Beeronomics: I’ll drink to that

This past week I attended the fourth Beeronomics conference in Seattle. The conference brings together economists and other scientists who work on the economics of beer. The first three conferences were in Europe; this was the first U.S. conference.

I was excited about the conference first because of the location: I wanted to see my friends and family in Seattle; our new granddaughter, Nava; her brother Geo, and her parents, Shie and Leigh. The weather was warm and pleasant and I guess that climate change may benefit Seattle (unlike Berkeley, where the heat seems unbearable).

Of course, I was also very curious about the topic; but I prefer wine to beer, and knew relatively little about it. Still, beer plays a significant role in the life of many of my friends, and I have always been fascinated by the way beer is marketed.

Finally, I was scheduled to give a talk, “Beer: The Poster Child of the Bioeconomy,” which allowed me the opportunity to learn about it.

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As I understand it, the Beer Consortium was founded by two beer aficionados: Jo Swinnen and Julian Alston. Actually, their fascination with beer seems to be shifting, from the applied side to theory. The consortium has attracted the attention of the industry and a diverse group of fascinating scholars.

The conference was organized by Jill Macloskey, AAEA president and one of our most prominent alumna, and Tom Marsh, a professor at Washington State University. It was further supported by WSU, whose provost, Ron Mittelhammer, participated in the conference.

Beer through the ages

I learned a lot about beer from this experience. First, it seems from the blogs that it’s unclear which came first: beer or bread? Historians speculate that prehistoric nomads may have made beer from grain and water before learning to make breadThe ancient Egyptians who built the pyramids got paid by beer, bread and green onions. Different cultures use different grains to make beer; and beer served for nourishment, pain relief, and socializing.

Swinnen suggested that the Low Countries (Holland and Belgium) won their independence from the Spanish because of beer. They financed their armies from beer tax, while the Spanish relied on tax on silver. The beer won. We learned that people consume more beer than any other alcohol and that the gap is increasing in spending and consumption. As in many other arenas, China has overtaken the U.S. as the largest consumer of beer.

What’s more surprising is that Russians consume more beer than vodka. Swinnen suggests that one reason could be that advertisements of vodka were disallowed in 1995. He also suggests that beer consumption increases with per capita income, but that once GNP per capita is greater than $30,000, beer consumption declines – this has been true in Germany, the U.S., and Belgium. But overall production continues to increase due to increased export.

book cover: the economics of beer

Prohibition in the U.S. was a traumatic event for the beer industry. More than 80% of the breweries disappeared, but those that survived became stronger, according to Carlos Hernandez, an economic historian from UCLA. Survivors switched to other drinks, such as sodas, and I imagine that during Prohibition, they were able to gain a foothold in the black market.

Another economic historian, Martin Stack from Saint Louis University, suggested that between the 1870s and 1950s, the poor were drinking local, unpasteurized beers with many exotic flavors, while the well-to-do middle class were buying more expensive pasteurized, uniform beer. After Prohibition, there was a period during which the big companies provided bland beer accessible to everyone.

And now, we live in a period of the budding sector of craft beers. The difference is that the middle-class pays the extra for the local, exotic beers while individuals with lower income purchase the standard beers. One encouraging statistic is that 46% of Millennials claimed not to consume Budweiser.

Beer is produced from yeast, hops, water and malted barley. The West Coast, and especially the Yakima Valley in Washington, specializes in hops, which is a high-value crop and is managed effectively through contracts. But the barley industry, which is a low-value crop, is declining in the U.S. and Canada. Furthermore, there is little breeding of it to provide more flavorful beers.

Enter craft beers

One interesting lesson from this conference is that the emergence of the craft-beer industry — with its emphasis on product diversity and quality — provides the opportunity to establish a specialized malt-barley sector. In particular, the new tools of crop breeding could be employed to develop special varieties of barley that will provide improved flavors resulting in better beers.

