up slightly from 2005. Americans drink more beer on the Fourth of July than on any other day during the year, according to the Beer Institute.

American beer drinkers have plenty of company as beer prices are rising worldwide.

Organizers of Oktoberfest in Munich, Germany, for example, warn that a liter, which is equivalent to nearly three 12-ounce cans of beer, will cost as much as $10.90 this year, up from $9.47 to $10.22.

"The whole industry has pressure," Heineken's van Boxmeer said.