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Sunday, 03 August 2014 22:00

Brewery tax credit aims to give Michigan farmers a boost

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New legislation designed to encourage Michigan-based microbreweries to source ingredients from in-state growers would provide tax breaks to brewers that meet certain thresholds. However, many brewers question whether there’s enough of an in-state supply of hops and malted grain to make the proposal feasible for most companies. New legislation designed to encourage Michigan-based microbreweries to source ingredients from in-state growers would provide tax breaks to brewers that meet certain thresholds. However, many brewers question whether there’s enough of an in-state supply of hops and malted grain to make the proposal feasible for most companies. COURTESY PHOTO

Michigan farmers targeting the state’s expanding craft beer business could benefit if a newly proposed “Farm to Glass” bill gains traction in the state Legislature.

The recently introduced Farm to Glass Bill, House Bill 5275, aims to provide tax incentives for beer, wine, mead and cider makers using Michigan-grown ingredients such as hops and grain in their products.

While craft beer production has soared in the state over the past decade, Michigan-based agriculture has been slow to catch up, said Rep. Douglas Geiss, D-Taylor, who introduced the bill. By providing incentives for licensed beverage producers, Geiss hopes to drive demand for Michigan-produced ingredients and grow the state’s agricultural sector.

Currently, the bill is up for review in the House Regulatory Reform Committee. Geiss expects the committee to vote on the legislation this fall.

The Farm to Glass Bill provides breweries, wineries and other producers with a tax credit of 8 cents per gallon on the first 500,000 gallons of production and 4 cents per gallon on the next 14.5 million gallons, according to the legislation. The credit would spare local craft brewers from having to pay thousands of dollars in taxes annually if they meet certain conditions for using Michigan-based ingredients.

For example, Grand Rapids-based Brewery Vivant aims to produce around 4,500 barrels of beer this year, said Jason Spaulding, the brewery’s co-founder. At 31 gallons per barrel, that equates to a savings of approximately $11,000 on the company’s state taxes — a significant number if the company’s entire production were to be in compliance with the legislation.

The legislation would also provide a marketing boost for brewers. Companies would be allowed to incorporate a Michigan Farm to Glass graphic on the labels of their qualified products. This added marketing component answers customers’ calls for heightened product familiarity and is designed to drive consumer demand for Michigan products, Geiss said.

If the legislation passes in its current form, breweries, wineries and other producers could expect to start receiving the credit as early as Jan. 1, 2015.

However, some West Michigan brewers are skeptical about the feasibility of the new legislation and question its immediate impacts on both the craft beer and agricultural industries. While the legislation does take a step in the right direction of supporting breweries’ use of local agriculture, it may take 10 years for it to become feasible, said Spaulding of Brewery Vivant.

“I remember first reading it and thinking that it sounded great,” he said. “Then I got into the meat of it and realized that we weren’t going to be able to utilize it.”

To be eligible for the credit, breweries would be required to source at least 20 percent of their hops and at least 40 percent of other ingredients from Michigan sources. Starting in 2020, those figures rise to at least 40 percent of hops and 50 percent of other ingredients.

Wines, meads and ciders would qualify for the credit if at least 40 percent of their ingredients were grown and produced in Michigan in 2015, but that threshold would increase to 50 percent by 2020, according to the legislation.

Brewers say they aren’t convinced that Michigan’s supply of ingredients can meet the legislation’s requirements — especially when it comes to malted grain, Spaulding said. Malting refers to the roasting process by which cereal grains are preserved at the height of their starch content and therefore, produce the most alcohol.

“Where the legislation falls off is with the grain inputs,” Spaulding said. “The quality is questionable and quantity unpredictable to the point that we couldn’t really plan on making a Michigan-based beer with those requirements.”

Calls for local malt have already prompted startup Pilot Malt House LLC to set up shop in Jenison. The company delivered its first order in January and has since added approximately two dozen customers. It’s currently in the middle of a crowdfunding campaign for a “six-figure” capital raise that it plans to use to scale up the business, founder and CEO Erik May told MiBiz in a previous report.

Despite those efforts, Michigan’s malting industry is in its infancy and lacks the capacity to process the volume brewers need, Spaulding said.

“From my understanding, we can grow the grain we need in Michigan, but it’s mostly grown for livestock,” Spaulding said. “Maybe this will spur some Michigan farmers and more importantly a malting company to establish here.”

Breweries may be able to work around this lack of capacity by shipping Michigan-grown grains to out-of-state malting houses for limited-run specialty brews, Spaulding said. Bell’s Brewery Inc. did just that for the Bell’s Beer Michigan line it bottled exclusively for the 2014 National Homebrewers Conference in Grand Rapids. But that process adds additional shipping costs and results in a more expensive end product, Spaulding said.

While brewers may struggle to secure the supply of grain they need under the legislation, Michigan’s hop industry has been rapidly expanding over the years and offers the quality brewers need, said Brian Tennis, founder of the Michigan Hop Alliance and owner of New Mission Organics LLC, a Traverse City grower.

Statewide, hop growers have planted between 300 and 350 acres of hops, Tennis said. The average yield of hops per acre ranges from about 1,000 pounds to 1,500 pounds.

Michigan’s climate and its cadre of dedicated farmers makes the area well-suited for hops, Tennis said. The acreage of hop production in the state has doubled every two years — a trend that he estimates will eventually propel Michigan into the top three or four hop producing states in the country.

But getting breweries that often rely on specially grown hops for their larger product lines to convert to all Michigan hops is a challenge, especially when the legislation does not go far enough to promote Michigan hop use under the initial 20 percent requirement, Tennis said.

“You’re basically putting 80 percent of hops from other states but (still) getting that (Farm to Glass) designation on the bottle,” he said. “The tax part is a decent start, but at 20 percent (local hops), it’s not going to do much. If it was 100 percent, it would be a big boost.”

The legislation comes at a time when the craft beer industry continues to expand its production both statewide and on a national level.

Nationally from 2011 to 2013, craft beer production by volume increased 36 percent, said Bart Watson, chief economist at the Boulder, Colo.-based Brewers Association, a national trade group. Retail market share for craft beers rose from 10.6 percent in 2011 to 14.3 percent in 2013. Over the last two years, breweries have opened at an average rate of 1.2 new operations per day across the country, and the industry shows no signs of slowing down in 2014, Watson said.

Michigan witnessed approximately 25-percent growth in the number of breweries from 2011 to 2013, Watson said. The state also ranked eighth in the nation in 2013 for production at 582,909 barrels a year, according to a craft beer production report published by the Brewers Association.

“There is such a boom in craft beer and cideries (that) the advantages of the Michigan economy and demand by consumers is starting to get noticed by the legislature,” said Michael Wiese, an associate attorney for Smith Haughey Rice & Roegge PC and part of the firm’s licensed beverage industry team.

Craft brewers also question the applicability of companies using the Farm to Glass credit in conjunction with the small brewers credit, which is available to brewers producing less than 30,000 barrels a year. These questions and more will be addressed as the legislation develops in the state House, said Geiss, the bill’s sponsor.

For now, Geiss — whose term concludes at the end of 2014 — feels content with having made the first step to address an untapped market for Michigan farmers.

“What I’m trying to do is say there’s an issue and that there is a demand out there,” he said. “It’s my hope that it will kickstart some progress and help solve the issues moving forward.”

Read 3089 times Last modified on Wednesday, 13 August 2014 10:36
John Wiegand

Staff writer

jwiegand@mibiz.com

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