V. 19 no. 2 • Nov/Dec 2015 Beer: A Poster Child of the Bioeconomy David Zilberman

he bioeconomy has been promoted forestry, fisheries and aquaculture, in recent years. It is viewed as biotechnology, biofuels, and fine The bioeconomy includes agricultural a large sector of the economy chemicals. The bioeconomy is part of sectors that rely on farm inputs and T that relies on biological processes the renewable economy (which also biological processes to produce a to produce various end products, includes solar energy and the recy- wide array of products. The traditional including food, fuel, chemicals, etc. cling sector) that will allow humanity bioeconomy relied on fermentation to produce cheese, beer, etc., while The recent interest in the bioecon- to deal with the increasing monetary the modern bioeconomy relies on omy stems first from concerns about and environmental cost of nonre- biotechnology. The history of beer climate change and the need to move newables and climate change. used as a case study suggests that away from nonrenewable resources. Agriculture is a crucial element over time, the bioeconomy evolved It also stems from the new capabil- of the bioeconomy as the source of to produce differentiated products ity developed in recent years through its raw materials. The notion of the with elaborate supply chains. Its modern techniques in molecular biol- bioeconomy suggests that outputs of evolution depended on investments in ogy. While the bioeconomy seems to agriculture will contribute to a larger research and a balanced regulatory be a modern concept, this paper argues range of products consumed. This new environment. that it has been with us for millennia range of products provides new oppor- and was part of our oldest industries. tunities for agricultural production; We use beer as a case study, begin- and the growing importance of these ning with its origin in the traditional products affects the way that we under- bioeconomy and drawing out what les- stand the economics of agriculture. sons it holds for the new bioeconomy. Understanding the performance of The first section elaborates on the bio- the bioeconomy is a new challenge for economy, the second tells the story of agricultural economists. One key ele- Also in this issue beer, and the third provides some of ment in this challenge is understanding its implications. This history of beer the supply chain of each of its sec- Investment Warning: Farming suggests that technological develop- tors. These supply chains consist of at May Endanger Your Financial ment will lead to the expansion of the least two elements: the production of Health bioeconomy, which will lead to new feedstocks and their processing to a Hoy F. Carman ...... 5 types of farming and new differentiated final product. For example, the biofuel products. The development of the bio- sector is an important element of the Obesity in Mexican-Origin economy will also be dependent on the bioeconomy. In the case of biofuels, the Children ability to capture new opportunities and supply chain includes the production Richard Green, Arthur Havenner, introduce reasonable regulations that of feedstocks on farms (e.g., corn and Adela de la Torre, balance concern over safety, with oppor- sugar cane) and processing to produce and Nan Zhang...... 9 tunities for creativity and innovation. multiple by-products in refineries (e.g., ethanol and dried distilled grains). The The Bioeconomy and Supply Chain modern bioeconomy also includes com- The bioeconomy includes many sec- panies that produce enzymes, farms that tors such as food, agriculture and produce feedstock for medical products, Figure 1. Per Capita Alcohol Consumption, United States, 1934–2009 example, in the Middle Ages, low- alcoholic beer was called ‘Small Beer’ 1.6 Beer as a safe alternative to water. Higher 1.4 Spirits alcohol content beer (4%) was used as Wine 1.2 part of regular meals, and even higher

1.0 content (6%) was used in festivals. This is part of the differentiation that 0.8 became a characteristic of the beer sec- Gallons 0.6 tor. Concern about quality and market 0.4 power led to the establishment of a

0.2 brewing guild in Germany, as well as purity standards in the 15th century. 0 Production of beer has industrial-

