APPL and new product cycle

FROM SNEHAH SHAH

********************************JUNE 18th—AUGUST FOLLOW UP BELOW,,,,,,,,,,,

The Technology industry is the one of the most dynamic industries in which the product trends change at a breath taking pace. A company given up for dead might become the world leader, while a monopoly might become bankrupt in a very short time span. Investing in the technology stocks is extremely difficult but it might give huge rewards to the investors who can make the right bets. There are high chances of profit when investing in a stock which is about to embark on a new product cycle. New products generate buzz in the media and make investors think that the company will make huge profits from the new products. Apple (AAPL) is about to start on a major product upgrade in the coming year. The stock has declined substantially as the other companies have been introducing new products and winning market share. Apple’s main competitors such as Google (GOOG), BlackBerry (BBRY), Samsung (SSNLF.PK) etc. have introduced a number of new products and services. Apple’s iPhone 5 and mini iPad are old stories for the fast changing technology industry. Apple unveiled a terrific new design for the new MacPro and introduced the new OS iOS7. The company will also launch a cheap iPhone in August and iPhone 5S in the near future. There are also rumors that the company will introduce larger smartphones in early 2014. The stock remains undervalued with a P/E of less than 10x and can give a sharp gain for investors in the next 6 months or so.

Apple has launched/upgraded some major products in the last month …

Apple has launched three major products/services during its recently held Worldwide Developers Conference. While these products have received mixed reviews, the company will launch many more products before the year is gone. The iOS 7 has been criticized by a lot of designers, while the Mac Pro’s sleek new cylindrical design has wowed everyone. Apple’s rumors of a music service also came true with the introduction of the iTunes Radio Service. The MacBook Air was also upgraded with Intel’s latest Haswell processors. The 22 nm Haswell Core chips are 50% more energy efficient than their predecessor IvyBridge chips. The MacBook Air will now have a 12 hour battery life, which is more than ~70% improvement from the previous version.

and Apple will launch many more in 2013

The recent product launches will not generate a lot of money for Apple as the MacPro is meant for a niche professional designer market, while others are mostly upgrades to existing hardware and software. The iTunes Radio Service will also not really move the needle in case of Apple’s gargantuan revenues and profits. The late 2013 launches might prove to be a game changer for the company and move up the revenue and profit estimates.

a) Cheap iPhone

Apple’s low cost iPhone which has been working the rumor mills for a long time will start to ship in August according to reliable sources. Apple has partnered with Taiwanese/Chinese EMS Pegatron for the smaller, cheaper iPhone. There are rumors that the device will ship for only $99. I don’t think that is possible, given that Apple follows a premium pricing model for its products and a decent smartphone costs at least $180 (Lumia 520). Even if Apple launches an unlocked product for $200, I think that Apple sales could surge and it would be able to capture if not exceed its lost smartphone market share. This product will be the most important product launch for Apple in my view and could radically change the face of the smartphone industry. Apple could take the wind out of the sails of its competitors who have been gaining on Apple.

Pegatron has landed orders for an inexpensive iPhone with plastic chassis and next-generation iPad mini from Apple and will begin shipments in August, according to Taiwan-based supply chain makers…The upstream supply chain will start shipping components for the new iPad mini and iPhone in July and players such as chassis supplier Casetek are expected to strongly benefit from the orders. A next-generation iPhone and 9.7-inch iPad reportedly will appear in early 2014 and will be manufactured by Foxconn Electronics (Hon Hai Precision Industry).

Source – DigiTimes

b) iPhone 5S and new iPads

Apple will also refresh its flagship iPhone 5 and iPad 4 with a new version, as it follows an annual product cycle for the iPhone and iPad. I don’t think the new iPhone or iPad will do too much for Apple, except for keeping its smartphone portfolio fresh and up to date with its smartphone rivals.

c) Phablets

A new rumor that is floating around the Internet is Apple seriously looking at introducing larger smartphones with a screen size of 4.7-5.7 inches. I think this makes sense given that consumers are moving towards larger screen sizes. The Samsung Note changed the industry by making large size smartphones popular with consumers. Now almost every big smartphone company has smartphones with > 4.5 inch screen sizes. Apple needs to get a product into the premium phablet space, otherwise it will lose market share because of the absence of a product for a large growing sub-segment.

Technology stocks get a boost during product launches

It is a fact that technology stocks can see a big price appreciation before the start of a major new product cycle. I can cite a few examples in the recent past where stocks jumped up as the companies were about to launch new products/services:

1. BlackBerry – This Canadian company was given up for dead by analysts who thought it could never recover against Apple or Samsung. However, BBRY stock surged before the launch of its new operating system BB 10. The company saw a price jump of almost 200% as the Z10 and Q10 generated a media frenzy. The stock price has now stabilized in the $13-16 range as the euphoria dies down.

BBRY Total Return Price Chart
(Click to enlarge)

BBRY Total Return Price data by YCharts

2. Intel (INTC) – Intel’s stock had been stuck in a $20 range for a long period of time due to investor concerns about the decline in the PC industry. The company’s launch of its new generation Haswell chips has generated a lot of excitement. Also its recent tablet and smartphone design wins led to a sharp jump in the stock price. I expect that Baytrail and Merrifield launch could take Intel’s stock to at least $30 in the next 6 months.

INTC Total Return Price Chart
(Click to enlarge)

INTC Total Return Price data by YCharts

3. Microsoft (MSFT) – The Seattle giant has been underperforming like Intel for the last few years and I have been positive about the stock from the beginning of the year. The stock burst out of its stock range with the buzz generated around its new Xbox One launch and the upcoming launch of new products such as Windows 8.1 and smaller Surface tablets.

MSFT Total Return Price Chart
(Click to enlarge)

MSFT Total Return Price data by YCharts

Valuation and Stock Performance

Apple’s stock has stabilized at the $450 level in recent months, after falling below $400 after it reported its C1Q13 results. The biggest share buyback in history and the increased dividend yield has set a floor for the stock. Apple’s stock is cheap like other smartphone stocks with a forward P/E of just ~10x and a dividend yield of ~2.5%. The stock is set to rally as new product launches act as a catalyst for investors to lap up this cheap stock.

Summary

Investing before a major product cycle is a tried and tested strategy for the technology stocks, though it does not work every time. In case of Apple, the conditions are near perfect as the stock is undervalued and sentiment remains very bearish. The expectations about the company and its management are one of the worst I have seen in the last few years. Apple’s MacPro upgrade shows that the company is still capable of launching tremendously innovative products that can wow users with their ease of use and premium looks. Investors should look at how Intel has given a ~25% return in the last 6 months under the same conditions. I would look to buy Apple now as the new products has the potential to surprise Apple bears and make the stock shoot up at least 20-25% in the next few months. Both Intel and Microsoft which are giant technology stocks have seen their valuations improve towards 12-12.5x forward P/E. Apple has similar size and also somewhat faces the same magnitude of risks.

***************AUGUST 21st.**********

had earlier advocated buying Apple (AAPL) stock before the start of a major new product cycle for a 20-25% upside. Technology stocks generally tend to move upwards before the introduction of a major new product and this has been a historical trend. Apple is all set to release its new iPhone and iPad in September and the stock has already moved up by 10% in recent days. The stock has also been helped by news that big hedge fund investors such as Icahn have increased their holdings in Apple. Though Apple is going to introduce a number of new products as well as upgrades, I think the biggest and most important product will be the new cheap iPhone variant. The new cheap iPhone has gotten many names such as the iPhone Lite, iPhone 5C and iPhone mini. The upgrades of the normal iPhone and iPad will help Apple retain its decreasing market share. The current news about these products indicates that the upgrades will be minor hardware ones without anything radically new. The big catalyst will be the cheap iPhone, which will help Apple break into a big multi-billion dollar low end smartphone market. This product will be the key to Apple’s stock in the next 6 months, in my view. The pricing of this cheap iPhone will be the most important parameter to watch out for. I currently remain long Apple given the stock’s cheap valuation and upcoming new products.

According to the tech rumor mill, September 10th will see the launch of two new iPhones – the 5S and the 5C. New iPhones for certain people are an exciting event (anyone for queuing outside the Apple store for 5 days?), but this launch is particularly significant as the 5C is going to be a budget version of the iPhone, which is a significant change to Apple’s strategy… Apparently the ‘C’ in 5C stands for colour (no, not cheap!) – initial colours are said to be blue, red, yellow and green and should give the 5C a more funky and young feel. However, if you are a lawyer for Apple I have good news. These colours are the same as those of the Google logo, so expect another protracted legal battle between the two tech foes. It is also likely to have more of a plastic feel than the 5 or 5S.

Source – Yahoo

iPhone Lite is the only Product that will expand Apple’s TAM

Apple’s iPhone Lite will be the only product that will expand Apple Total Addressable Market (TAM). The smartphone industry has become too big and vast to brush it under one category. The industry can be categorized into the low, mid and high end from the pricing perspective. The low end of the smartphone market is growing at a rapid pace, while the high end has slowed down sharply. The developed markets have been saturated by premium smartphones and growth now is coming from the emerging markets. The buying power of consumer in the fastest growing markets such as India and China is quite low. This has made Android gain market share rapidly as it is the only smartphone OS with products in this market. Nokia (NOK) is trying hard to break into the low and mid end segments with its Lumia range using the new Windows mobile OS. The low end market not only is growing fast but the size has also become quite large. I think that Apple has been too slow in recognizing the potential and growth of this segment. In the $350 billion smartphone market, I estimate that the low end segment is at least $50 billion. If Apple is able to capture even a 25% market, then its TAM will increase by $12.5 billion. It will also help increase Apple’s software and iTunes sales, which have already crossed the $1 billion mark last quarter. Though the revenue figure may look small compared to Apple’s overall revenues of ~$40 billion a quarter, the growth of this segment will make it one of the most important for Apple.

The low-end spectrum represents the fastest-expanding segment of the global smartphone market, with shipments more than doubling from 2012 to 2016. Low-end smartphone shipments will rise to 559 million in 2016, up from just 206 million in 2012, as presented in the figure below. Shipments of low-end smartphones will rise at a compound annual growth rate (CAGR) of 51 percent from 2011 to 2016. In contrast, high-end smart shipments will grow at a CAGR of only 12 percent during the same period.

Source – iSuppli

Why Pricing will be the Key for the New Cheap iPhone

The new iPhone should have the familiar iOS software and services such as iTunes. The hardware will definitely be inferior to the normal iPhone, otherwise the company cannot make the pricing different. The pricing of the cheap iPhone will be the most important factor for its success or failure, in my view. If Apple prices the phone too cheaply, then it will lose the premium branding that Apple products enjoy. If Apple prices the phone too high, it will miss the target audience in the emerging markets who cannot afford higher end Apple products. Apple’s fastest growing product in India and China is its two generation old iPhone 4. The reason for its high volumes of shipment in recent quarters has been the substantial discounts that Apple has offered on the iPhone 4. With the discount, an iPhone 4 can be bought for around $300, which is nearly half the price of the iPhone 5.

What should the Pricing of the new iPhone Lite be?

Many analysts have estimated that the new iPhone Lite should be priced between $350-450. I think it would be stupid for iPhone to price in this range. Even ~$300 is a bit too high for emerging markets, but I think it is about right for Apple. This price will be high enough to maintain Apple’s exclusive brand appeal. It will also allow emerging market consumers to stretch a bit to buy an Apple product. At $400 or higher, Apple will fail to reach its target audience, which will not be able to afford such a high priced product. The pricing for this smartphone is important as there are some great products such as the Nexus 4 that fall in the same price range. I think that Apple will stick to a price of $350 for this product, though I think that $250-$300 is ideal.

iPhone Lite Risks

The competition in the smartphone market has increased tremendously since the launch of the first iPhone. These days the whole smartphone market is seeing hyper competition with the likes of LG and Samsung (SSNLF.PK) becoming quite strong. The Chinese players such as Lenovo (LNVGY.PK), ZTE (ZTCOY.PK) and Huawei have also broken into the global top 10 rankings due to their strong presence in China, which accounts for more than 30% of the global smartphone shipments. Google (GOOG) has also introduced its first in-house designed smartphone — the Moto X.