I expect that the 21st century will see immense growth in the bioeconomy, which consists of the sectors of the economy that use biological processes to produce products like food, fiber, mineral, fuel and other consumer goods. The bioeconomy is part of the renewable economy (which also includes solar energy and the recycling sector) that will allow humanity to deal with the increasing monetary and environmental cost of non-renewables and climate change.

The potential of the bioeconomy has been enhanced immensely with the discovery of DNA and new technologies that utilize modern molecular biology, genetics and information technology. Beer is perhaps the oldest sector of the bioeconomy, and its history has many lessons for the modern bioeconomy. The supply chain of the various sectors of the bioeconomy consists of at least two elements: the production of feedstocks and their processing to a final product. In the case of beer, feedstocks vary across locations and have changed over time. Beer-like products use wheat, corn and of course barley. The fermentation process has become a science based on increased selection and better management of yeast.

Technology and regulations are two drivers of the various sectors of the bioeconomy. The discovery of the use of hops in beer production around the 14th century improved quality and taste, as hops contributes bitterness (to counter the sweetness of barley), adds flavor and aroma, and contributes to the preservation of the beer.

Refrigeration, gradually introduced in the 19th century and improved ever since, redefined brewing. It improved production processes and created new types of beer, assured uniform products and expanded the reach of breweries becoming a major source of economies of scale in beer production.

Beer and public policy 

The history of beer at various locations was affected by its taxation as well as regulation on alternative products, such as wine. Regulations of production practices and distribution were introduced for safety, as well as to serve the interests of various groups, such as brewers.

The negative side-effects of alcohol led to an excessive reaction in the form of Prohibition in the U.S. But by 1933, society realized the folly of excessive regulation and bans, and repealed Prohibition. But even after Prohibition, breweries were denied the right to sell beer to the public.

In 1982, the current mayor of Berkeley, then state Assemblyman Tom Bates, sponsored AB 3610, which legalized brewpubs in California. It was followed by similar legislation elsewhere and spawned the craft beer industry in the U.S., which became the most creative and dynamic segment of the beer industry.

The rich history of beer illustrates the potential and the unpredictably of the nascent sectors of the bioeconomy. It demonstrates the expanding revenue potential originated in the agricultural sector, the importance of cleverly designed supply chains, the challenge of combining globally affordable products with differentiated, high value, specialty creations, the capacity of science to increase the diversity and safety of the product, and the necessity of creative regulations that assure safety but don’t impede creativity.

What is CNR (College of Natural Resources)?

Especially at the start of the semester, I am frequently asked by students, parents, sponsors, and otherwise curious people, what is the College of Natural Resources. I actually asked it myself; and over the years I think that I got the answer. The college embodies all the contradictions, practical deliberations, and social debate relating to agriculture, the environment, natural resources, and biotechnology.

The CNR, like any living thing, is a work in progress. It originated from the merger of two old-fashioned schools: the school of agriculture and the school of forestry that aimed to form a school with a cool name, the College of Natural Resources.

But this name is misleading. For instance, minerals are natural resources and we do not have a mining division, and humans are natural resources and we lack a focus on medicine. So perhaps the school should have been called the College of Agriculture, Food and the Environment, in short, CAFÉ. Which would have been cool but also realistic. This name would also be consistent with the structure of the college – it has four departments, agricultural resource economics (ARE), nutrition and toxicology (NST), plant and microbial biology (PMB) and environmental science policy and management (ESPM) (which is less cool than ESPN, the sports network, Go Bears!).

Recently, another unit, the Energy & Resources Group (ERG) joined the College, and ARE is adopting the Energy Institute, so the accurate name should be CAFEE! These developments tell us that schools are living things: they can be re-organized and adapt to the changing times. I am sure that structures will change, but research on these topics will continue here at Berkeley.

While the content of CNR is evolving around several themes, a key element of its identify is that it is a professional school, which means that it emphasizes finding solutions to problems rather than only understanding and analyzing various phenomena. To some extent CNR is to biology what engineering is to science. I believe that the 21st century will be the century of life sciences and the bioeconomy, and thus the College is set for success if we are opportunistic, and with that our students will be employable.

