As I get ready to head to Washington DC for the first SAVOR festival, sponsored by the Brewers Association, I’ve been reflecting on the state of the industry and the meaning of American Craft Beer Week, which starts today. In the last several years, brewers, industry insiders, beer lovers, and others have debated the true meaning of the term ‘craft beer.’ The debate has at times been very contentious, and it continues to split the beer community into increasingly small, if quiet factions. To hear the history of how this term came to be, from the earliest usage by writer Vince Cottone to the politicalization by the Brewers Association, is to behold quiet a tale. And it also should serve to confuse and upset you a little bit.

I’m itching at this scab because my friends Todd and Jason Alstrom over at BeerAdvocate.com have released their own definition of craft beer. Their definition, which for disclosure sake I had a hand in debating, goes a long way, in my opinion, to rectifying many of the divisive problems needlessly created by the overly political definition propagated by the Brewers Association.
For the purpose of context, let’s review the Brewers Association’s definition of craft brewer.

An American craft brewer is small, independent, and traditional.

Small: Annual production of beer less than 2 million barrels. Beer production is attributed to a brewer according to the rules of alternating proprietorships. Flavored malt beverages are not considered beer for purposes of this definition.

Independent: Less than 25% of the craft brewery is owned or controlled (or equivalent economic interest) by an alcoholic beverage industry member who is not themselves a craft brewer.

Traditional: A brewer who has either an all malt flagship (the beer which represents the greatest volume among that brewers brands) or has at least 50% of it’s volume in either all malt beers or in beers which use adjuncts to enhance rather than lighten flavor.

This is the definition that many of the Brewers Association insiders have touted for several years now. The first time I heard it was from Jim Koch, founder of Boston Beer Company. When he told it to me in an interview in 2005, this is how Koch defined craft beer.

ANDY CROUCH What does the term ‘craft beer’ mean?

JIM KOCH There is actually a definition. It is small, independent and traditional. Small meaning it is under two million barrels, independent meaning not owned by a big brewery, and traditional meaning you only use traditional brewing processes. No non-traditional adjuncts, no high gravity brewing and so forth.

And here illustrates a problem with the definition of craft brewer as set by the Brewers Association: it’s inherently malleable. It’s subject to revision and indeed has been quietly changed since its introduction.

Fast forward to 2008 and here is how the growing Boston Beer Company now defines craft brewer.

Samuel Adams® is proud to be an American Craft Brewer. An American Craft Brewer is defined as being Small, Independent and Traditional. We follow the Brewers Associations definition of a Craft Brewer but include a Craft Brewer who grows beyond two million barrels and continues to brew Craft Beer. We hope to be the first Craft Brewer to reach this threshold. Here is what we mean by “Craft Brewer”:

Small - Annual production of beer less than 2 million barrels or annual production of beer exceeds 2 million barrels and the brewery was founded as a Craft Brewer and continues to satisfy the other Craft Brewer defining criteria.

Independent - Less than 25% of the Craft Brewery is owned or controlled (or equivalent economic interest) by an alcoholic beverage industry member who is not themselves a Craft Brewer.

Traditional - A brewer who has either an all malt flagship (the beer which represents the greatest volume among that brewery’s brands) or has at least 50% of its volume in either all malt beers or in beers which use adjuncts to enhance rather than lighten flavor.

I’ve written at length about the problems I have with the Brewers Association’s definition of and attempted co-option of the term ‘craft brewer’ and the criticisms remain to the present day. At the heart of my critique is that the term suggests that if you qualify under the definition, that you per se make good beer. That is simply not true. And the two million barrel mark, even with its genesis in federal tax law, is also troubling as several smaller brewers are quietly attempting to use it to push Boston Beer out of the craft clubhouse. At least for me, I think it’s an uphill argument to convince beer enthusiasts that Boston Beer should not qualify as a craft brewer. That attitude simply smacks of competitive jealousy or a decidedly myopic view of the history of the development of better beer in the last twenty-five years and Boston Beer’s clear role in that achievement.

It is in this context, and in those described by myself and many others in dozens of articles on the subject, that I welcome BeerAdvocate’s new definition, not only of craft brewer, but more importantly of craft beer. Under their definition, smaller breweries can maintain their determined efforts to define themselves as being something other than that which is represented by the big three (and their subsidiary breweries) while also not decrying the considerable brewing efforts and talents of the bigger breweries. Let’s take a look at the simple definitions offered by BeerAdvocate.