The pricing of smartphones has also become very aggressive with Android companies operating on wafer thin margins to gain market share. Nokia has also shown a recent resurgence with its Windows 8 mobile OS powered Lumia range of smartphones. Microsoft (MSFT) is pouring a huge amount of resources into improving its mobile operating system and we should soon see the first quad core, high resolution Windows smartphones. Microsoft is desperate to get a slice of the mobile devices market, which is dominated by Apple and Google. The Seattle giant wants to become the third major mobile ecosystem, but is finding the going hard. Its tablet venture was an unmitigated disaster. However, Nokia is doing extremely well despite the Windows limitations. Microsoft has massive resources and it is early days in the mobile OS game. Apple not only has to fight Google with its ~80% smartphone OS market share, but also has to remain vigilant against Nokia-Microsoft.

Apple’s Stock Performance and Valuation

Apple’s stock has broken out of its $400-450 range as the imminent product releases create some excitement around the stock. I don’t think Icahn was the main factor, even though the media would like you to believe so. I have been waiting for a 20-25% upside move in the stock. The valuation of the stock is still low at around 12x forward P/E. The company has got a massive cash hoard of more than $100 billion, which makes the enterprise value much lower than the market capitalization of ~$460 billion.

AAPL Total Return Price Chart

AAPL Total Return Price data by YCharts

Summary

Apple’s new product cycle will see the introduction of a whole host of new products before the holiday season. There are also rumors of products such as an iWatch or iTV, but the only product investors should be watching closely now is the new, cheaper iPhone. This will not only increase Apple’s TAM substantially, but also fend off the low and mid end smartphone competitors. Apple is losing millions of customers and future iTunes revenues by not targeting the mid or low end of the smartphone market. Some of these smartphone companies have become quite big and may soon target Apple’s premium end market share. In fact many of these companies have already entered the mid smartphone segment where they are competing with the iPhone 4 for customer dollars. Apple’s market share in the overall smartphone market is declining every quarter. The pricing of the new product will be the most important factor for the stock in the next 6 months. I will wait for another 10% upside to $550 before taking profits, or depending on the new iPhone’s performance, hold on for a higher price.

 

SNEHAH SHAH

http://seekingalpha.com/article/1649912-apple-the-most-important-variable?source=email_rt_article_readmore

 

Advertisements

AAPL: Debt ot Rebuy Shares.

A somewhat academic but thorough analysis of what happens to Apple stock if it buys its own share using debt.

********************************************

 

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More…)

This article serves to analyze Apple’s (AAPL) stock buyback program and shed light on the controversial topic.

Due to a series of disappointments, Apple’s stock plummeted from $705 down to $385, which prompted the most aggressive capital returns program by any company in history. Now, here’s where it gets interesting, and a bit confusing simultaneously. Rather than using its tremendous cash, accounts receivable (which will eventually be converted into cash), short-term, and long-term investments pile of $155.46 billion, Apple has chosen to issue debt to buy back its stock. It chose to do so because, in short, the cost of debt is cheaper than its cost of equity. For other reasons, much of Apple’s assets are overseas and the cost of repatriating those assets is too steep. In this article, I will discuss and analyze the stock buyback program Apple has implemented.

Abstract

Apple’s share buyback program through the use of debt has been controversial, but I believe it’s worthwhile for the company to engage in. Ultimately, the buyback program destroys $12.19 billion in value from interest, while adding back $26.5 billion in value from retained dividends. The buybacks will push the share price to $647.78 even assuming unchanging growth prospects.

Approach 1: Cost of Debt vs. Cost of Equity

Cost of Debt

In May, 2013, Apple issued $17 billion in debt to finance its stock buyback program.

(click to enlarge)

The maturities of the notes range from 3-30 years, which allowed Apple to borrow at effective rates ranging from 0.51%-3.91%. Using the 35% marginal tax rate for U.S. corporations, the after-tax cost of debt actually ranges from 0.3315%-2.542%. Ultimately, Apple’s weighted after-tax interest rate is only 1.26%. This seems low, but it’s given the fact that 50% of Apple’s debt issuance matures within 5 years, allowing Apple to benefit tremendously from the low short-term rates.

Cost of Equity

In calculating Apple’s cost of equity, I will be utilizing the Capital Asset Pricing Model, which was introduced by William Sharpe, John Lintner, and Jan Mossin. The creators were awarded the Nobel Memorial Prize in Economics for this tremendous contribution to the financial world.

The model base its theory on a well diversified portfolio and stipulates that any particular stock’s cost of equity is dependent on its level of exposure to market movements. To anyone who follows the stock market, it’s quickly apparent that stocks tend to move together, or correlate each other. This asset pricing model extrapolates that a stock’s level of risk depends how heavily it correlates the market. Essentially, if a stock moves twice the magnitude of the market (in an upwards, or downwards direction), then the investor should be compensated for that increased volatility.

Overall, though, investment risk isn’t solely dependent on market risk (otherwise known as systematic risk). There’s also tremendous business (idiosyncratic) risk associated to investing in a company. Apple, for example, is exposed to competition from Samsung (SSNLF.PK), Google (GOOG), Microsoft (MSFT), BlackBerry (BBRY), and Nokia (NOK), which have been eating into its profits; however, in a well diversified portfolio, an investor would also own Google, for example, which has done well during the past years. Overall, the ups and downs of a particular stock would be nullified by ups and downs in other stocks. Theoretically, idiosyncratic risk would be eliminated in a well diversified portfolio, leaving only systematic risk, or market risk, to worry about. That’s where the Capital Asset Pricing Model comes into play. The formula is as follows:

  1. E(R) is the expected return, or the cost of equity.
  2. Rf is the risk free rate
  3. β represents Beta
  4. E(Rm) represents the expected return of the market

The cost of equity essentially represents the risk an investor takes on when investing in an asset, which has to be at a premium to a risk-free investment, like investing in U.S. treasuries. It’s arguable that U.S. treasuries aren’t risk-free anymore, like they’ve historically been, but for the sake of this model, we will assume they are still the most risk-free benchmark.

Now, to simply explain what Beta is. In essence, Beta calculates a stock’s magnitude of correlation with the stock market. So, if a stock’s Beta is 1.0 and the stock market moves up/down 10%, then the stock’s expected upward/downward movement is also 10%. If a stock’s Beta is 2.0 and the stock market moves up/down 10%, then the stock’s expected upward/downward movement will be 20%. Beta helps quantify the level of volatility a stock has with respect to the stock market, which helps quantify the expected return for a stock dependent on its market risk.

Quantifying the Cost of Equity

Assumptions will have to be made when building the model. We’ll look at historical and current data to do so. For the sake of conservatism, we’ll assume a 30-year holding period.

Taking the 30-year holding period into account, I needed to define our market risk premium, which is a function of the expected market return and current 30-year risk free rate. To emphasize why I chose the 30-year risk free rate, it’s because I wanted to match our holding period with my duration. Furthermore, I’ll be utilizing the 30-year arithmetic return of the Russell 3000, which has historically been 11.40%. Also, the Russell 3000 resembles the market the closest, assuming its 3000 stock portfolio more definitively correlates the market than the other indices. The current yield on a 30-year treasury sits at 3.86% as of August 20, 2013.

Using the current 30-year risk free rate of 3.86%, as represented by the 30-year U.S. Treasury yield, Beta of 0.98, and expected market return of 11.40%, as represented by the Russell 3000’s 30-year arithmetic average, we can derive a cost of equity of 11.25%.

So, how does this cost of equity really play into the whole Apple valuation thing? Well, the 11.25% is the rate used to discount Apple’s future cash flows, which is used to calculate Apple’s present value. So, for example, let us assume that Apple will generate $50 billion in free cash flow in the next year. The present value of that free cash flow will be ($50 billion)/(1.1125), which comes to $44.94 billion. If Apple generates (for example) $75 billion in 10 years, then the present value becomes ($75 billion)/((1.1125)^10) which comes to $25.83 billion.

The key takeaway here is that the cost of equity is used to discount Apple’s future cash flows to present values, which tremendously influences the stock’s fair value. Essentially, in the long run, an investor who owns shares of Apple is expected to generate 11.25% returns annually.

Recap

So now we know that Apple’s after-tax weighted cost of debt sits at only 1.26%, whereas its stock’s cost of equity sits at 11.25%. The fact that Apple has access to such cheap debt allows it to finance buying back its stock at deep discounts to its stock’s cost of equity. This made it viable for Apple to initiate such a tremendous stock buyback program to create stock price appreciation for its shareholders.

Approach 2: Marginal Cost vs. Marginal Return

The economic concepts of marginal costs and marginal returns support Apple’s buyback program as a way to retain shareholder value. Now, to explain these concepts:

Taken from Investopedia, the Marginal Cost of Production is: “The change in total cost that comes from making or producing one additional item”. The Marginal Return is the change in total return of producing one additional item. So, let’s explain this further.

Scenario 1

If a company wants to create 1 widget, it costs them $3 to make that 1 widget. It can then resell that 1 widget for $10, making a $7 profit on that widget.

If the company wants to create 1,000,000 widgets, it costs them $1 to make each widget because factors like economies of scale come into play. It can then sell those widgets for $10 each, making a $9 profit per widget.

In this scenario, the company is experiencing increased marginal returns from building and selling more widgets, as the profit increases from $7 per widget to $9 per widget.

Scenario 2

If a company wants to create 1 widget, it costs them $3 to make that 1 widget. It can then resell that 1 widget for $10, making a $7 profit on that widget.

If the company wants to create 1,000,000 widgets, it costs them $3 to make each widget. It can then sell those widgets for $10 each, making a $7 profit per widget.

The marginal return on creating the additional widgets is fixed at a constant $7 return per widget.

Scenario 3 (the most important one)

If a company wants to create 1 widget, it costs them $3 to make that 1 widget. It can then resell that 1 widget for $10, making a $7 profit on that widget.

If the company wants to create 1,000,000 widgets, it costs them $5 to make each widget. It can then sell those widgets for $10 each, making a $5 profit per widget.

Here’s where it gets interesting, and very important. In the third scenario, the company is experiencing declines of marginal returns, which means that for each additional widget they create, they’re making less profit per widget.

In this scenario, the company made its maximum profit per widget when creating only 1 widget, but as they ramped up production, the profit per widget declined. Now, let’s create a table to help illustrate this situation, which plays into Apple’s buyback program (I promise).

Widget Production Cost Per Widget Revenue Per Widget Profit Per Widget
0-500,000 $3 $10 $7
500,001-1,000,000 $5 $10 $5
$1,000,001-9,999,999 $9 $10 $1
$10,000,000-$15,000,000 $9.75 $10 $0.25
$15,000,001+ $12 $10 ($2)

This table helps illustrate the law of diminishing returns. As production ramps up, the profit of producing each additional widget declines. Ultimately, once the company produces its 15 millionth widget, it will stop producing widgets because producing each additional widget comes at a loss.

Now, how does this all play in with Apple’s stock buyback program? Apple is issuing debt to buy back and retire its stock which pays a nice dividend of $12.20/year, or at a 2.4% yield. Back in May, Apple issued $17 billion in debt at a weighted average after-tax rate of 1.26% and bought its stock which was then yielding 2.4% (back when its dividend was $10.6/year). Applying the current dividend to the historical price for consistency, the stock was yielding 2.8%. So, essentially, Apple issued debt at 1.26% to buy back its stock that was yielding 2.8%, netting them a 1.54% spread which is now retained by the company.

Lately, Carl Icahn has been pushing Apple to issue debt at 3% to buy back and retire shares. Applying Apple’s U.S. marginal tax rate of 35%, the effective cost of that debt will only be 1.95%, as Apple’s stock is still yielding 2.4% in the market. At this point, though, Apple’s net interest spread will be 0.45%, which still makes it worthwhile to buy back and retire its shares. Apple can keep buying back its shares until the net interest spread is 0%, which makes it profitable to continue the buyback until the stock’s dividend yield reaches 1.95%, or when the stock price is $625. As Carl Icahn stated, “Buy the company here and even without earnings growth, we think it ought to be worth $625.” Interesting, I know.

