At What Cost — Abrupt Skagit Valley Malt Closure Highlights Risks of Craft Malt Expansion — Good Beer Hunting

THE GIST

The unexpected closure and forthcoming bankruptcy of Washington State’s Skagit Valley Malt has left employees, breweries, distilleries, and barley farmers reeling, with financial and business ramifications impacting them all. At its closure, Skagit Valley was contracted with growers for 3.5 million pounds of barley worth about $500,000 for those farmers, while 272 distilleries and breweries relied on Skagit Valley for a variety of base and custom malts. News of the closure was first reported by Washington Beer Blog.

The ripple effects downstream following the company’s end have the potential to reverberate for weeks as everyone determines what’s next—whether that means finding a new company to sell barley or breweries who need to find new sources. The closure was a shock to staff and business partners who had watched Skagit Valley add two new malting machines as part of a production expansion that began earlier this year. Eric Buist, former marketing manager for Skagit Valley, says the company’s board of directors abruptly broke the news to staff on June 15, laying off all but two of the 18 employees (those two will be retained to package some remaining grains).

Bruist says that while the abrupt shutdown was unexpected for the 12-year-old company, many on the team also knew that “things weren’t great financially for us this year.” The expansion was set to cost a total of $11 million and be completed next year, according to GoSkagit.com. It would reportedly increase the facility’s capacity six-fold.

“We’d been able to attract investors in the past and I think with interest rates going up and inflation and stuff they were a little more hesitant,” he says. “We were moving forward with the expansion on the premise of fundraising coming through, and it didn’t.”

But the numbers show a facility that already wasn’t firing at full capacity: With eight 10-ton drums installed, each at a cost of roughly $1 million, Skagit Valley Malt had the potential to produce 4,160 tons of malt annually (8.32 million pounds). Buist says the company produced between 3.8-4 million pounds of malted barley last year, with more capacity expansion planned.

Skagit Valley joins a roster of recently closed or for-sale malting facilities. Ohio’s West Branch Malts and Vermont Malthouse shuttered earlier this year, and New York’s 1886 Malt House closed last year. In Oregon, Gold Rush Malt is for sale, and Mecca Grade Estate Malt is seeking outside investors or an outright acquisition.

Together, this news might seem to indicate trouble for the craft malt industry, but the truth is more nuanced: Craft maltsters, Skagit Valley included, say they’re not struggling to attract customers, but at the same time are facing a need for critical levels of cash flow and funding in order to create economies of scale in a capital-intensive, low-margin craft malt industry. Friction comes from the high cost of equipment and raw materials necessary to take local craft malting facilities to the next level of output, which would create efficiencies and make them more profitable.

“I’m selling everything I make as fast as I can make it. There’s a market there and there’s potential,” says Tom Hutchinson, owner of Gold Rush Malt. He estimates he would have to spend between $500,000 and $1 million for Gold Rush to double its output; instead, Hutchinson is trying to sell the business. “To expand production would require investing a lot more capital, and I’m not going to invest any more of my personal money. … The economies of scale have always been a big issue for people in craft malt.”

WHY IT MATTERS

As the war in Ukraine and high shipping costs made commodity malt more expensive, small maltsters like Skagit Valley and others saw 2023 as an opportunity for more locally grown and malted grains to grow in sales and operations. But expansion comes at a high price, and how any expansion is financed can make all the difference. Buist says private equity and investment groups were among the financial backers of Skagit Valley Malt.

The financial issues that faced Skagit and eventually were part of its closure are part of the craft malting industry to various degrees. Balancing current and future cash flow amidst the potential for huge growth is hard enough for any business, but adding the many variables inherent in an agricultural product, including weather (and climate change), or harvest timing and yields, adds layers of complexity when raising money from people who want certainty from investments.

“The worlds that some of these owners and investors were coming from were very high-margin worlds, and I don’t think they fully understood that this industry is slow growth, low margin, high risk,” says Andrea Stanley, co-owner of Valley Malt in Holyoke, Massachusetts. Stanley says that equipment for her other business, the flour mill Ground Up Grains, costs less than malting equipment, even to process the same amount of grain. “With craft malting, you’re talking about millions of dollars [to purchase equipment] and 3-4% margins.”

