Friday, October 26, 2007

Beeronomics: Hops Shortages and the Price System

The current shortage of hops that is affecting the craft brewing industry seems to be a nice teaching moment about the role of prices in the market economy. First some background, courtesy of Beervana: there is a severe hop shortage thanks to some bad weather and dwindling acreage and since supplies take a while to produce, they can't be ramped up overnight. So the bad news in increasing prices - but wait - are higher prices bad news? Well, no.

Sure high prices are bad in the fact that beer prices will follow and that will make it a bit harder for all of us to enjoy beer. But it is these very same high prices that will fix the problem. Without prices going through the roof, no new acreage will be planted, perhaps even more acreage will go to some other, more lucrative, crop. Without high hop prices, in other words, there would be continual hop shortages! Astute observers will complain that if it is mostly a weather story then my contention is a bit thin, but the other way of looking at it is with high enough hop prices, more production will occur and that production will be spread and thus the total exposure to one adverse weather event will be reduced - hopefully leading to lower supply and price fluctuations in the future.

So, let's hear it for high prices!

This leads to a reminder of what the price system does in general. It transmits data about relative demand and supply to all the important economic actors, buyers and producers, and assures that the 'right' amount of stuff is produced. What is remarkable is that prices do this all on their own - they serve as a humongous coordinating device - and they do it incredibly well. Attempts to replace prices with something better have always failed: they have led to shortages, black markets and inflation. This is one of the true wonders of a market based economic system.


Jeff Alworth said...

If the airplane you're flying in is high enough above the market, I have no doubt it looks like this organic process you describe. Like an ecosystem in balance.

But fly a little lower, and you see that for a healthy ecosystem to flourish, there are a thousand tiny deaths. I worry in this circumstance that the breweries that will survive a protracted hop shortage will be those that have larger capacity and can cut profit margins. While it may be theoretically true that the bigger breweries make the best beer--and are thus the "fittest"--we know this to be untrue.

In five years, there will be no hop shortage; equilibrium will be restored. I hope my favorite small breweries are still around to enjoy the bounty.

Patrick Emerson said...

Well, true, but high prices also may spur breweries to experiment, may cause them to invest in some hop acreage themselves, etc. I cannot think of another mechanism though which these things would occur.

I think your contention about small breweries is not necessarily true, BTW. I think that most drinkers of craft beers, one, do not consider macro brews good subsitiutes and, two, are not terribly price sensitive. (For economics geeks: I think price elasticity is low) So if high hop prices affect all brewers in a similar fashion, I am not that worried about them.

Jeff Alworth said...

I suppose you could make the argument that brewpubs are actually more resistant than larger breweries. Brewpubs can raise prices more easily and without the same kind of blowback as bottle-beer breweries, which must compete head-to-head on the grocery shelves. Brewpubs sell only their own beer, and the difference between four bucks and four fifty for a pint is not likely to influence sales.