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Thursday, February 28, 2008

Hop Supply Driving Barley Prices ... Down?

Okay, this is counterintuitive. Economist Patrick Emerson (and my friend) forwards an argument that the steep price of hops may actually be keeping the price of malt barley from rising. It is a lesson in market interdependence and (perhaps) unanticipated consequences.
Apparently barley can be sold as malting barley and feed barley and usually malting barley (which is a bit more selective) fetches a much higher price than feed barley. But these days the prices are as close together as he can remember. What gives? One reason is that barley malters are constrained somewhat by the supply of hops, if there are no hops there is little demand for malted barley. Thus the price of malting barley has not risen as fast. On the other side, as corn has displaced a lot of wheat and barley, feed barley prices have risen in response (also, apparently you can write longer forward contracts on malt than you can on feed barley because they are traded in different commodity markets).

So the point is that the hops shortage might actually be helping to keep the barley price from rising as much as it otherwise would because the two are such strong complements in the production of beer.
He posts and update that malt and feed barley prices are starting to diverge again, but are still close by historical measures. A silver lining, perhaps, for hard-hit brewers.


  1. (scratching head...)

    I'm not sure I follow, wouldn't the demand for barley (for feed) increase the price of barley to maltsters?

  2. The key is the demand for malted barley, this is what Andrew argues is keeping malting barley prices down. But you are right, feed barley demand will raise the price of malt (and has). The story is that this price increase for malting barley is not as much as it would have been without the hops shortage.