All hopped up but still a ways to grow: surging sales in Colorado's beer industry tempered by price spikes for ingredients.

• Author: Dorris, Jennie
• Position: VINE - Industry overview

Last year, Colorado's breweries faced a unique situation. Big brewers merged, craft brewery sales surged, but ingredients--from malts to hops to glass for the bottles--went through the roof.

Colorado ranks first in the country in overall beer production and, with 92 active craft breweries, the state weighs in as the third largest craft brewing producer of any state. In 2007, the beer industry pumped close to $6 billion into the state's economy.

The breweries are also spending on themselves--Great Divide Brewing just sank $1.2 million in a new bottling line after seeing 45 percent sales growth last year. Left Hand Brewing just welcomed a new brewhouse and tanks, nearly doubling their output. Oskar Blues built a 35,000-square-foot facility that opened in April and tripled capacity with new brewing and canning systems. And New Belgium announced in June that Fat Tire will be offered in cans.

However, breweries big and small are struggling to keep up with the price of ingredients--hops prices rose at least fourfold, and malt prices doubled. Earlier this year, the rising cost of beer ingredients was one of the reasons cited by Flying Dog Brewery--Colorado's second biggest craft brewery--to move to Frederick, Md.

CRAFT BEER'S CHANGING ECONOMY

Last fall, craft brewers were faced with a sudden hops shortage for a variety of reasons. First, a warehouse fire in Washington destroyed 4 percent of the world's hops crop. Growers also weren't making money on their hops, and had incentives to replant with corn for ethanol. Finally, bad crops abroad had European and Asian breweries buying U.S. hops.

The end result is that breweries have seen prices jump from $6 a pound to $30 a pound. This year, 8,000 new acres of hops were planted in the United States, but due to the worldwide shortage, farmers are growing bittering hops rather than aroma and flavoring hops as favored by craft brewers.

"This is really hitting breweries hard," says Paul Gatza, director of the Boulder-based Brewers Association.

Marty Jones, director of publicity and marketing for Lyons-based Oskar Blues, says the shortages were a surprise. "Right when we're in the throes of building a new brewery we got blindsided--no one saw this coming."

Hops haven't been the only problem--Europe and Australia have both suffered from a drought that has affected the volume of harvestable barley. Also, because corn has been associated closely with ethanol production, it was moved out of the livestock and feed...