Food For Thought

Apple’s current $60 billion share buyback program still has room to expand, as some analysts claim, and as investors like Carl Icahn are pushing for. Amit Daryanani (from RBC) believes Apple can issue another $55 billion in debt to finance the share buyback program. In total, that would indicate a $115 billion share buyback program. As of now, Apple bought back and retired $17 billion worth of shares through its debt issuance, implying that it can buy back an additional $98 billion in shares assuming such a program expansion would be initiated.

Assuming an average cost of $563.04 (the midpoint of the current stock price and the target $625 price), Apple would be able to retire an additional 174.06 million shares. As per Apple’s most recent earnings report, there are currently 908.42 million shares outstanding. The additional buybacks would reduce the total shares outstanding to 734.36 million shares. Assuming a constant market cap, this would push the share prices to $628.37.

Now, remember where we calculated the marginal cost and marginal returns of share acquisition and concluded that it would be beneficial to repurchase shares up to $625? Well, we just calculated that it would take about $115 billion in debt to do so. Interesting, I know.

The analyst at RBC didn’t use my approach in calculating the additional $55 billion buyback, instead, he looked at average Debt/EBITDA levels for large-cap companies, which is where he calculated that Apple could increase its debt by $55 billion.

However, the market cap won’t stay the same. The interest expense will lead to a degree of value destruction. In my calculations (which I will get into next), the interest expense on $115 billion in debt will destroy a total of $12.19 billion in present value for the company, which would bring its current market cap to $449.26 billion. Even accounting for this adjustment, the share prices will reach $611.77 even with no additional earnings growth. From what it seems, analysts haven’t been accounting for the impact of the interest payments on Apple’s share price.

Methodology

In calculating the value destroyed by Apple issuing new debt, I had to make certain assumptions.

First, I looked at Apple’s previous $17 billion debt issuance to see the spreads Apple was paying on top of U.S. Treasury Rates. From this information, I was able to calculate the new costs of debt Apple would incur if they issued the remaining $98 billion in debt.

Next, I analyzed the structure by which Apple issued its debt. What I found came as follows:

Bracket Maturity Debt Weight
1 3 Years 1,000,000,000.00 5.88%
2 5 Years 2,000,000,000.00 11.76%
3 3 Years 1,500,000,000.00 8.82%
4 5 Years 4,000,000,000.00 23.53%
5 10 Years 5,500,000,000.00 32.35%
6 30 Years 3,000,000,000.00 17.65%
Sum 17,000,000,000.00 100.00%

In short, Apple structured its maturities as follows:

  1. Expiring in 3 years: 14.71% of total debt issued
  2. Expiring in 5 years: 35.29% of total debt issued
  3. Expiring in 10 years: 32.35% of total debt issued
  4. Expiring in 30 years: 17.65% of total debt issued

From this, I was able to extrapolate the amount of debt Apple would issue according to its maturity:

Expiration Debt
3 Year 14,411,764,705.88
5 Year 34,588,235,294.12
10 Year 31,705,882,352.94
30 Year 17,294,117,647.06
Sum 98,000,000,000.00

Now I had to calculate the interest rate Apple would be paying on its debt issuance which came as follows:

Treasury Maturity Premium Current Treasury Rates Apple’s Rate After-Tax Rate
3 Year 0.20% 0.73% 0.93% 0.60%
5 Year 0.40% 1.60% 2.00% 1.30%
10 Year 0.75% 2.84% 3.59% 2.33%
30 Year 1% 3.86% 4.86% 3.16%

Finally, I had everything I needed: the structure of debt expirations and the after-tax interest rate Apple would be paying on the borrowed funds. With this information, I projected the interest payments Apple would be paying for the next 30 years on the additional $98 billion debt issued. I discounted these outflows with Apple’s cost of equity and found the present value of them to be $10.855 billion. I also applied the same methodology and calculated the present value of Apple’s previous $17 billion debt issuance, and came to $1.334 billion. The total value destroyed from Apple issuing $115 billion in debt came to $12.19 billion.

Value Retention

From our calculations, if Apple were to expand its stock buyback to $115 billion, it would be able to buy back and retire 174.06 million shares. These used to be shares which Apple would have been paying dividends to for the life of the company’s existence, but now it has retained those dividends, which should create some value for the remaining shareholders.

As of now, Apple is paying $12.20 dividends/year per share outstanding; however, the dividend will not remain the same in the future years. In reality, dividends grow through time. So now that Apple has retired those 174.06 million shares, it can now retain all those dividends as well, which would have grown throughout time. So let’s try valuing the amount of savings derived from retaining the dividends on those shares. A few assumptions will be made:

  1. We’ll assume that Apple will not decrease its future dividends
  2. We’ll assume that the dividends will grow at 3% per year
  3. We’ll use the Dividend Discount Model to value the savings to Apple
  4. We’ll use Apple’s cost of equity of 11.25%

So, what is the Dividend Discount Model? Essentially, it’s a model used to discount future cash flows (dividends) and derive its present value. Utilizing a base dividend/year of $12.20, cost of equity of 11.25%, and growth rate of 3%, we derive a value of $26.51 billion which is retained by the company. Assuming 734.36 million shares outstanding (after the buyback), this translates to an added value of $36.10 per share.

Ultimately, $12.19 billion in value was destroyed by the interest from the buyback program, while $26.5 billion in value was retained. This ultimately pushes the share price up to $647.78 after the buyback program, even if growth prospects have not changed.

Final Words

Apple’s share buyback program through the use of debt has been controversial, but I believe it’s worthwhile for the company to engage in. Ultimately, the buyback program destroys $12.19 billion in value from interest, while adding back $26.5 billion in value from retained dividends. The buybacks will push the share price to $647.78 even assuming unchanging growth prospects.

Apple is currently in a position in which its access to debt markets creates a strategic opportunity to finance stock buybacks, which will lead to share price appreciation, even without any additional growth prospects. Many have argued, to which I agree, that Apple’s stock is undervalued and this buyback program will allow Apple’s management to take advantage of this opportunity. Some argue that this is a form of “financial engineering” and artificially inflating the stock price, which just isn’t true. In the end, the shares that are being bought back are being retired, which increases the value of each remaining share outstanding, leading to gains for current shareholders.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More…)

This article serves to analyze Apple’s (AAPL) stock buyback program and shed light on the controversial topic.

Due to a series of disappointments, Apple’s stock plummeted from $705 down to $385, which prompted the most aggressive capital returns program by any company in history. Now, here’s where it gets interesting, and a bit confusing simultaneously. Rather than using its tremendous cash, accounts receivable (which will eventually be converted into cash), short-term, and long-term investments pile of $155.46 billion, Apple has chosen to issue debt to buy back its stock. It chose to do so because, in short, the cost of debt is cheaper than its cost of equity. For other reasons, much of Apple’s assets are overseas and the cost of repatriating those assets is too steep. In this article, I will discuss and analyze the stock buyback program Apple has implemented.

Abstract

Apple’s share buyback program through the use of debt has been controversial, but I believe it’s worthwhile for the company to engage in. Ultimately, the buyback program destroys $12.19 billion in value from interest, while adding back $26.5 billion in value from retained dividends. The buybacks will push the share price to $647.78 even assuming unchanging growth prospects.

Approach 1: Cost of Debt vs. Cost of Equity

Cost of Debt

In May, 2013, Apple issued $17 billion in debt to finance its stock buyback program.

(click to enlarge)

The maturities of the notes range from 3-30 years, which allowed Apple to borrow at effective rates ranging from 0.51%-3.91%. Using the 35% marginal tax rate for U.S. corporations, the after-tax cost of debt actually ranges from 0.3315%-2.542%. Ultimately, Apple’s weighted after-tax interest rate is only 1.26%. This seems low, but it’s given the fact that 50% of Apple’s debt issuance matures within 5 years, allowing Apple to benefit tremendously from the low short-term rates.

Cost of Equity

In calculating Apple’s cost of equity, I will be utilizing the Capital Asset Pricing Model, which was introduced by William Sharpe, John Lintner, and Jan Mossin. The creators were awarded the Nobel Memorial Prize in Economics for this tremendous contribution to the financial world.

The model base its theory on a well diversified portfolio and stipulates that any particular stock’s cost of equity is dependent on its level of exposure to market movements. To anyone who follows the stock market, it’s quickly apparent that stocks tend to move together, or correlate each other. This asset pricing model extrapolates that a stock’s level of risk depends how heavily it correlates the market. Essentially, if a stock moves twice the magnitude of the market (in an upwards, or downwards direction), then the investor should be compensated for that increased volatility.

Overall, though, investment risk isn’t solely dependent on market risk (otherwise known as systematic risk). There’s also tremendous business (idiosyncratic) risk associated to investing in a company. Apple, for example, is exposed to competition from Samsung (SSNLF.PK), Google (GOOG), Microsoft (MSFT), BlackBerry (BBRY), and Nokia (NOK), which have been eating into its profits; however, in a well diversified portfolio, an investor would also own Google, for example, which has done well during the past years. Overall, the ups and downs of a particular stock would be nullified by ups and downs in other stocks. Theoretically, idiosyncratic risk would be eliminated in a well diversified portfolio, leaving only systematic risk, or market risk, to worry about. That’s where the Capital Asset Pricing Model comes into play. The formula is as follows:

  1. E(R) is the expected return, or the cost of equity.
  2. Rf is the risk free rate
  3. β represents Beta
  4. E(Rm) represents the expected return of the market

The cost of equity essentially represents the risk an investor takes on when investing in an asset, which has to be at a premium to a risk-free investment, like investing in U.S. treasuries. It’s arguable that U.S. treasuries aren’t risk-free anymore, like they’ve historically been, but for the sake of this model, we will assume they are still the most risk-free benchmark.

Now, to simply explain what Beta is. In essence, Beta calculates a stock’s magnitude of correlation with the stock market. So, if a stock’s Beta is 1.0 and the stock market moves up/down 10%, then the stock’s expected upward/downward movement is also 10%. If a stock’s Beta is 2.0 and the stock market moves up/down 10%, then the stock’s expected upward/downward movement will be 20%. Beta helps quantify the level of volatility a stock has with respect to the stock market, which helps quantify the expected return for a stock dependent on its market risk.

Quantifying the Cost of Equity

Assumptions will have to be made when building the model. We’ll look at historical and current data to do so. For the sake of conservatism, we’ll assume a 30-year holding period.

Taking the 30-year holding period into account, I needed to define our market risk premium, which is a function of the expected market return and current 30-year risk free rate. To emphasize why I chose the 30-year risk free rate, it’s because I wanted to match our holding period with my duration. Furthermore, I’ll be utilizing the 30-year arithmetic return of the Russell 3000, which has historically been 11.40%. Also, the Russell 3000 resembles the market the closest, assuming its 3000 stock portfolio more definitively correlates the market than the other indices. The current yield on a 30-year treasury sits at 3.86% as of August 20, 2013.

Using the current 30-year risk free rate of 3.86%, as represented by the 30-year U.S. Treasury yield, Beta of 0.98, and expected market return of 11.40%, as represented by the Russell 3000’s 30-year arithmetic average, we can derive a cost of equity of 11.25%.

So, how does this cost of equity really play into the whole Apple valuation thing? Well, the 11.25% is the rate used to discount Apple’s future cash flows, which is used to calculate Apple’s present value. So, for example, let us assume that Apple will generate $50 billion in free cash flow in the next year. The present value of that free cash flow will be ($50 billion)/(1.1125), which comes to $44.94 billion. If Apple generates (for example) $75 billion in 10 years, then the present value becomes ($75 billion)/((1.1125)^10) which comes to $25.83 billion.

The key takeaway here is that the cost of equity is used to discount Apple’s future cash flows to present values, which tremendously influences the stock’s fair value. Essentially, in the long run, an investor who owns shares of Apple is expected to generate 11.25% returns annually.

Recap

So now we know that Apple’s after-tax weighted cost of debt sits at only 1.26%, whereas its stock’s cost of equity sits at 11.25%. The fact that Apple has access to such cheap debt allows it to finance buying back its stock at deep discounts to its stock’s cost of equity. This made it viable for Apple to initiate such a tremendous stock buyback program to create stock price appreciation for its shareholders.