Craft Beer

Beer brewed in limited quantities, often using traditional methods.

Craft Brewer

One whose primary focus is brewing craft beer, as defined.

In contrast to the unduly restrictive (and largely political) definitions offered by the Brewers Association, the BeerAdvocate definitions are left intentionally vague in several respects. The Brewers Association originally created its definitions to help refine the numbers in its annual production reports. Later, the definition came to shape that particular organization’s vision and advocacy efforts on behalf of its selected members. This simple definition alleviates a lot of the political purposes served by the prior definitions and allows ‘craft beer’ to grow unencumbered by unnecessary and needless constraints. While the Brewers Association may believe it makes sense to exclude the gains of brands such as MolsonCoors’ Blue Moon and Leinenkugel’s Sunset Wheat from its numbers, the exclusion undersells the full extent of the rise of more flavorful beer in America. And it also undersells and debases the efforts of some pioneering breweries, including Redhook, Widmer, Goose Island, and Old Dominion. I still maintain that in a blind tasting that hardcore beer enthusiasts would be hard pressed to pick out the big brewer’s brands from those produced by members of the craft brewer’s club.

I welcome and accept BeerAdvocate’s new definitions and I look forward to discussing them with my fellow beer lovers this week in DC as we celebrate the success of true ‘craft beer’ in America.

Amidst the stream of recent posts elsewhere about the results of the bi-annual World Beer Cup, held in conjunction this year with the Craft Brewers Conference in San Diego, California, was a little reported story about how big craft beer is growing on an international scale. About a year ago, I spent a few weeks traveling around Japan, seeing the country and trying its beers. I was impressed with the relatively young craft beer scene across the country, with its pockets of excellent breweries.

The competition has grown quite international since its early days, with 58 countries competing this year. Breweries from 21 countries took home medals. When the Brewers Association announced its recent awards, American brewers, as expected, pretty well cleaned house with 158 awards. From there, you’d expect traditional brewing countries, such as German, Belgium, and the Czech Republic to have dominated the rest. While German brewers took home a respectable 25 medals, Japanese breweries nearly outlasted their Belgian counterparts with 10 medals to the Belgian’s 11. Here’s the interesting part: German breweries, as expected, won medals in German styles and Belgian brewers won medals in Belgian styles. Japanese brewers, like their American counterparts, won medals across a broad swath of international styles, from hefeweizen to cream ale to Scottish ale and even in the experimental category. That is an impressive achievement. Brewer Bryan Baird of the Baird Brewing Company won two medals as did the producers of the Swan Lake brands. My congratulations go out to the Japanese brewers for their impressive performance.

-Baird Brewing Co, Big Red Machine Fall Classic Ale, Cellar or Unfiltered Beer, Bronze
-Baird Brewing Co, Nide Beer - The Ale, American-Style Cream Ale or Lager, Bronze
-Fujikankokaihatsu co., LTD, Fujizakura kogen Beer “Weizen”, South German-Style Hefeweizen/Hefeweissbier, Silver
-Hyokoyashikinomori Brewery Tentyokaku Co., Inc., Swan Lake Beer Amber Swan Ale, American-Style Amber/Red Ale, Silver
-Hyokoyashikinomori Brewery Tentyokaku Co., Inc., Swan Lake Beer Porter, Robust Porter, Bronze
-Kiuchi Brewery Hitachino Nest Beer, Espresso Stout, Coffee Flavored Beer, Bronze
-Kumazawa Brewing Co., Shounan Liebe, German-Style Schwarzbier, Gold
-Nasu Kohgen Beer., Ltd., Scottish Ale, Scottish-Style Ale, Bronze
-Sekinoichi Shuzo Co. Ltd, Iwate Kura Beer Oyster Stout, Experimental Beer (Lager or Ale), Silver
-Shimono Co., LTD, Kaorino Nama, German-Style Kölsch/Köln-Style Kölsch, Bronze

Congratulations are also due to Molson Coors for its strong showing with the Blue Moon Brands, culminating in a win for the Blue Moon Brewing Company and brewer Warren Quilliam in the Large Brewing Company category.