These relatively low margins mean many maltsters, including Jeff Bloem at Murphy & Rude Malting Co. in Charlottesville, Virginia, take a slow, cautious approach to financing expansion. His company is in the middle of a five-year growth plan financed with a mix of equity capital, bank loans, community raises, organic growth, and government grants.

“What I have come to terms with is that the financing play has to jive with aspirations, not the other way around. Allowing the needs and requirements of the financing to influence our goals or take undue risks is simply too reckless for me,” Bloem says. “The running joke in the [Craft Maltsters] Guild is that we all want to know what the ideal size is, but none of us have figured it out yet. We are all still looking for the sweet spot but the answer is different based on aspirations.”

Ron Extract, co-creator of Garden Path Fermentations in Burlington, Washington, sees a parallel between breweries and maltsters when it comes to the challenges of chasing growth and expansion. Some breweries that a decade ago financed expansion at any cost are now merging, selling, or going out of business.

“There isn’t room for everyone to be a giant regional brewery,” Extract says. “And that’s true on the malt side. At a certain point, some producers need to be niche producers.”

Garden Path is itself a niche producer of farmhouse ales, ciders, and wines made from ingredients grown in the Skagit Valley. It had relied on Skagit Valley Malt for “literally every ounce of malt” that it uses to make beer. Extract says his company hasn’t yet figured out how it will replace that critical beer ingredient, but he hopes that a new malting facility will emerge that keeps area farmers producing grains for brewing and distilling.

“This will leave a significant void that I feel will have to be filled in some way. We’re trying to figure out: What can we do for local farmers and to keep the local grain for malting alive in Skagit Valley?” Extract says.

In craft malt, growth is expensive, but so is staying small. A common reason breweries don’t buy craft malt is because they consider it too expensive and not consistent enough compared to commodity malt purchased from national or international companies. Expanding production can help a small malting house achieve greater economies of scale, potentially offering better prices and more consistent batches.

Stanley says Valley Malt aspires to malt roughly three times as much grain as it does now, hoping to one day purchase grain from about 2,000 acres, up from its current level of 600 acres. She says a diversified craft malt industry would have space for all sizes of businesses, from regional maltsters to niche, local maltsters who service just two to three breweries.

“I aspire to be more at the price point of a European premium malt so that is part of why I want to have more acres planted and get another germination bin. I want to realize the efficiency so that I can pass that cost [savings] on to my customers so that I can get our malts priced under $1 per pound,” Stanley says.

Valley Malt has so far tried to allow organic growth to drive its expansion, financing an expansion last year through a bank loan backed by the Small Business Administration. Currently, Stanley is waiting to purchase a second germination bin, which will approximately $900,000. She is holding off until after this year’s barley harvest, which will tell her whether the company can afford a down payment on that equipment and whether there is enough barley being harvested to demand a second bin.

At Mecca Grade, founder Seth Klann is open to either bringing on an additional equity investor —someone who shares his commitment to malting estate-grown barley—or selling the business outright. He says additional cash would fund a sales representative (which Mecca Grade doesn’t currently have) and potentially a larger brewhouse. Rather than growing sales exponentially, Klann hopes these upgrades would allow Mecca Grade to deepen its commitment to vertical integration: malting barley grown on Klann’s family farm for use in its own brewhouse, and to service a small number of external clients.

Stanley and Klann believe in a future for a thriving craft malt scene in the Pacific Northwest. Stanley says two critical keys for Skagit Valley’s success—great growers and paying customers—are in good supply there.

“They were in an area that’s set up for success so it’s really unfortunate that it didn’t take hold, because it wasn’t about the region and the capability of the growers,” Stanley says. “You’ve got to have the right feet in the right seat. The seat is great; I think the feet weren’t the right feet. Maybe somebody with the right passion will come take it over.”