While here, students benefit from an endearing feature of CNR: it is student-friendly. In our smaller college, faculty are approachable and students form collaborative networks. Another worthy feature of the college is having cooperative extension specialists. These are researchers who link the research at Berkeley with the needs of the practitioners in the field (farm advisors, policy makers, farmers and foresters, NGOs, etc). I have a 15% appointment as a specialist, and have enjoyed the real world inspiration that it has provided me.

The current challenge of the College is to develop a unique entity, and loyalty among faculty, alumna, and students. The loyalty of faculty members traditionally is to their departments. When I was a graduate student and young faculty member, I knew and loved ARE. It has a great tradition, being the best agricultural economics department in the world (at least in our minds and in the NRC survey). But, I did not know, nor did I care, in which college I worked. The dean of the college was a problem of the chair and the college bureaucracy, a barrier to the smooth flow of resources from different sources to the department.

All this has changed gradually. Over the years CNR has built an identity for itself by establishing several common undergraduate programs, various centers of research, a summer program (Beahrs ELP), a masters program (MDP), and an international program. While the college is rooted in California, its research and education program address global issues – and it has become a hub for international development research and outreach for the Berkeley campus.

But the real driver that led to the strengthening of the College has been economies of scale; administrative functions have moved from the department to the college and now to the university, and while the quality of service has sometimes declined (at least in my humble opinion), I am an optimist and believe that they will figure it out before I retire. It seems, or I hope, that centralization of functions has saved resources and one of the undisputed benefits of it is that we have a central development fundraising office. The office has already accomplished quite a lot.

Another benefit of the centralization is that we enhance conversation among and between disciplines. And as I got to know my college (and colleagues) better, I realized that it encompasses all the conflicts and challenges of agricultural and natural resource sciences. CNR has excellent plant biologists who advance frontiers in genetic engineering and agro-ecologists who develop new approaches to organic farming. Our agricultural economists that see an important role to corporations, market forces as well government regulations in agriculture, and our food institute that has embraced a naturalist, slow-food approach to agriculture and food systems. We have cutting edge research programs on climate change, food and nutrition, biodiversity, preservation, forestry, range management, water sciences, economic development, and alternative energy.

Most of the time we still operate in parallel in our separate silos, but slowly barriers are breaking and creative collaborations emerge. Researchers in CNR increasingly address cross-disciplinary topics — like sustainable development, climate change, and the bioeconomy — that tend to shake the disciplinary walls.

For the enlightened student, CNR can provide a rare exposure to alternative and opposing perspectives as well as a path to diverse career paths. In the college-wide programs like the ELP and the MDP, we try to provide a space to present alternative perspectives, and some graduate students have been creative in integrating differing approaches to address research challenges.

Universities are places where multiple paradigms coevolve and compete — and that is happening now in CNR. Because we emphasize alternative approaches to study nature, we can incorporate all of these views, achieve excellence through diversity, and let a thousand flowers bloom.

Smart adaptation to climate change in agriculture: A recipe from Milan

I returned from a ten day stay in Milan where I attended both the International Conference of Agricultural Economists (ICAE) triennial meeting as well as a workshop on climate smart agriculture sponsored by FAO.[1] Milan is known as the “city that works” in Italy, and indeed I marveled at its modernized public transportation, cleanliness, and elegance. Of course, it also has its share of magnificent older buildings, churches, and neighborhoods that are a must see when visiting Italy.Of course, it also has its share of magnificent older buildings, churches, and neighborhoods that are a must see when visiting Italy.