The Hop Crisis

The celebrations of craft beer producers have a darkening cloud hanging over them. The talk among brewers and distributors in recent months has turned from their recent successes to the possibility of a severe shortage of raw materials for use in the brewing process. While craft brewers produced a greater number of so-called fresh hop beers, those brewed with hops fresh from the field, hop growers and traders were becoming increasingly concerned about the sorry state of the world’s hop supply. The first whispers focused on a poor hop harvest in the Yakima Valley region of the Pacific Northwest and in the Hallertau region of southern Germany.

Despite recent increases in American demand for hops, worldwide hop production is significantly reduced from previous years. Between the late 1990s and early 2000s, an excess of hop production caused price depression. According to a recent seminar developed by the Brewers Association, overall hop production today is now ten to fifteen percent below the current demand, which has caused a tightened market. Worldwide hop acreage has dropped almost fifty percent in the last ten years, from 203,000 acres to 113,000, as farmers have chosen to plant crops other than hops. In 1996, the United States boasted 44,161 acres of hops. By 2006, that number had dropped to 29,435.

In addition to the loss of hop acreage, the remaining stocks are subject to poor weather, fires, and other catastrophes. A slight loss of the existing hop crop can cause reverberations and volatility throughout the hop marketplace. In Slovenia, which is a leading grower of the Styrians variety, hop growers may have lost as much as half of their crop to a hailstorm. A devastating warehouse fire in Washington State and fires at two hop-drying kilns caused a twenty percent decline in available hops.

The result has been a substantial increase in hop prices on the spot market for those who did not secure long-term contracts with suppliers. In the recent past, brewers could pay as little as $1.70 for a pound of the popular Cascade hops. This price hurt growers whose costs exceeded the sale price. Prices have now reached historic levels, with Cascade hops hitting seven dollars per pound and more, and with other varieties exceeding ten dollars per pound on the open market. The scarcity of hops has caused increase competition among world brewers. Many high alpha acid American grown hops, as well as aroma hops, are going abroad for brewers in China and Europe that now can benefit from the American dollar’s dropping value.

The difficult situation has resulted in two different reactions depending upon which side of the crisis you are facing. According to Ralph Olson, General Manager and Owner of HopUnion LLC, the growers who remained in the hop growing business are now enjoying their present situation. Dr. Johann Pichlmaier, president of the Association of German Hop Growers based in the Hallertau region of Germany, agrees. “The market is quite tight and times are good again.”

Things are not so good for the brewers who now have to meet higher hop prices. Olson concedes that he foresees that some brewers may have to shut down due to a lack of available hops. The danger is most present for those brewers that failed to contract enough hops before the shortage, according to the Brewers Association. While larger breweries buy options on raw materials several years in advance and existing customers will likely continue to receive their hop orders, smaller brewers may find their access to specific and favored hop varieties limited. This may lead some brewers to have to switch varieties and alter the flavors and aromas of their beers.

At the Brewers Association seminar, Olson counseled craft brewers to seek contracts with hop suppliers to combat against future price increases. “What we really need is for brewers to understand that it is OK to have longer than a year’s supply of hops…An extra inventory of hops can come in handy should sales go better than normal during a given year.” Olson also reported to brewers that he does not see the situation improving in the near future. “It is not going to get better soon, but will be likely just as bad, or worse, for the crops from 2008 and 2009, in other words, for beers brewed from now through 2010.”

The Malt Crisis

In addition to the global hop shortage, brewers are also starting to get hit with price increases for malt as well. Barley crops have taken a hard hit in recent years. In the last two years, North American brewers and producers have seen a significant decrease in their supplies as the demand for barley has risen. Poor global barley yields for two consecutive harvests have resulted in a barley shortage. Some meager worldwide harvests, which have largely occurred due to poor weather conditions, have sent European and Australian brewers to North American suppliers for barley. Due to high corn prices and demand, a shift in feed grain has caused farmers to move away from corn and towards barley and oats, further stressing the amount of barley available for malting. Recent poor returns for growers and maltsters has led to either a move away from barley planting or the use of barley crops in the production of bio-fuel, which results in a forecast of further reduction of barley acreage in the future.