1944 1949 1964 1934 1939 1954 1959 1969 1974 1979 1984 1989 1994 1999 2004 2009 ized. In early times, families brewed Source: National Institute of Health, NIAAA. http://pubs.niaaa.nih.gov/publications/surveillance97/tab1_11.htm beer. Then it shifted to centralized pro- and factories that use forest and food wine, beer, vodka, pickled foods (like duction and became a source of income residue to produce building materials. kimchi), and cheeses of various types. for monasteries and convents. Eventu- The supply chain of the various sec- The old bioeconomy provides some ally, breweries became independent tors of the bioeconomy may give rise valuable lessons for the new bioecon- businesses that were selling beer both to interesting industrial structures. For omy. One of the most important case on the premises and in containers to go. example, in the poultry sector, Tyson studies is beer, which we emphasize The production of beer evolved over Foods supplies feedstock to farmers below. A large body of research has time. In the early days, it required some who raise chickens. In turn, Tyson pro- focused on beer, including an informa- grain, water, and the addition of herb- cesses the chicken into various prod- tive book by Jo Swinnen, The Economics als for flavoring. Since the Middle Ages, ucts. The interaction between Tyson of Beer, as well as several other books the use of hops replaced most of these and the chicken farms is through con- and websites dedicated to this subject. flavorings. In 1876 Pasteur unraveled tract farming. Other chicken processors the secrets of yeast in the fermentation such as Foster Farms use vertical inte- The Evolution of Beer process, and he also developed pas- gration—and own the chicken farms. It seems from the blogs that it’s unclear teurization to stabilize beers 22 years Further, the development of the which came first: beer or bread. His- before the process was applied to milk. bioeconomy is subject to government torians speculate that prehistoric Currently, there is a specialized regulations on acceptable technolo- nomads may have made beer from industry producing different variet- gies. For instance, genetically modi- grain and water before learning to ies of yeast for beer. The West Coast, fied crops are banned in many parts make bread. The ancient Egyptians and especially the Yakima Valley of Europe but used in some parts of who built the pyramids got paid by in Washington, specializes in hops, the United States. It is interesting to beer, bread, and green onions. which is a high-value crop that is man- understand the factors that drive the Different cultures rely on available aged effectively through contracts. emergence of supply chains and the grains to produce beer. They use millet, Brewers operate barley breeding different ways they are regulated. maize, and cassava in Africa, agave in programs to produce malt that will The potential of the bioeconomy Mexico, and rice in Japan. The Egyp- result in beer with specific flavors. has been enhanced immensely by tians grew a specific variety of barley for However, the barley industry, which the discovery of DNA and new tech- brewing beer, and beers were part of is a low-value crop, is declining in nologies that utilize modern molecular many medical prescriptions in Egypt both the United States and Canada. biology, genetics, and information and many other cultures. Even before Taxation of beer was a major source technology. While the bioeconomy people knew about germs, they realized of income for governments. Jo Swin- seems like a new and modern system, that beer and alcohol protected them nen suggested that the Low Countries actually the old bioeconomy is one against contaminated water. (Holland and Belgium) won their inde- of the oldest industries. The old bio- Also, alcoholic beverages provided pendence from the Spanish because economy relied on fermentation nourishment, pain relief, and social- of beer. They financed their armies to produce alcoholic products like izing. People consumed different from beer tax, while the Spanish relied drinks according to their needs. For on tax on silver. The beer won.

2 Giannini Foundation of Agricultural Economics • University of California Beer was very important in the his- Figure 2. Global Consumption of Beer, Wine, and Other Alcoholic Beverages in Volume, 1961–2005 tory of the United States. In 1620 Pil- 180 grims land at Plymouth Rock because Beer 160 the beer supplies were running low. Wine 140 The soldiers of the Revolutionary Army Other alcoholic beverages received a quart of beer a day. Beer 120 was taxed, but James Madison sug- 100 gested a low duty in order to encour- 80 60

age beer production in the states. Billion Liters Prohibition in the United States 40 was a traumatic event for the beer 20 industry, when more than 80% of 0

1961 1967 1976 1979 1994 the breweries disappeared. However, 1964 1970 1973 1982 1985 1988 1991 1997 2000 2003 those that survived became stronger, Source: FAOstat (2010) according to Carlos Hernandez, an greater than $30,000, beer consump- Each of the main inputs to beer has its economic historian from UCLA. Sur- tion declines—this has been true own supply chain. Grains, like wheat vivors switched to other drinks, such in Germany, the United States, and and especially barley, are major com- as sodas, and I imagine that during Belgium. On the other hand, wine modities. A small fraction of the overall Prohibition, they were able to gain consumption increases with income. output is directed to the production a foothold in the black market. While overall consumption of beer of beer. But, there hasn’t been much Another economic historian, Martin is declining, production continues effort to identify specialized grain Stack from Saint Louis University, to increase due to export growth. varieties for the production of beer. suggested that between the 1870s Figure 2 suggests that globally, on The emergence of the craft-beer in- and 1950s, the poor were drinking average, people consume more beer dustry—with its emphasis on product local, unpasteurized beers with many than any other alcohol and that the diversity and quality—provides the op- exotic flavors, while the well-to-do gap is increasing. The reason for the portunity to establish a specialized middle class was buying more expen- increase in beer consumption is that for malt-barley sector. In particular, the sive pasteurized, uniform beer. After most countries in the world, per capita new tools of crop breeding could be Prohibition, there was a period during income growth has been significant. employed to develop special varieties of which the big companies provided However, average income still remains barley that will provide improved fla- bland beer accessible to everyone. below $30,000 per person annually vors resulting in better beers. The case And now, we live in a period of and thus beer consumption continues of beer illustrates how new technologies the budding sector of craft beers. The to outpace other alcoholic beverages. provide new opportunities and the im- difference is that the middle-class As Figure 3 shows, China over- portance of product differentiation in pays the extra for the local, exotic took the U.S. as the largest overall generating value in various segments of beers, while individuals with lower consumer of beer at the beginning of the bioeconomy. income purchase the standard beers. the millennium, and Russia overtook The fermentation process has For example, 46% of millennials Germany in overall consumption a become a science based on increased claimed not to consume Budweiser. couple of years later. Swinnen pres- selection and better management of Figure 1 suggests that beer has ents a more surprising finding in that yeast. The production of hops, which been the dominant alcoholic bever- Russians consume more beer than is a high-value crop, is done through age in the U.S. over the past 100 vodka today. He suggests that one elaborate contractual agreements that years. Consumption of beer peaked reason could be that advertisements emphasize quality and there are ongo- in the 1910s, declined significantly of vodka were disallowed in 1995. ing processes to develop new varieties during Prohibition, then slowly recov- of hops. Beer companies also compete ered until the 1980s—but has since Beer and the Bioeconomy to upgrade the quality of their prod- declined. Wine consumption per capita Beer is perhaps the oldest sector of the uct by securing access to high-quality has risen steadily since Prohibition. bioeconomy, and its history has many water. As the willingness to pay for Swinnen suggests that beer con- lessons for the modern bioeconomy. In beer increases, there will be continuous sumption increases with per capita the case of beer, feedstocks vary across efforts to increase the quality of inputs. income but once GNP per capita is locations and have changed over time. Furthermore, the supply chain of beer