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The ICAE conference was held on the campus of the University of Milan—a converted hospital that was built in the 15th century. It is the best venue of the best-run conference I have attended in many years. The FAO workshop took place in a palace that was built by a rich merchant in the 18th century, was the home of the Austrian queen, then sold to Napoleonic government in 19th century, and is now owned by the Italian government. It has a marvelous mirror room and a great yard for lunches and other outdoor activities. The workshop focused on a line of ongoing research on how climate change considerations should affect agricultural investments and policies in developing countries in the near future (the next 15-20 years). It emphasized identifying effective strategies for adaptation to (rather than mitigation of) climate change, and assessing their impacts.

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It is predicted by the IPCC and other notable groups that the main short term effect of climate change is the increased likelihood of extreme weather events (droughts, typhons, etc.). In the longer run (after 2040), climate change may lead to rising water levels and significant “migration of weather” (e.g. the weather in San Francisco in the future may be similar to the current weather of Los Angeles). The main forms of adaptation to long run changes includeinnovation and adoption of alternative agricultural practices and economic activities or migration away from locations where farming and livelihood become unfeasible to new locations . The main proposed forms of adaptation to the short term increases in the likelihood of extreme weather events are adoption of more climate resilient crop varieties and management practices and introduction of crop insurance and input subsidies. Based on this background and the discussion in the workshop, I developed my own conclusions on the design of effective adaptation strategies for the near future.

First, agricultural investment activities in the near future should address both long and short term challenges of climate change. While weather migration and rising water levels may be outcomes in the distant future, designing investments to protect against rising water levels and the development of institutions and arrangements that will foster migration requires significant lead time.

Second, agriculture is evolving regardless of climate change, and investment and adaptation strategies should be forward looking and aim to address emerging agricultural realities, not the realties of the past. Smallholders across the world are becoming less autarkic and are engaging more frequently in trade, as more and more of them own cell phones and even bicycles. They sell to supermarkets and hold jobs outside of the farm. Thus, the introduction of production practices that will increase average productivity and earnings that contribute tofinancial resilience can be an important component of adaptation strategies. Further expansion of agricultural trade networks, transportation and communication channels, and access to credit markets that will allow farmers to save and borrow at reasonable rates will also be valuable in addressing crisis situations.

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Third, the emphasis on the introduction of resilient farming and other practices that will help to withstand weather shocks has its limits. Climate resilient strategies are very desirable if they are not very costly in terms of average yield or income.  Moreover, resilient strategies have their limitations, as they may not be able to withstand the worst-case scenarios (severe drought or flooding). The build up of agricultural resilience should be accompanied by construction of modern roads and building up local storage as a safety measures for extreme situations. That suggests that research on adaptation should quantify the cost of resilience strategies, which will allow parties to determine which ones to use, where, and to what extent. Research should also be conducted on the feasibility and financial viability of insurance schemes as a mechanism to address increases in the likelihood of extreme events, and its use limited to situations where it is economically viable.

Fourth, the objective of agricultural development strategies should be that farmers will thrive, not merely survive. Thus, assuring food security is a threshold, but agricultural and development strategies should aim higher. While assuring a competitive farm sector consisting of many smallholders is a valuable objective, we need to realize that sometimes farms may be too small to succeed (the opposite of too big to fail). Policy-makers should not aim to prop up small farms at any cost, and natural processes of migration away from farming and consolidation resulting in fewer, but stronger, small farmers may be welcome and will enhance their ability to withstand the challenge of climate change.

Fifth, farmers in developing countries are continuously engaged in global supply chains, which are vulnerable to extreme weather and other impacts of climate change, and private sector firms are engaged in adaptation activities of their own. Coordination and planning of climate change policies should be synergistic with activities of the private sector, and emphasize public sector efforts  to complement rather than compete with the private sector.

Our workshop in Milan helped us to develop priorities for future research efforts. The beauty of Milan and its historical heritage are inspiring, but to be effective, we need to go out to the field, solidify our analysis, and verify and update our initial conclusions.

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[1] A special thanks to my partners Leslie Lipper, Nancy Mccarthy, Solomon Asfaw, and Giacomo Branca who organized the workshop.