Approach 2: Marginal Cost vs. Marginal Return

The economic concepts of marginal costs and marginal returns support Apple’s buyback program as a way to retain shareholder value. Now, to explain these concepts:

Taken from Investopedia, the Marginal Cost of Production is: “The change in total cost that comes from making or producing one additional item”. The Marginal Return is the change in total return of producing one additional item. So, let’s explain this further.

Scenario 1

If a company wants to create 1 widget, it costs them $3 to make that 1 widget. It can then resell that 1 widget for $10, making a $7 profit on that widget.

If the company wants to create 1,000,000 widgets, it costs them $1 to make each widget because factors like economies of scale come into play. It can then sell those widgets for $10 each, making a $9 profit per widget.

In this scenario, the company is experiencing increased marginal returns from building and selling more widgets, as the profit increases from $7 per widget to $9 per widget.

Scenario 2

If a company wants to create 1 widget, it costs them $3 to make that 1 widget. It can then resell that 1 widget for $10, making a $7 profit on that widget.

If the company wants to create 1,000,000 widgets, it costs them $3 to make each widget. It can then sell those widgets for $10 each, making a $7 profit per widget.

The marginal return on creating the additional widgets is fixed at a constant $7 return per widget.

Scenario 3 (the most important one)

If a company wants to create 1 widget, it costs them $3 to make that 1 widget. It can then resell that 1 widget for $10, making a $7 profit on that widget.

If the company wants to create 1,000,000 widgets, it costs them $5 to make each widget. It can then sell those widgets for $10 each, making a $5 profit per widget.

Here’s where it gets interesting, and very important. In the third scenario, the company is experiencing declines of marginal returns, which means that for each additional widget they create, they’re making less profit per widget.

In this scenario, the company made its maximum profit per widget when creating only 1 widget, but as they ramped up production, the profit per widget declined. Now, let’s create a table to help illustrate this situation, which plays into Apple’s buyback program (I promise).

Widget Production Cost Per Widget Revenue Per Widget Profit Per Widget
0-500,000 $3 $10 $7
500,001-1,000,000 $5 $10 $5
$1,000,001-9,999,999 $9 $10 $1
$10,000,000-$15,000,000 $9.75 $10 $0.25
$15,000,001+ $12 $10 ($2)

This table helps illustrate the law of diminishing returns. As production ramps up, the profit of producing each additional widget declines. Ultimately, once the company produces its 15 millionth widget, it will stop producing widgets because producing each additional widget comes at a loss.

Now, how does this all play in with Apple’s stock buyback program? Apple is issuing debt to buy back and retire its stock which pays a nice dividend of $12.20/year, or at a 2.4% yield. Back in May, Apple issued $17 billion in debt at a weighted average after-tax rate of 1.26% and bought its stock which was then yielding 2.4% (back when its dividend was $10.6/year). Applying the current dividend to the historical price for consistency, the stock was yielding 2.8%. So, essentially, Apple issued debt at 1.26% to buy back its stock that was yielding 2.8%, netting them a 1.54% spread which is now retained by the company.

Lately, Carl Icahn has been pushing Apple to issue debt at 3% to buy back and retire shares. Applying Apple’s U.S. marginal tax rate of 35%, the effective cost of that debt will only be 1.95%, as Apple’s stock is still yielding 2.4% in the market. At this point, though, Apple’s net interest spread will be 0.45%, which still makes it worthwhile to buy back and retire its shares. Apple can keep buying back its shares until the net interest spread is 0%, which makes it profitable to continue the buyback until the stock’s dividend yield reaches 1.95%, or when the stock price is $625. As Carl Icahn stated, “Buy the company here and even without earnings growth, we think it ought to be worth $625.” Interesting, I know.

Food For Thought

Apple’s current $60 billion share buyback program still has room to expand, as some analysts claim, and as investors like Carl Icahn are pushing for. Amit Daryanani (from RBC) believes Apple can issue another $55 billion in debt to finance the share buyback program. In total, that would indicate a $115 billion share buyback program. As of now, Apple bought back and retired $17 billion worth of shares through its debt issuance, implying that it can buy back an additional $98 billion in shares assuming such a program expansion would be initiated.

Assuming an average cost of $563.04 (the midpoint of the current stock price and the target $625 price), Apple would be able to retire an additional 174.06 million shares. As per Apple’s most recent earnings report, there are currently 908.42 million shares outstanding. The additional buybacks would reduce the total shares outstanding to 734.36 million shares. Assuming a constant market cap, this would push the share prices to $628.37.

Now, remember where we calculated the marginal cost and marginal returns of share acquisition and concluded that it would be beneficial to repurchase shares up to $625? Well, we just calculated that it would take about $115 billion in debt to do so. Interesting, I know.

The analyst at RBC didn’t use my approach in calculating the additional $55 billion buyback, instead, he looked at average Debt/EBITDA levels for large-cap companies, which is where he calculated that Apple could increase its debt by $55 billion.

However, the market cap won’t stay the same. The interest expense will lead to a degree of value destruction. In my calculations (which I will get into next), the interest expense on $115 billion in debt will destroy a total of $12.19 billion in present value for the company, which would bring its current market cap to $449.26 billion. Even accounting for this adjustment, the share prices will reach $611.77 even with no additional earnings growth. From what it seems, analysts haven’t been accounting for the impact of the interest payments on Apple’s share price.

Methodology

In calculating the value destroyed by Apple issuing new debt, I had to make certain assumptions.

First, I looked at Apple’s previous $17 billion debt issuance to see the spreads Apple was paying on top of U.S. Treasury Rates. From this information, I was able to calculate the new costs of debt Apple would incur if they issued the remaining $98 billion in debt.

Next, I analyzed the structure by which Apple issued its debt. What I found came as follows:

Bracket Maturity Debt Weight
1 3 Years 1,000,000,000.00 5.88%
2 5 Years 2,000,000,000.00 11.76%
3 3 Years 1,500,000,000.00 8.82%
4 5 Years 4,000,000,000.00 23.53%
5 10 Years 5,500,000,000.00 32.35%
6 30 Years 3,000,000,000.00 17.65%
Sum 17,000,000,000.00 100.00%

In short, Apple structured its maturities as follows:

  1. Expiring in 3 years: 14.71% of total debt issued
  2. Expiring in 5 years: 35.29% of total debt issued
  3. Expiring in 10 years: 32.35% of total debt issued
  4. Expiring in 30 years: 17.65% of total debt issued

From this, I was able to extrapolate the amount of debt Apple would issue according to its maturity:

Expiration Debt
3 Year 14,411,764,705.88
5 Year 34,588,235,294.12
10 Year 31,705,882,352.94
30 Year 17,294,117,647.06
Sum 98,000,000,000.00

Now I had to calculate the interest rate Apple would be paying on its debt issuance which came as follows:

Treasury Maturity Premium Current Treasury Rates Apple’s Rate After-Tax Rate
3 Year 0.20% 0.73% 0.93% 0.60%
5 Year 0.40% 1.60% 2.00% 1.30%
10 Year 0.75% 2.84% 3.59% 2.33%
30 Year 1% 3.86% 4.86% 3.16%

Finally, I had everything I needed: the structure of debt expirations and the after-tax interest rate Apple would be paying on the borrowed funds. With this information, I projected the interest payments Apple would be paying for the next 30 years on the additional $98 billion debt issued. I discounted these outflows with Apple’s cost of equity and found the present value of them to be $10.855 billion. I also applied the same methodology and calculated the present value of Apple’s previous $17 billion debt issuance, and came to $1.334 billion. The total value destroyed from Apple issuing $115 billion in debt came to $12.19 billion.

Value Retention

From our calculations, if Apple were to expand its stock buyback to $115 billion, it would be able to buy back and retire 174.06 million shares. These used to be shares which Apple would have been paying dividends to for the life of the company’s existence, but now it has retained those dividends, which should create some value for the remaining shareholders.

As of now, Apple is paying $12.20 dividends/year per share outstanding; however, the dividend will not remain the same in the future years. In reality, dividends grow through time. So now that Apple has retired those 174.06 million shares, it can now retain all those dividends as well, which would have grown throughout time. So let’s try valuing the amount of savings derived from retaining the dividends on those shares. A few assumptions will be made:

  1. We’ll assume that Apple will not decrease its future dividends
  2. We’ll assume that the dividends will grow at 3% per year
  3. We’ll use the Dividend Discount Model to value the savings to Apple
  4. We’ll use Apple’s cost of equity of 11.25%

So, what is the Dividend Discount Model? Essentially, it’s a model used to discount future cash flows (dividends) and derive its present value. Utilizing a base dividend/year of $12.20, cost of equity of 11.25%, and growth rate of 3%, we derive a value of $26.51 billion which is retained by the company. Assuming 734.36 million shares outstanding (after the buyback), this translates to an added value of $36.10 per share.

Ultimately, $12.19 billion in value was destroyed by the interest from the buyback program, while $26.5 billion in value was retained. This ultimately pushes the share price up to $647.78 after the buyback program, even if growth prospects have not changed.

Final Words

Apple’s share buyback program through the use of debt has been controversial, but I believe it’s worthwhile for the company to engage in. Ultimately, the buyback program destroys $12.19 billion in value from interest, while adding back $26.5 billion in value from retained dividends. The buybacks will push the share price to $647.78 even assuming unchanging growth prospects.

Apple is currently in a position in which its access to debt markets creates a strategic opportunity to finance stock buybacks, which will lead to share price appreciation, even without any additional growth prospects. Many have argued, to which I agree, that Apple’s stock is undervalued and this buyback program will allow Apple’s management to take advantage of this opportunity. Some argue that this is a form of “financial engineering” and artificially inflating the stock price, which just isn’t true. In the end, the shares that are being bought back are being retired, which increases the value of each remaining share outstanding, leading to gains for current shareholders.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More…)

This article serves to analyze Apple’s (AAPL) stock buyback program and shed light on the controversial topic.

Due to a series of disappointments, Apple’s stock plummeted from $705 down to $385, which prompted the most aggressive capital returns program by any company in history. Now, here’s where it gets interesting, and a bit confusing simultaneously. Rather than using its tremendous cash, accounts receivable (which will eventually be converted into cash), short-term, and long-term investments pile of $155.46 billion, Apple has chosen to issue debt to buy back its stock. It chose to do so because, in short, the cost of debt is cheaper than its cost of equity. For other reasons, much of Apple’s assets are overseas and the cost of repatriating those assets is too steep. In this article, I will discuss and analyze the stock buyback program Apple has implemented.

Abstract

Apple’s share buyback program through the use of debt has been controversial, but I believe it’s worthwhile for the company to engage in. Ultimately, the buyback program destroys $12.19 billion in value from interest, while adding back $26.5 billion in value from retained dividends. The buybacks will push the share price to $647.78 even assuming unchanging growth prospects.

Approach 1: Cost of Debt vs. Cost of Equity

Cost of Debt

In May, 2013, Apple issued $17 billion in debt to finance its stock buyback program.

(click to enlarge)

The maturities of the notes range from 3-30 years, which allowed Apple to borrow at effective rates ranging from 0.51%-3.91%. Using the 35% marginal tax rate for U.S. corporations, the after-tax cost of debt actually ranges from 0.3315%-2.542%. Ultimately, Apple’s weighted after-tax interest rate is only 1.26%. This seems low, but it’s given the fact that 50% of Apple’s debt issuance matures within 5 years, allowing Apple to benefit tremendously from the low short-term rates.

Cost of Equity

In calculating Apple’s cost of equity, I will be utilizing the Capital Asset Pricing Model, which was introduced by William Sharpe, John Lintner, and Jan Mossin. The creators were awarded the Nobel Memorial Prize in Economics for this tremendous contribution to the financial world.

The model base its theory on a well diversified portfolio and stipulates that any particular stock’s cost of equity is dependent on its level of exposure to market movements. To anyone who follows the stock market, it’s quickly apparent that stocks tend to move together, or correlate each other. This asset pricing model extrapolates that a stock’s level of risk depends how heavily it correlates the market. Essentially, if a stock moves twice the magnitude of the market (in an upwards, or downwards direction), then the investor should be compensated for that increased volatility.