Brewers have already seen the price of several varieties of base malt increase 5 to 10 cents per pound. Despite these increases and dire warnings, Ian Ward, President for Sales and Marketing at the Brewers Supply Group, counsels that the situation is likely to improve in the next season. “Most maltsters have by now purchased all the barley requirements they are likely to need since they have had to make contracts for malt with brewers,” he said at the recent Brewers Association seminar. “As the inquiries from maltsters have fallen, farmers who have grain left to sell have found themselves having to be somewhat less bullish. What this means for the brewer is that prices are not likely to rise further in 2008 based on barley cost.” There is, of course, always the possibility of price increases looming, warns Ward. “The upward trend in oil prices and currency may play a role in spot purchase malt, especially from overseas. What is important now is what futures are trading for in the 2008 crop and how the growing season plays out from April next year.”

So What Does It All Mean?

The increases will certainly affect smaller producers and those brewers who did not secure the necessary contracts in advance. But while hop and malt prices have increased on the spot market in recent months, many brewers have contracts for their raw materials that will serve them for several months if not years to come. There is no agreement how the prices, or the perception of price increases, will affect six pack and keg prices and when the effects will be seen. It is possible that some small producers may use the perception of the raw material cost increases as cover for a desire to increase the prices of their products. In the dozen or more informal conversations I have had with brewers over the last few weeks, not one has expected to keep his prices stagnant. Most expect to implement a price increase of anywhere from fifty cents to one dollar per six-pack by Spring 2008.

The Birth of A Craft Conglomerate

After years of working together in a sales and marketing joint venture called the Craft Brands Alliance (CBA), the Widmer Brothers Brewing Company and the Redhook Ale Brewery have announced their intention to merge into one company. The new brewery, which will be called the Craft Brewers Alliance, will create one of the nation’s largest craft breweries. Kurt Widmer will serve as the company’s chairman of the board and Paul Shipman will serve as chairman emeritus, effectively starting his retirement from the beer trade. Redhook’s current president and chief operating officer Dave Mickelson and Terry Michaelson, president of the Craft Brands Alliance, will serve as co-CEOs of the new company. The deal with also include Widmer’s forty-percent share of the Goose Island Brewing Company of Chicago, Illinois.

“I believe that the merger will allow us even greater opportunity to deliver unique and great-tasting beers for our customers,” said Kurt Widmer, president and brewmaster of Widmer Brothers. “The two companies have a common goal—we both strive to brew the best possible beer for our customers.” “Our combination of talented people, high-quality beers and first-class brewing operations presents tremendous advantages for the combined company,” said Paul Shipman, founder and chief executive officer of Redhook. “The two breweries have worked well together over the past few years, and I’m confident that we will be even stronger as one company.”

Relations have not always been so rosy between the two companies. In a 2006 filing with the Securities and Exchange Commission, Redhook complained that its brands were getting shortchanged in the sales and marketing alliance it forged with Widmer in 2004. In that filing, Redhook said, “The Company believes its third quarter sales in CBA territory have declined due to CBA’s unsuccessful execution of its sales and marketing strategy for Redhook’s core and emerging products. During this same period, CBA has been very successful selling the Widmer and Kona products.”

While the two breweries have agreed to merge, the deal remains subject to shareholder and regulatory approval, which includes the voice of Anheuser-Busch, which owns a significant percentage of both Redhook and Widmer. The breweries hope to complete the merger by first quarter of 2008 and expect to maintain both the Redhook and Widmer brands in the marketplace. The all stock transaction will result in Widmer shareholders and existing Redhook shareholders each holding approximately fifty-percent of the outstanding shares in the new company.

Widmer has by far been the more successful of the two breweries, growing from 199,000 barrels in 2004 to 269,000 barrels in 2006. Redhook produced 271,600 in 2006, on weak to stagnant sales. After releasing news of the merger, Redhook announced a decline in profits for the first three quarters of 2007. As a private company, Widmer does not release sales figures.

Aftermath of the Deal

After years of toiling as the little kids, it is now clear that craft brewers must view themselves as nearing adulthood. With the renewed interest of domestic macro-breweries and the merging and distribution alliances of larger craft breweries, regional breweries will have to consider their strategic visions for the future. What was once for many just about the beer and fun is now about serious business.

–Article appeared in January 2008 issue of Beverage Business Magazine.