Saturday, January 29, 2011

A Hops Supply Curve

In Prin. of Microeconomics I use something called a supply curve a great deal. Basically, the idea of a supply curve is that as market prices increase, producers have an incentive to increase production and when market prices decrease, producers have an incentive to decrease their production. Thus we tend to get a positive relationship between market prices and the amount produced (or what I call quantity supplied). Here is an interesting article from the USA Today on the hops supply curve. Notice from the linked article, that as hops prices increase resulted in an increase in production. This is what the supply curve represents.

Notice that as the value (proxy for price) increases, so does production and as value decreases so does production.

This Wall Street Journal article refers to firms entering due to higher hops prices. If this is the case, then what we have is a shift in the supply of hops, which is what would be predicted using a long-run competitive market.

Thus the distinguishing variable is whether higher prices are resulting in existing hops producers to produce more hops or whether higher prices are resulting in firms entering the hops production market. If it is existing hops producers, then what we have is a supply curve, where if it is entering producers, then this would result in a shift in the supply curve to the right. Either way, the model predicts that as market prices rise, the short-run response if for the quantity supplied of hops to increase, which is exactly what we are seeing.

1 comment:

Okobojicat said...

Both of the articles you site are from 2008. I wonder if there is anything published yet in the main stream press about the 2010 yield. Apparently the US was down slightly and Europe was down significantly. And while Australia/New Zealand have never grown that many hops, with their crazy weather over the past year, who knows what they'll bring in.

I've heard this from some of my brewing friends who are hearing it from their suppliers. With craft beer demand increasing rapidly and thus the demand for hops, we're going to start seeing the prices of six packs and pints start going up as well.

The problem with your scenario is that its not an easy exit and entry industry. It takes about one growing season to get a farm ready and then about three full seasons before a hop farm is at full productivity. That's about how long a vine goes from planting to full production. So entry/exit is going to lag prices.

If I was a betting man, I would say shifts in production you note in 2008 are probably the existing farms using marginal vines that they would normally not use. Or else a dirty trick: increasing the percentage of moisture in the hop to make it seem as though there is more hops by weight.

Either way, expect your hoppy beers to be shifting away from lower Alpha-Acid hop variations to the higher variations so they can use slightly less hops and thus slightly less money.