Price Linkage and Volatility Spillover of Beer Inputs

Driven in part by increasing demand of beer, the rising price of critical inputs, such as hops and barley, reduce the profit margin of the craft breweries in United States. However, brewers are left with limited tools to manage risk. Considering cross-hedging in futures market, we investigate price linkages and volatility spillover among hops, barley, and other selected agricultural products. Based on previous studies, hard red wheat, soft red wheat and corn are selected as the grain inputs most relevant to the brewery industry. We use monthly price data and nearby future price data, estimate VAR and VEC models to capture short and long-run price relationships, then estimate a BEKK-ARCH model to analyse the volatility spillover effects. The empirical results provide evidence supporting bidirectional long-run price relationship between hops and barley, but only short-run relationships between hops and other grain inputs. For barley, the long-run price relationships are found in all barley related pairs, e.g. barley-soft red wheat, barley-hard red wheat and barley-corn. Moreover, we identify volatility spillover transmission from soft red wheat and barley to hops. And soft red wheat, hard red wheat and corn exhibit volatility spillover effects on barley. In addition, the in-sample prediction shows the great fitting performance. This provides the empirical evidence to cross hedge the price risk of hops and barley using soft red wheat, hard red wheat and corn in brewery industry for the future studies.