Overall, though, investment risk isn’t solely dependent on market risk (otherwise known as systematic risk). There’s also tremendous business (idiosyncratic) risk associated to investing in a company. Apple, for example, is exposed to competition from Samsung (SSNLF.PK), Google (GOOG), Microsoft (MSFT), BlackBerry (BBRY), and Nokia (NOK), which have been eating into its profits; however, in a well diversified portfolio, an investor would also own Google, for example, which has done well during the past years. Overall, the ups and downs of a particular stock would be nullified by ups and downs in other stocks. Theoretically, idiosyncratic risk would be eliminated in a well diversified portfolio, leaving only systematic risk, or market risk, to worry about. That’s where the Capital Asset Pricing Model comes into play. The formula is as follows:

  1. E(R) is the expected return, or the cost of equity.
  2. Rf is the risk free rate
  3. β represents Beta
  4. E(Rm) represents the expected return of the market

The cost of equity essentially represents the risk an investor takes on when investing in an asset, which has to be at a premium to a risk-free investment, like investing in U.S. treasuries. It’s arguable that U.S. treasuries aren’t risk-free anymore, like they’ve historically been, but for the sake of this model, we will assume they are still the most risk-free benchmark.

Now, to simply explain what Beta is. In essence, Beta calculates a stock’s magnitude of correlation with the stock market. So, if a stock’s Beta is 1.0 and the stock market moves up/down 10%, then the stock’s expected upward/downward movement is also 10%. If a stock’s Beta is 2.0 and the stock market moves up/down 10%, then the stock’s expected upward/downward movement will be 20%. Beta helps quantify the level of volatility a stock has with respect to the stock market, which helps quantify the expected return for a stock dependent on its market risk.

Quantifying the Cost of Equity

Assumptions will have to be made when building the model. We’ll look at historical and current data to do so. For the sake of conservatism, we’ll assume a 30-year holding period.

Taking the 30-year holding period into account, I needed to define our market risk premium, which is a function of the expected market return and current 30-year risk free rate. To emphasize why I chose the 30-year risk free rate, it’s because I wanted to match our holding period with my duration. Furthermore, I’ll be utilizing the 30-year arithmetic return of the Russell 3000, which has historically been 11.40%. Also, the Russell 3000 resembles the market the closest, assuming its 3000 stock portfolio more definitively correlates the market than the other indices. The current yield on a 30-year treasury sits at 3.86% as of August 20, 2013.

Using the current 30-year risk free rate of 3.86%, as represented by the 30-year U.S. Treasury yield, Beta of 0.98, and expected market return of 11.40%, as represented by the Russell 3000’s 30-year arithmetic average, we can derive a cost of equity of 11.25%.

So, how does this cost of equity really play into the whole Apple valuation thing? Well, the 11.25% is the rate used to discount Apple’s future cash flows, which is used to calculate Apple’s present value. So, for example, let us assume that Apple will generate $50 billion in free cash flow in the next year. The present value of that free cash flow will be ($50 billion)/(1.1125), which comes to $44.94 billion. If Apple generates (for example) $75 billion in 10 years, then the present value becomes ($75 billion)/((1.1125)^10) which comes to $25.83 billion.

The key takeaway here is that the cost of equity is used to discount Apple’s future cash flows to present values, which tremendously influences the stock’s fair value. Essentially, in the long run, an investor who owns shares of Apple is expected to generate 11.25% returns annually.

Recap

So now we know that Apple’s after-tax weighted cost of debt sits at only 1.26%, whereas its stock’s cost of equity sits at 11.25%. The fact that Apple has access to such cheap debt allows it to finance buying back its stock at deep discounts to its stock’s cost of equity. This made it viable for Apple to initiate such a tremendous stock buyback program to create stock price appreciation for its shareholders.

Approach 2: Marginal Cost vs. Marginal Return

The economic concepts of marginal costs and marginal returns support Apple’s buyback program as a way to retain shareholder value. Now, to explain these concepts:

Taken from Investopedia, the Marginal Cost of Production is: “The change in total cost that comes from making or producing one additional item”. The Marginal Return is the change in total return of producing one additional item. So, let’s explain this further.

Scenario 1

If a company wants to create 1 widget, it costs them $3 to make that 1 widget. It can then resell that 1 widget for $10, making a $7 profit on that widget.

If the company wants to create 1,000,000 widgets, it costs them $1 to make each widget because factors like economies of scale come into play. It can then sell those widgets for $10 each, making a $9 profit per widget.

In this scenario, the company is experiencing increased marginal returns from building and selling more widgets, as the profit increases from $7 per widget to $9 per widget.

Scenario 2

If a company wants to create 1 widget, it costs them $3 to make that 1 widget. It can then resell that 1 widget for $10, making a $7 profit on that widget.

If the company wants to create 1,000,000 widgets, it costs them $3 to make each widget. It can then sell those widgets for $10 each, making a $7 profit per widget.

The marginal return on creating the additional widgets is fixed at a constant $7 return per widget.

Scenario 3 (the most important one)

If a company wants to create 1 widget, it costs them $3 to make that 1 widget. It can then resell that 1 widget for $10, making a $7 profit on that widget.

If the company wants to create 1,000,000 widgets, it costs them $5 to make each widget. It can then sell those widgets for $10 each, making a $5 profit per widget.

Here’s where it gets interesting, and very important. In the third scenario, the company is experiencing declines of marginal returns, which means that for each additional widget they create, they’re making less profit per widget.

In this scenario, the company made its maximum profit per widget when creating only 1 widget, but as they ramped up production, the profit per widget declined. Now, let’s create a table to help illustrate this situation, which plays into Apple’s buyback program (I promise).

Widget Production Cost Per Widget Revenue Per Widget Profit Per Widget
0-500,000 $3 $10 $7
500,001-1,000,000 $5 $10 $5
$1,000,001-9,999,999 $9 $10 $1
$10,000,000-$15,000,000 $9.75 $10 $0.25
$15,000,001+ $12 $10 ($2)

This table helps illustrate the law of diminishing returns. As production ramps up, the profit of producing each additional widget declines. Ultimately, once the company produces its 15 millionth widget, it will stop producing widgets because producing each additional widget comes at a loss.

Now, how does this all play in with Apple’s stock buyback program? Apple is issuing debt to buy back and retire its stock which pays a nice dividend of $12.20/year, or at a 2.4% yield. Back in May, Apple issued $17 billion in debt at a weighted average after-tax rate of 1.26% and bought its stock which was then yielding 2.4% (back when its dividend was $10.6/year). Applying the current dividend to the historical price for consistency, the stock was yielding 2.8%. So, essentially, Apple issued debt at 1.26% to buy back its stock that was yielding 2.8%, netting them a 1.54% spread which is now retained by the company.

Lately, Carl Icahn has been pushing Apple to issue debt at 3% to buy back and retire shares. Applying Apple’s U.S. marginal tax rate of 35%, the effective cost of that debt will only be 1.95%, as Apple’s stock is still yielding 2.4% in the market. At this point, though, Apple’s net interest spread will be 0.45%, which still makes it worthwhile to buy back and retire its shares. Apple can keep buying back its shares until the net interest spread is 0%, which makes it profitable to continue the buyback until the stock’s dividend yield reaches 1.95%, or when the stock price is $625. As Carl Icahn stated, “Buy the company here and even without earnings growth, we think it ought to be worth $625.” Interesting, I know.

Food For Thought

Apple’s current $60 billion share buyback program still has room to expand, as some analysts claim, and as investors like Carl Icahn are pushing for. Amit Daryanani (from RBC) believes Apple can issue another $55 billion in debt to finance the share buyback program. In total, that would indicate a $115 billion share buyback program. As of now, Apple bought back and retired $17 billion worth of shares through its debt issuance, implying that it can buy back an additional $98 billion in shares assuming such a program expansion would be initiated.

Assuming an average cost of $563.04 (the midpoint of the current stock price and the target $625 price), Apple would be able to retire an additional 174.06 million shares. As per Apple’s most recent earnings report, there are currently 908.42 million shares outstanding. The additional buybacks would reduce the total shares outstanding to 734.36 million shares. Assuming a constant market cap, this would push the share prices to $628.37.

Now, remember where we calculated the marginal cost and marginal returns of share acquisition and concluded that it would be beneficial to repurchase shares up to $625? Well, we just calculated that it would take about $115 billion in debt to do so. Interesting, I know.

The analyst at RBC didn’t use my approach in calculating the additional $55 billion buyback, instead, he looked at average Debt/EBITDA levels for large-cap companies, which is where he calculated that Apple could increase its debt by $55 billion.

However, the market cap won’t stay the same. The interest expense will lead to a degree of value destruction. In my calculations (which I will get into next), the interest expense on $115 billion in debt will destroy a total of $12.19 billion in present value for the company, which would bring its current market cap to $449.26 billion. Even accounting for this adjustment, the share prices will reach $611.77 even with no additional earnings growth. From what it seems, analysts haven’t been accounting for the impact of the interest payments on Apple’s share price.

Methodology

In calculating the value destroyed by Apple issuing new debt, I had to make certain assumptions.

First, I looked at Apple’s previous $17 billion debt issuance to see the spreads Apple was paying on top of U.S. Treasury Rates. From this information, I was able to calculate the new costs of debt Apple would incur if they issued the remaining $98 billion in debt.

Next, I analyzed the structure by which Apple issued its debt. What I found came as follows:

Bracket Maturity Debt Weight
1 3 Years 1,000,000,000.00 5.88%
2 5 Years 2,000,000,000.00 11.76%
3 3 Years 1,500,000,000.00 8.82%
4 5 Years 4,000,000,000.00 23.53%
5 10 Years 5,500,000,000.00 32.35%
6 30 Years 3,000,000,000.00 17.65%
Sum 17,000,000,000.00 100.00%

In short, Apple structured its maturities as follows:

  1. Expiring in 3 years: 14.71% of total debt issued
  2. Expiring in 5 years: 35.29% of total debt issued
  3. Expiring in 10 years: 32.35% of total debt issued
  4. Expiring in 30 years: 17.65% of total debt issued

From this, I was able to extrapolate the amount of debt Apple would issue according to its maturity:

Expiration Debt
3 Year 14,411,764,705.88
5 Year 34,588,235,294.12
10 Year 31,705,882,352.94
30 Year 17,294,117,647.06
Sum 98,000,000,000.00

Now I had to calculate the interest rate Apple would be paying on its debt issuance which came as follows:

Treasury Maturity Premium Current Treasury Rates Apple’s Rate After-Tax Rate
3 Year 0.20% 0.73% 0.93% 0.60%
5 Year 0.40% 1.60% 2.00% 1.30%
10 Year 0.75% 2.84% 3.59% 2.33%
30 Year 1% 3.86% 4.86% 3.16%

Finally, I had everything I needed: the structure of debt expirations and the after-tax interest rate Apple would be paying on the borrowed funds. With this information, I projected the interest payments Apple would be paying for the next 30 years on the additional $98 billion debt issued. I discounted these outflows with Apple’s cost of equity and found the present value of them to be $10.855 billion. I also applied the same methodology and calculated the present value of Apple’s previous $17 billion debt issuance, and came to $1.334 billion. The total value destroyed from Apple issuing $115 billion in debt came to $12.19 billion.

Value Retention

From our calculations, if Apple were to expand its stock buyback to $115 billion, it would be able to buy back and retire 174.06 million shares. These used to be shares which Apple would have been paying dividends to for the life of the company’s existence, but now it has retained those dividends, which should create some value for the remaining shareholders.

As of now, Apple is paying $12.20 dividends/year per share outstanding; however, the dividend will not remain the same in the future years. In reality, dividends grow through time. So now that Apple has retired those 174.06 million shares, it can now retain all those dividends as well, which would have grown throughout time. So let’s try valuing the amount of savings derived from retaining the dividends on those shares. A few assumptions will be made:

  1. We’ll assume that Apple will not decrease its future dividends
  2. We’ll assume that the dividends will grow at 3% per year
  3. We’ll use the Dividend Discount Model to value the savings to Apple
  4. We’ll use Apple’s cost of equity of 11.25%

So, what is the Dividend Discount Model? Essentially, it’s a model used to discount future cash flows (dividends) and derive its present value. Utilizing a base dividend/year of $12.20, cost of equity of 11.25%, and growth rate of 3%, we derive a value of $26.51 billion which is retained by the company. Assuming 734.36 million shares outstanding (after the buyback), this translates to an added value of $36.10 per share.