Giannini Foundation of Agricultural Economics • University of California 3 Figure 3. Beer Consumption in the World, Billion Liters, 1961–2007 of science to increase the diversity and safety of the product, and the neces- 40 USA UK Brazil France sity of creative regulations that ensure Germany China Russia safety but don’t impede creativity. 35 The story of beer suggests that 30 expansion of the bioeconomy to other fields will provide many opportunities 25 to expand farming to other high-value

20 products. The structure of the industry Billion Liters that will produce this new source of 15 feedstock will be unveiled over time; it is likely to emphasize use of contract- 10 ing as well as vertical integration. 5 The new sectors of the bioeconomy may compete with traditional agri- 0 cultural sectors for resources such as

1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 2005 1999 2001 2003 2007 land and water. Recent concerns over Source: Reuters Blog availability of resources to produce both food and biofuel is an indica- includes two modes: (i) large brewer- distribution were introduced for tor of the potential for conflict. Thus, ies that emphasize distribution through safety, as well as to serve the interests one of the challenges of traditional retail stores, and (ii) small breweries of various groups such as brewers. agricultural crops is to increase pro- that focus on local markets and make The negative side effects of alcohol ductivity to increase the production of much of their income on the premises led to an excessive reaction in the form non-conventional, high value-added of selling both beer and food items. of Prohibition in the United States. products and develop safe, cost-effec- Technology and regulations are But by 1933, society realized the folly tive ways to produce new feedstock. two drivers of the various sectors of of excessive regulation and bans, and the bioeconomy. The discovery of the repealed Prohibition. But even after Suggested Citation: use of hops in beer production around Prohibition, breweries were denied the Zilberman, David. 2015. "Beer: A Poster the 14th century improved quality and right to sell beer to the public. How- Child of the Bioeconomy." ARE Update 19(2): 1-4. University of California taste, as hops contribute bitterness ever, in 1982, State Assembly Bill 3610 Giannini Foundation of Agricultural (to counter the sweetness of barley), passed, which legalized brewpubs in Economics. add flavor and aroma, and contrib- California. It was followed by similar ute to the preservation of the beer. legislation elsewhere and spawned the David Zilberman is a professor and holds the Refrigeration, gradually introduced craft beer industry in the United States, Robinson Chair in the agricultural and resource in the 19th century and improved ever which became the most creative and economics department at UC Berkeley. He can be since, redefined brewing. In the 1870s, dynamic segment of the beer industry. contacted by email at [email protected]. Adolphus Busch pioneered the use of The rich history of beer illustrates double-walled railcars and a network of the potential and the unpredictability of icehouses to make Budweiser the first the nascent sectors of the bioeconomy. national brand. Refrigeration improved It demonstrates the expanding revenue production processes and created potential originated in the agricultural new types of beer, assured uniform sector as feedstock for new products. products, and expanded the reach of It also highlights the importance of breweries becoming a major source of cleverly designed supply chains for economies of scale in beer production. marketing differentiated, high-value, The history of beer at various specialty products. These products can locations was affected by its taxa- be sold through stores or through spe- tion, as well as regulation on alterna- cialized outlets that can be controlled tive products such as wine. Regula- by the brewer. The future of the bio- tions of production practices and economy also depends on the capacity

4 Giannini Foundation of Agricultural Economics • University of California