Wednesday 15 May 2024

Homebrewing as the gateway to craft brewing

Despite some fluctuations and concerns about reaching the peak, one of the key trends in the brewing industry (both in New Zealand and in most Western countries) has been the rise of craft brewing. However, craft brewing remains quite concentrated in some areas rather than others. What might explain the regional concentration of craft brewing?

That is essentially the question that this 2019 article by Michael McCullough (California Polytechnic State University), Joshua Berning (Colorado State University), and Jason Hanson (History Colorado), published in the journal Contemporary Economic Policy (sorry, I don't see an ungated version online). Specifically, they look at the effect of legalising the homebrewing industry on brewing across states in the U.S. As they explain:

Amendment XXI, ratified in 1933, repealed Prohibition and made the commercial production of beer and other alcoholic beverages legal again in the United States, although it left it to the states to allow and regulate brewing, vinting, and distilling within their borders. Importantly, the amendment solely omitted homebrewing, the brewing of beer at home for personal consumption, from the list of legal activities...

From 1933 to 1978, 13 states affirmed the right to homebrew in spite of the federal ruling... In 1978, President Carter signed H.R. 1337 which legalized homebrewing, although federal law deferred to state statutes. At that time, only an additional nine states opted in to legalize homebrewing. The remaining 28 states gradually legalized homebrewing over the next 35 years, with Alabama and Mississippi being the last in 2013.

McCullough et al. look at how the date that a state legalised homebrewing affected the commercial brewing industry, hypothesising that:

...states that legally restricted homebrewing may have hindered the development of future brewmasters and therefore the expansion of their own brewing industry...

However, there are some challenges here, because states that legalised homebrewing earlier may have done so because of high demand for beer, so any relationship between brewing and legalisation of homebrewing would arise because both are driven by beer demand (a common cause, or confounding). Or, large breweries might lobby for less restrictive laws on all brewing, thereby cultivating a homebrewing culture that would also lead to more demand for their products (reverse causation). So, a simple model that looks at the relationship between legalisation of homebrewing and brewing would not demonstrate a causal relationship, just correlation.

McCullough et al. solve this problem using an instrumental variable model, which involves finding an instrument that is correlated with homebrewing legalisation, but which would have no effect on commercial brewing more generally. They argue that the number of years since each state repealed their antimiscegenation laws (laws prohibiting marriage between different races) is such an instrument, because it represents "that measures a state’s willingness to pass legislation in favor of individual rights", and because these laws were pure-and-simple racism, they aren't related to brewing [*].

Using data from 1970 to 2012, McCullough et al. find that:

...the legalization of homebrewing has a positive effect on the average number of breweries per capita. The estimate suggests roughly 7.1 breweries per 1 million people.

McCullough et al. also show that there is an increase in the growth rate of brewing after homebrewing is legalised. Moreover, when comparing how legalisation of homebrewing affected breweries of different sizes, they find that:

...the change in homebrewing laws had a significant effect on the number of small breweries. There were roughly 5.6 more breweries per 1 million people. Furthermore, the number of breweries is growing over time... Looking at medium-sized breweries... we find that the effect of legalization is smaller and not growing significantly over time...

There is no significant change in the number of larger breweries per million people following changes in homebrewing laws...

These results are consistent with their hypothesis, because if homebrewing leads to the development of brewmasters, you would expect a greater number of small breweries to develop, since that's what the brewmasters would create first (to become a middle-sized or big brewery, you probably have to start out as a small brewery first). McCullough et al. also show that there is a statistically significant effect on craft beer production, where:

...craft production increases significantly following the legalization of homebrewing. The estimated impact is roughly 85,000 barrels per million people.

So, it seems clear that homebrewing is the gateway to craft brewing. As McCullough et al. conclude:

While one cannot draw the conclusion that the mere legalization of homebrewing was the main driver for the existence of the beer brewing industry as it is today, one can say that it would not exist in its current fashion without such political action.

*****

[*] However, as McCullough et al. partially note in the paper, states that are more religious and conservative may be more likely to maintain antimiscegenation laws, and more likely to be in favour of temperance. McCullough et al. wave this away by saying that they control for alcohol laws like Sunday sales bans, as well as state fixed effect, but including those variables is only likely to partially allay concerns about the instrument.

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