Ultimately, $12.19 billion in value was destroyed by the interest from the buyback program, while $26.5 billion in value was retained. This ultimately pushes the share price up to $647.78 after the buyback program, even if growth prospects have not changed.

Final Words

Apple’s share buyback program through the use of debt has been controversial, but I believe it’s worthwhile for the company to engage in. Ultimately, the buyback program destroys $12.19 billion in value from interest, while adding back $26.5 billion in value from retained dividends. The buybacks will push the share price to $647.78 even assuming unchanging growth prospects.

Apple is currently in a position in which its access to debt markets creates a strategic opportunity to finance stock buybacks, which will lead to share price appreciation, even without any additional growth prospects. Many have argued, to which I agree, that Apple’s stock is undervalued and this buyback program will allow Apple’s management to take advantage of this opportunity. Some argue that this is a form of “financial engineering” and artificially inflating the stock price, which just isn’t true. In the end, the shares that are being bought back are being retired, which increases the value of each remaining share outstanding, leading to gains for current shareholders.

Enbridge: Truth Shifter

keep this alive….

KV

Juanita Hadwin

http://www.vancouversun.com/opinion/op-ed/Opinion+Enbridge+misrepresents+pipeline+benefits/8780459/story.html
As an economist, I am troubled by continued attempts by Enbridge to misrepresent the facts of this project, even as these facts pertain to their own analysis. In an opinion piece in The Vancouver Sun last week, Enbridge executive Janet Holder claimed, “The Northern Gateway pipeline represents a $6.5-billion investment in our economy. It will create 3,000 jobs during construction and 560 permanent British Columbia jobs.”

This is just not true.

Enbridge’s analysis assumes Alberta will export the same volume of crude oil whether or not Northern Gateway proceeds. So whether the project is built through B.C., or elsewhere in Canada, Enbridge believes billions in capital investment will be made no matter what the outcome of the board’s decision. Therefore, there will be no economic loss to Canada’s economy if the National Energy Board rejects the project. Enbridge’s basic assumption renders their impact analysis as nothing more…

View original post 496 more words

Opening a grain sack.

298 images on august 11-2013 284298 images on august 11-2013 282 298 images on august 11-2013 283

Now that steel cut oats is at last becoming popular, and Anna has even used the grain sack stitch to close her bags of oats, it’s time to reveal the farmer’s trick. How to open a grains sack. DInk Sinclair taught me this, back in 1971 when we bought our first farm.

 Look closely at the stitching at the top of the feed sack. One side of the stitching will be a flat single running stitch, while the other side will have a knotty or looped appearance.Usually, the flat stitch is the “front” of the bag as well, with any printing appearing on that side. The loops are usually on the back side. Once you removed the “pull string” you will see the lops more clearly.

With the looped side of the bag facing you and the “pull string” side facing away, grasp the corner of the bag to your right and with a scissors or knife cut off the chain of stitches that extend past the right edge of the bag.

Pull the stitches of what you have just cut  with your fingers or the point of your jackknife until you have unraveled enough of the pull string to reach the fabric of the feed sack or the paper closure sometimes used.

Grasp the end of the pull  string in your left hand and the loops string in your right. Pull the strings away from each other. The stitching on the bag should unravel across the top, leaving you with an open feed sack.

Simplicity of Beer 3

Here’s a very good summary. FROM A HYPERCARD!!!

 

The following is from The BeerStack, a HyperCard file created by Robert Bush for recording brewing recipes. Note that this version of the document only provides background information. Robert originally wrote

‘The BeerStack was first intended as a kind of base for me because I almost lost track of all brewing & beer notes lying around. Please give copies of TBS to friends, post it on BBS’s, send it to magazines, spread it!’

     Written by Robert Bush, Eskilstuna, Sweden

Beer is one of the most complex beverages that you can drink. It is, among other things, good-tasting, social, and in too high a quantity intoxicating. To me, beer is more than a glass of light brown liquid with alcohol and a foam head; it is the ultimate topic to discuss among friends or enemies and a very peculiar fluid indeed.

Many people I know are not as enthusiastic. I have tried to convince them to try something other than the regular golden coloured brew that they always have when we’re down the pub, but talking about it doesn’t seem to be enough.

Water, of course, is the main ingredient of beer. Without water we would have to chew our brew, wouldn’t we? Then we have malted barley in different forms, hops of several varieties, yeast, and sometimes sugar or cereals known as adjuncts.

Ingredients

Water

The most famous brewing water is the water of Burton-upon-Trent. It has perfect water for some types of beer but is not necessarily the best water for all beer. Burton’s fame has more to do with the fact that a couple of Benedictine monks who knew how to brew happened to live there long ago.

Water can be hard or soft and without me being to technical about it, let’s say that some waters are suitable for some beers while others are not as suitable.

Because of that, most breweries treat their water to suit their beer best. They add minerals like Calcium sulphate, Sodium chloride, Magnesium sulphate or reduce the contents of other undesirable chemicals. Sulphates are considered to produce a dry flavour, which suits pale ales best; a darker beer with a fuller flavour is helped by chlorides and milds or dark ales benefit from a higher quantity of (common) salt. A lot of breweries ‘copy’ the Burton water for their ales. Commercial breweries talk about ‘water’ as something you use to clean the equipment or cool the wort with, while the treated water used in beer is called ‘liquor’.

Malted Barley

Barley is what you get the fermentable sugar from. Most of the barley used in brewing is malted. That means it has been soaked in water for a time, until it has absorbed enough water to begin germination. After that it is kilned (dried in an oven) and sometimes roasted in order to reach the desired colour. From now on, it is called malt.

In days long past, all breweries malted their own barley. This is no longer common practice; most breweries get their malted barley from independent malteries. In Sweden, Pripps and Vivungs are the only breweries that still malt themselves.

The colour can range from very light (pilsner malt, lager malt, pale malt) to dark brown or black (chocolate malt, black malt). Between those extremes there are several more grades. A special scale, known as EBC (European Brewing Convention) is used to indicate colour in malts (and beers). The lower the EBC is, the lighter is the malt (thus kilned for a shorter time).

Mild ale malt 7 EBC
Munich malt 20 EBC
Amber malt 40-60 EBC
Brown malt 150 EBC
Crystal malt 100-300 EBC

Some beer styles need roasted barley (1000-1550 EBC) for their colouring. That is unmalted but roasted barley that gives a very black, often opaque beer.

Adjuncts

Rice, flaked maize, raw barley, wheat and oats are all examples of adjuncts. They have a similar amount of fermentable extracts to malt and some of them also contribute to head formation and retention. In some cases the brewer wants to achieve a special taste or a certain colour for his beer; then adjuncts might be the answer.

The use of adjuncts partly comes from the U.S.A., where they used maize and rice for economic reasons. Today it is not only because of economy brewers put adjuncts in their mash. Maize and rice gives a lighter, more easily-drinkable beer for the mainstream consumer. Many American (mainstream) beers have up to 50 per cent of adjuncts in them, and anyone can understand that this ‘dilutes’ the taste. Adjuncts are not all bad, though. Some beers actually benefits from them.

In Germany, in 1516, a law called ‘Reinheitsgebot’ was passed. This law implied that nothing but malt, water, hops and yeast could be used when brewing (i.e. no adjuncts). However, an EU-rule from 1987 says that beer with adjuncts can be sold within the Community and therefore Germany had to allow brewing as well (for Law students: 178/84 Commission v. Germany).

Nowadays the Reinheitsgebot is used as a sales trick. ‘Pure’ beer is supposed to be better according to the advertisers.

Sugar is another kind of adjunct. It is common practise to use sugar in Czech Pilsners and a Sweet Stout wouldn’t be sweet enough without it.

Hops

A very fast growing plant, hops is. It can reach 8 – 9 metres in a couple of months. Of course, it would be a bit inconvenient to climb that high in order to be able to harvest the cones so the plants are cut down to ‘man-height’.

It is only the cones that are needed in brewing. Furthermore, it is only the female plant that is used. The hop cones contain a lot of certain aromatic oils, resins and bittering and aroma acids known as lupulins. These things affect our final product – the beer – to a great extent.

The hop cones (or in the form of pellets) are boiled with the wort and a series of reactions take place that contribute to the flavour and aroma of the beer, assist in the precipitation of trub (sludge, wort sediment). The oils and the acids also provide some nutrients for the yeast.

Virtually all beer styles contain hops – some more than others. It is the hops that help in preserving the beer, it is the hops that gives it its bitterness, flavour and aroma.

Different hops have different properties and therefore brewers classify their hops into three categories; namely bittering hops, aroma hops and dry hops.

Before we take a look at those categories I have to mention something about the system used to classify the bitterness of beer. It is known as EBU (European Bittering Units). This is another one of those scales, only this one tells you the alpha acid contents of beer. More alpha acid in the hops gives more bitterness and a higher EBU of the final beer.

Bittering Hops

These are the most bitter varieties. They are, not surprisingly, used for bittering purposes. Thrown in the copper (boiler) at an early stage of the boil. Typical bitterness for a bittering hop would be 7 – 12 % alpha acid.

Aroma Hops

Aroma hops have a lower yield than bittering hops which makes them expensive. They could be used for bittering too but that is not economical and only ‘De Luxe’ beers use them for that purpose. Instead of high bitterness they have a pleasant aroma which is the main reason brewers use them. Aroma hops are usually not thrown in the copper until towards the end of the boil, in order to retain some of the aroma that would otherwise be boiled away. Typical bitterness for an aroma hop would be from as low as 2 up to 7 % alpha acid.

Dry Hops

Even though you use aroma hops for aroma, it is sometimes not enough for some brewers. They want more aroma, more flavour and more taste of hops in their beer. Now, brewers are smart so they found out that if they add some hops after the wort is boiled or even after it is done fermenting they will end up with an even better product. I can assure you that brewers, including myself, are hop-lovers and commercial brewmasters would use much more hops in their batches if their bosses (or the so-called market) let them.

Since adding hops to the beer at this stage of the brewing process doesn’t add any bitterness one could think that any hops could be used for dry hopping. That is not true; only the finest hops are used. Bittering hops could impart a harsh aroma to the beer, which is why only a couple of varieties with low alpha acidity are used as dry hops.

Yeast

Yeast is the most exciting ingredient of beer. It is also very important; I dare say that it is the most important, most character-and aroma-providing ingredient in all fermented beverages. Yeast is what turns sugar into alcohol and carbon dioxide. It also helps head formation and head retention and produces a lot of other things that are responsible for a great part of the taste.

Most beers are filtered and pasteurised but sometimes yeast is added to the finished beer, to create a second fermentation in the bottle. Most wheat beers, some ales and many Belgian beers have yeast in the bottle. Look for the words “Bier op gist” or “Biere sur lie” on labels. It means “Beer with yeast” in Flemish and French. On a beer-bottle from Germany it might say “Mit hefe”, indicating that it contains yeast.

This is very useful to home-brewers, since it is possible to revive the yeast with some sweet wort and then use it in your own beer. It is of much help when you want to duplicate a particular beer.

When talking about yeast and brewing one might think that it is possible to go down to the grocer’s and buy regular baking yeast. That is not the case. It has to be real brewers’ yeast. Either in dried form or in liquid form. I use the latter because it is absolutely sterile, which ensures a clean, germ-free brew provided that your stirring equipment, siphons, funnels etc. are properly cleaned.

There are yeasts and there are yeasts. Ale yeast, Lager yeast and Wild yeast.

Ale Yeast

This is my favourite and what I use for most of my beers. Ale yeast is a top-fermenting or top-working yeast. That means that it stays on the surface of the wort and does its job there. It is the yeast used in Bitters, Pale Ales, Stouts, Milds, Altbiers and a lot more beer styles. The Latin name for ale yeast is Saccharomyces cerevisae. It works best at temperatures around 18-24°C.

Lager Yeast

A lager yeast is a bottom-worker. It ferments the wort from the bottom of the fermenting vessel. It is exclusively used in lagers (but there are several types of lagers).

When using this type of yeast one should ferment at a very low temperature. At different stages of the fermenting process, different temperatures are used. Anything from 0-15°C or even minus figures would be normal. It would work to use a lager yeast at temperatures over that too, but then you miss the point; ale yeasts perform much better in those cases. Like ale yeast and most other yeasts, lager yeast dies at around 30-35°C. In Latin, lager yeast would be Saccharomyces uvarum.

Wild Yeast

Since I haven’t had the opportunity to visit the Zenne Valley of Belgium to collect an air sample, I haven’t used this type of yeast in my own brews. Does that sound strange? I’ll tell you about it.

This type of yeast does not go berserk or anything; it is not wilder than any other yeast in that sense. On the other hand, you can’t keep it as a pet either. The term ‘wild’ is simply used because it is very difficult to keep wild yeast under control.

Wild yeast is a form of fungus (so is all yeast) that flies around in the air and settles onto anything that it likes. Have you ever left a loaf of bread for too long in a plastic bag? See what I mean? After a while the loaf is green with mould; which like yeast is a fungus. This is exactly the way our wild yeast works, only it wouldn’t choose a loaf, but the wort we want to ferment. The wild yeast used in brewing is not any wild yeast though. It is only in the Zenne Valley mentioned above that people brew with this special yeast. The brewers make their wort like any other brewer but when it is time to pitch (pour the yeast into the wort), they don’t! Instead they leave a hatch or a window open and wait for the wild yeast to start munching the sugar in the wort.

This spontaneous fermentation produces a very special type of beer, known as Lambic.

Characteristics

I think it is necessary to know some ‘rules’ of classification that I use. Before you continue, read this:

Colour of Beer

I’ve mentioned the colour system for malt under the button “What’s in beer?”. The same system is used for the colour of finished beer, only the figures are not in the same range.

Bitterness of Beer

A higher EBU gives a higher bitterness in the finished beer. Most brewers follow the alcohol content of the beer. A stronger beer often has more bitterness and vice versa. They seem to ‘disguise’ each other. A beer with good body or mouth-feel can be highly hopped too, without the high bitterness spoiling it.

It is fairly easy to calculate how bitter your beer will be if you know the alpha acid content of the hops used. The formula is available under the button “About Hops” on the main menu. There is also more information on the EBU system used to describe the bitterness of beer.

Alcohol Content

In Sweden (where I’m from) it is mandatory to put the alcohol percentage on the labels of beer bottles or cans. Until some years ago, Great Britain did not have that; they used another system (see below). Some countries don’t use any system, so you have to guess how strong the beer is. For a beer-lover like myself, sometimes that’s fine; it is the taste that matters to me. But what do you do when you have to drive a car? How do you know when you can drive? This creates a problem and I think that it should be mandatory everywhere to display the alcohol percentage.

There are two ways you can measure this. Either by % of the weight or by volume. The latter is more common internationally. With two simple formulas it is easy to convert from one method to the other. If it is displayed by volume, just take that figure times 0.8 and you get the percentage by weight (e.g. 5.5% by vol. × 0.8 = 4.4% by weight). The other way around you cannot use the same formula. Instead, if it is displayed by weight, take that figure times 1.25 and you get the alcohol content expressed in % by volume (e.g. 4.4% by weight × 1.25 = 5.5% by vol.).

I will use the % by volume system, abbreviated ABV.

Original gravity (OG)

This is what Great Britain displayed on labels until a couple of years ago (and still do sometimes, but accompanied by the alcohol content). It is the density of the wort before it is fermented. Using the original gravity, an estimation of the alcohol content is possible. We know that water has a gravity of 1000. The higher the gravity, the more fermentable sugar in the wort and with more sugar for the yeast to chew on, the more alcohol is produced in the beer. But all sugars are not fermentable so there will be some of them left in the finished beer. This gives some extra gravity left. Unless you use a hydrometer to measure this you can’t calculate the exact alcohol content. But you can ‘guesstimate’. Say we have a beer with an original gravity (OG) of 1045. The yeast ferments it as much as possible and we end up with a beer with a final gravity (FG) of around 1011. Using the following formula we can calculate the alcohol content:

OG – FG or 1045 – 1011 = 4.56% ABV

7.45         7.45

Degrees Plato

Degrees Plato are in a way linked with OG. It is just another way of expressing the ‘thickness’ of the beer. A beer with 6° Plato would be very thin, watery and weak in alcohol while a beer with 14° has a lot more mouth-feel, body and alcohol.

If you know the OG of a beer and want the degrees Plato (roughly), just take away 1000 and divide it by 4 (e.g. OG1045 – 1000 / 4 = 11.25° Plato).

Finally

There is, and always will be, brewers that misunderstand things and brew a beer they think will fit into a specific category without it having anything to do with the style. So chances are that you sooner or later will encounter a bottle of beer that, for instance, says Märzen on it when it’s just another plain lager. Or an IPA, which is supposed to be high in both alcohol and bitterness, that tastes like an ordinary bitter.

Another thing that is weird, is that I’ve seen beer bottles with the word ‘draught’! But all this doesn’t matter unless you’re really picky, as long as it tastes good.

Beer Types

Pilsner

The ideal pilsner would be a yellow, malty, flowery-hoppy lager with a dry finish and approximately 5%ABV and 12° Plato.

A lot of breweries call their beer pilsner even if it is not. An exception is Germany where most breweries follow the original quite good. So what is the original then? Well, the name Pilsner means ‘from Pilsen’ which is a town in Bohemia in the Czech Republic and this certainly tells us a lot about the origin of the style. The most famous pilsner is Pilsner Urquell, and I think I can say that it is also the best pilsner in the world. I blind-tested that brew along with four other Czech brews (Bohemia Regent, Kozel, Staropramen and Budweiser Budvar) and the result was devastating for the ‘challengers’!

Pilsner is the number one beer of the Czech Republic and the Czechs really know how to brew it. In Plzen they made their first batch of this type of beer in 1842, and in the 1870s it became famous throughout Europe. The Germans brew similar beer but variations are rather great so in my opinion a pilsner is a Czech beer. The barley grown in Bohemia is special; it contributes to the softness of the beer, and the hops used in a true pilsner is almost always the Saaz variety, which is grown in the Czech Republic as well.

Pilsner OG 1044 – 1056 EBU 35 – 45 EBC 7 – 14 ABV 4 – 5%

Pale Ale / Bitter

Bitter and Pale Ale are very similar but it is not the same. You could say that the Bitter is what you get on tap while the Pale Ale is bottled, but that is not all true. The Bitter is less carbonated and slightly more bitter than the Pale Ale but the Pale Ale is said to have a higher original gravity.

The name suggests that it is bitter. This type of beer is among the most bitter ones but there are breweries that call their beer Bitter even when the bitterness is lower than it is supposed to be for the type.

The Bitter can be divided into Ordinary Bitter, Best Bitter or Special Bitter with ascending strength and complexity. The colour varies between bronze and dark copper.

Although it is becoming more and more accepted in other countries, it is most common in Britain. But there are Belgian ales that are interesting as well. They are more aromatic and spicy in both malt- and yeast character than their British counterparts.

IPA is short for India Pale Ale, which is a bottled beer. It was originally intended to be shipped to the British army in India at the turn of the nineteenth century. In order to keep, the beer was very strong and hoppy. It is not very common these days; only a few breweries have it. Instead, IPA is used as a name for ‘super premium’ ale and I get very disappointed when I have an IPA on tap and find that it’s just another ale.

Pale Ale / Bitter OG 1033 – 1056 EBU 20 – 55 EBC 10 – 35 ABV 3 – 5.5%

Lager (or ‘Beer’ to some)

This is silly, really, because lager does not represent a style of its own although many people think so.Lager is the name of a beverage that has been fermented with a yeast strain that works on the bottom ofthe vessel.

Under this heading falls the BIG mass-produced, internationally famous brands like Carlsberg, Stella,Heineken etc. These brands don’t have anything to make them stand out; they’re all light in colour,have a clean and neutral flavour and often a short after-taste.

The “International Lager” is often brewed with adjuncts as maize, rice or sugar. They are so similar intaste and appearance that I won’t bother to mention them again.A beer-style that comes very close is Dortmunder. It is stronger in alcohol and has a more appearingmaltiness as it is not brewed with adjuncts.

Lager OG 1035 – 1055 EBU 5 – 20 EBC 4 – 20 ABV 3.0 – 5.6%

Märzen / Oktoberfest

Märzen is the German name for the month March. It is also a type of beer. (In Belgium they used to brew a beer in March, called Mars but that style is now extinct.) The name stems from the fact that it was brewed in March and stored in cool caves during the summer, and by October it was just enough left to have a great ‘fest’. Today we have fridges to store our beer in so this style still lives because people want traditions. Every October, or rather September/October, there is a beer-drinking party in Munich (Oktoberfest). This tradition is now spread to the whole world and thousands of people swing their 1.2 litre beer-jugs, around this time, every year.

What about the beer then? It is almost the same as Vienna-beer, which often is amber in colour and is brewed with so-called Vienna-malt (a lightly roasted type of malt). The difference is that the Märzen / Oktoberfestbier is brewed to a higher gravity, which in turn gives a beer stronger in alcohol.

Märzen / Oktoberfest OG 1052 – 1064 EBU 22 – 28 EBC 10 – 35 ABV 4.8 – 6.5%

Bock

Another famous type of beer with its roots in Germany, first produced in a little town called Einbeck in the 14th century. The word ‘Bock’ is often misused on any lager with a high strength in alcohol but a true Bock is also an all-malt beer with a very long lagering time. It can be either golden or dark brown. It is mostly a seasonal beer, but the season it is served varies from country to country. A Maibock is a bock that is brewed for the first of May, to celebrate the arrival of spring. A Doppelbock is an even stronger brew. It reaches 7.5%ABV or more and is always leather coloured or dark brown. Many Doppelbocks have names with the ending ‘-ator’, because Paulaner of Munich, made a Doppelbock called Salvator and the other breweries wanted similar names. The EKU brewery in Kulmbach has its Kulminator, Ayinger in Munich has its Fortunator and Hacker-Pschorr brew a Doppelbock named Animator. Delicator, Celebrator and Optimator are other examples, while my own home-brewed Doppelbock is called Liquidator. (Please, let me know if that name is taken by a professional brewery!) As if the Doppelbock wasn’t strong enough, somebody had to invent a method to make it stronger. Since water turns to ice before alcohol does, they freeze the beer, remove the ice and voilà, the beer is stronger. That type of Bock is called Eisbock.

Bock OG 1066 – 1085 EBU 20 – 35 EBC 10 – 40 ABV 6 – 14%

Münchner Helles / Dunkel

In German ‘hell’ means ‘light’ and ‘dunkel’ means ‘dark’. A Dunkel is a Münchner that is amber or dark, while a Münchner Hell is lighter in both colour and often also in alcohol.

Münchener is one of the earliest bottom-fermenting beer styles. It was developed by a brewmaster at the Spaten brewery in the beginning of the 19th century and a hundred years later, the first light variety (Helles) was brewed (in 1928); it is now the most common in Bavaria. The Dunkels are full in body with a noticeable malt-aroma and often a taste of roasted malt. The Helles are thinner, with a modest bitterness.

Helles OG 1044 – 1052 EBU 18 – 25 EBC 7 – 12 ABV 4.5 – 5%
Dunkel OG 1052 – 1056 EBU 16 – 25 EBC 40 – 80 ABV 4.5 – 5%

Mild

Being very low in alcohol, this type of beer is perfect if you intend to consume a lot of it. It cannot be kept for too long so it must also be consumed quickly. It is certainly not as hoppy as Pale Ale or Bitter, but more on the toasty, sweet side. The colour could be copper but more often it is dark brown. The Scots have a similar beer that goes under the name Light Ale and in Wales they refer to it as Dark.

Mild OG 1030 – 1038 EBU 10 – 24 EBC 16 – 135 ABV 3.2 – 4%

Old Ale

Also known as Stock Ale because it was stored for quite a few months, or even years, in the old days. Before refrigeration, it was difficult to brew ale during high summer due to problems with infection. Instead, the brewers made their beer in January or February and stored it for the summer. It was usually a very strong beer.

Old Ale is still brewed today. It is often dark and sweet. The sweetness comes from the very high OG which means a lot of sugar in the wort and sometimes sugar is added by the brewer. Sugar gives alcohol, but that is only true if you let the beer ferment out properly. That is not often the case with Old Ale; the brewers want their Old Ale sweet.

Modern Old Ale (What a contradiction!) is not as strong as Barley Wine but stronger than the average brew. It often contains crystal malt and black malt and is given a long period of maturation in cask and an extra six to twelve months in the bottle.

Old Ale OG 1055 – 1075 EBU 30 – 40 EBC 20 – 35 ABV 6 – 8%
• Competition brews worth remembering:-

Plain Pils German Pils   Brewer: Robert Bush

Gold in The Swedish National Homebrewers Competition 1995, class 1 “Light lager”. Judges comments: “Impressive head, yellow / golden in colour. Lovely clean aroma with a hint of peppermint. Clean, straight and correct for style. Nice bitterness in aftertaste. Slim and well balanced…”

Score: 38.

Bushendonk Belgian Abbey Beer   Brewer: Robert Bush

Silver in The Swedish National Homebrewers Competition 1995, class 8 “Specialty Beers”. Judges comments: “Nice head. Acidic aroma that is a bit over the limit but otherwise gives a nice association to apples. Elegant, light flavour with held-back acidity. Winy, a bit fruity and a little brown sugar. Another couple of years in oak casks, maybe?”

Score: 37.

The Brewing Process

Beer has been brewed in virtually the same way since man first discovered that it was possible to brew. The equipment used is more modern these days but the main principle is the same: Barley is malted, steeped in water which becomes wort. The wort is boiled with hops, yeast is added and fermentation takes place. After that, the beer is matured and bottled.

Since this is a very rough description I better explain the steps more thoroughly, but only on a homebrewing level; commercial brewing is more complicated, with a lot of extra steps involved.

Malting

Fortunately, this is something you don’t have to do yourself, as a home-brewer, but it is important so I include it anyway.

Finest barley is germinated for a certain time and then dried. This drying-process is called kilning. During the kilning phase the malt gets its colour (depending on the time its kilned). Sometimes it is roasted or almost burnt but the main part of the malt is simply dried; meaning it is turned into pale- or lager-malt.

After it is dried (and/or roasted), the malt is crushed in a mill. It is important that it is not ground to a flour; nor should the grinding be too coarse. A perfect malt should have its shell cracked open just enough to let the water in. If it is too finely ground it creates a set mash, which means that the water won’t run through the mash tun. On the other hand, if it is to roughly ground, the water doesn’t reach the sugar (in the form of starch) inside the barley.

Mashing

It is through mashing the starch in the barley is converted to sugar. At different temperatures different enzymes start to work, and it is those enzymes that sort-of ‘suck out’ the sugar (the starch actually). It is not that simple but I will try to explain.

There are more than one method of mashing:

The Infusion Mash

The simplest method. All you have to do is mix the malt with water at a temperature of about 63-67°C. The temperature is then held there for 1.5-2 hours and then raised to 76°C to reduce wort viscosity and make the wort easier for mash tun run-off.

The left-overs (the spent grains) are then sparged (see below) with water at 78°C. This method of mashing is very common in Great Britain, where a lot of bitter and pale ale is brewed.

The Decoction Mash

A complicated method invented in the mid-nineteenth century by the Germans, to deal with high nitrogen malt. The Brits already had transparent beer at that time, which probably was an annoyance to the Germans. But Germany didn’t have the same quality of their barley so they had to treat it differently.

A decoction mash is started at low temperature and then gradually raised to 45-55°C. That temperature is held for about 30 minutes. At that temperature a lot of protein is degraded into simpler substances. This is called the protein rest and is done because protein in the wort gives the beer a haze.

After the protein rest (and this is where the complicated bit starts) a third of the mash (grains and water) is taken away and thrown into a boiler. It is boiled and put back into the mash tun. This raises the temperature of the mash to around 65°C. Another rest for about 30 minutes and again a third of the mash is removed, boiled and put back into the mash tun. This goes on until the temperature of the main mash has reached 76°C and it is time for run-off. As with the infusion mash, the spent goods is sparged.

The reason for boiling the grains is that the boiling gelatinises the starch, which would otherwise give a cloudy beer if the malt was bad.

The Temperature-stepped Mash

I use the decoction mash every time I brew a lager and sometimes I use adjuncts (like flaked maize for instance) to make a lighter beer and some adjuncts can cause a haze if too much protein is left in the wort. It is here the temperature-stepped mash comes in handy.

It is not as simple as the infusion mash but it is the easiest way to raise the temperature. I start with water heated to 54°C (called strike heat) which I pour into my mash tun. I then add the grains. This makes the temperature drop to about 50°C, which is perfect for the protein rest. I hold that temperature, with blankets wrapped around the mash tun, for about half an hour. Then I raise the temperature again, through the adding of boiling water. This time it goes up to 60-70°C. The rest is similar to an infusion mash, with the temperature held there for an hour-and-a-half, run-off at 76°C and sparging at 78°C.

Sparging

This is part of the mashing procedure. It simply means rinsing the spent grains in order to get most out of it. The grains are gently sprayed with water (77-80°C) until the gravity of the wort collected is around 1005. If you continue sparging after that, you get almost only water (which has a gravity of 1000). It is important that the sparging is carefully done. If you pour too much water in the mash tun at a time, you will crack up the ‘filter bed’ (the grains filter the wort) and a very cloudy wort will be the result.

The spent grain is called draff; commercial breweries sell it to farmers as cattle-feed.

Boiling

You now have wort, ready to be boiled, and that is done because you have to:

  • vaporise it to the right concentration
  • extract bittering substances from the hops
  • coagulate the proteins
  • destroy enzymes and bacteria
  • caramelise sugar (gives colour)
  • sterilise the wort

As soon as the wort boils, it is time to add the first (bittering) hops. The wort is then boiled for about an hour-and-a-half and the aroma hops is added during the last 1-15 minutes. It is very important that the boil is vigorous, to allow volatile products to escape. A mere simmer is not sufficient. When the wort has been boiling for some time it gets hazy. This is the hot break; the protein particles that begins to stick to each other, creating little ‘sausages’ which will sink to the bottom when the heat is turned off. This undesirable sludge is called trub; it is left behind in the boiler when you transfer the wort to the next bucket.

Cooling

It is important to cool the wort as soon as possible. You don’t want any bacteria in it, and the sooner you can pitch the yeast, the sooner the wort can start fermenting (the yeast ‘protects’ the wort). Furthermore, a quick cooling to around 17-20°C will cause even more trub to drop out of solution. This is called the cold break.

An easy way of cooling the wort is to put a piece of hose on each end of a copper coil, put the coil in the bucket with hot wort, connect the hose to the water-tap and run cold water through the coil. The other end of the hose must, of course, be put in the sink so that the water doesn’t get into the wort. I use this method, and 25 litres of hot wort is cooled down to 20°C in just over 20 minutes. A friend of mine runs the wort through the coil instead; keeping the coil in cold water. This takes about the same time but I find it a bit risky, since the inside of the coil is more difficult to clean and thereby keep sterile.

Fermenting / Maturation

If you think that your beer has the perfect balance in hop aroma, fine, but if you want a hoppier-tasting brew it is now time to add the dry-hops. As with ingredients only the finest hop varieties are used for dry-hopping and the hops are put in the fermenter at this stage. This is also when you pitch the yeast. It could be an ale yeast or a lager yeast and the fermenting-bin should be placed with what yeast you’re using in mind. Ale yeast – 18-22°C, lager yeast – 10-15°C to start with.

About half-way through fermentation the beer is transferred to another bucket (known as dropping), leaving excess yeast and sludge behind. The hydrometer is needed to determine when that is done. (For instance, a beer with an OG of 1040 and a calculated FG of 1010 would be dropped at around 1025, which would leave enough active yeast cells to ferment the rest of the sugar.) When the gravity has gone down to close to the calculated FG the beer is transferred again, this time leaving as much as possible of the yeast behind. The beer is then matured for some time (depending on what type of beer is being brewed). A lager needs longer maturation than an ale.

Kegging

A day or so before it is time to bottle the beer, it is usually primed. That means sugar or dry malt extract is stirred into the beer. This will give the remaining yeast enough ‘food’ to build up carbonation. I usually put my beer in kegs, so I put the priming sugar into the keg, siphon the beer into it and seal it. A couple of weeks (sometimes months) later the beer is carbonated and ready to drink. When bottling, I wait 24 hours after I have put the sugar into the fermenting-bucket, siphon the beer into bottles and cap them.

Note: Corneliuskeg = 19 litres

The only time I bottle beer is when I brew an extra-strong or ‘expensive’ batch. These batches often need a prolonged maturation period; sometimes years.Bottle sizes:

Bottle Size Usage
50 cl Euro Standard
50 cl Weiß
33 cl Newcastle Brown Ale
33 cl Swedish Standard
33 cl British
75 cl
12 oz American
Pint British
17 cl
25 cl Belgian

Home Brewing Equipment

Commercial breweries have a lot of equipment that would take too much time and space to explain here, so I will just tell you what is needed for home brewing. Almost every type of beer is possible to brew at home with domestic utensils; without the use of the expensive stuff they have at breweries. Here is what you need:

Mash tun: a vessel where you put your malt and the water, in order to get the fermentable sugar out of the malt. That sugary water becomes wort.

Copper or boiler: any vessel that can be used for boiling the wort with the hops. Unless you are brewing a pint at a time you should use something bigger than a household saucepan; preferably in the range 25 – 50 litres. The ‘copper’ word is used because many old breweries still have boilers made of copper.

Hop-back: many home-brewers use a perforated false bottom in their boilers as a strainer. That way the spent hops are kept back and the boiled wort can be run off. Another method is to use a hop-back. A plastic bucket with holes drilled in the bottom is fine. Simply put it over another bucket, pour the wort in it and the hops stay in the upper bucket.

Fermenting vessel: this could be made of plastic, glass or metal. It should be large enough to hold the amount of wort you just have boiled plus enough head-space for the foam that will rise from the fermenting process. A carboy is a fermenting vessel; a plastic bucket another. The fermenting vessel should be fitted with a lid, to keep bugs and bacteria out. A fermenting lock in the form of a glass tube filled with water is also useful.

Hydrometer: it looks like a thermometer but instead it measures the gravity of the wort / beer. When the gravity has gone down to 1007-1018 the beer has finished fermenting (normally; it depends on the beer being brewed). Gravity varies with temperature and most hydrometers are calibrated to be used at 20°C. Scale: essential for weighing malt, hops, sugar etc.

Thermometer: also essential. Temperatures are important when you mash and when you pitch the yeast you have to make sure that the wort isn’t over 30°C or the yeast dies. Siphon: a hose on a tube. Used for transferring liquid from one container to the other.

Kegs: cleaning bottles is laborious. I use stainless steel kegs instead and put all my beer in those. I only use bottles when I’ve brewed a really good beer that I want to keep for a while.

Spoons, funnels, strainers: things that can come in handy unless you want to stir with your arms, get hot wort over the kitchen floor or use a towel to filter out dirt in your wort.

Brewing in Detail

The best part about home brewing is creating your own recipes. Check other recipes that are known to work and see what is needed for the beer style you want to brew. Roll up your sleeves and start writing & calculating. I usually create a recipe, write it down, think about it for a week and then go back and change it or approve of it. I then gather the ingredients and brew!

You will need a pocket calculator when you are using the following formula:-

OG × Percent of grist × litres = Weight of ingredients in kilos

Extract of ingredient

Example: You want a beer with an original gravity (OG) of 1050. Take away 1000. You want the grist to consist of 70% lager malt. That’s 0.7. You want to brew 25 litres. You check the table where you can see that with a mash efficiency of 80% the extract contribution is 237, i.e. the figure to divide by. If your mash efficiency is lower or higher you simply take the laboratory figure times your efficiency (e.g. ME of 70%: 296 × 0.7= 207).

Thus:

50 × 0.7 × 25 = 3.690 kilos

237

Repeat procedure with the rest of the ingredients (e.g. 25% Munich malt and 5% Black malt).

Colour

The list shown below gives the colour of some well-known beers, expressed in EBC-units. This is short for European Brewing Convention and it is the special scale that is used to indicate the colour of beer in Europe. In America the SRM method is more common (I think) but I’m not too familiar with that so I won’t mention it any further. A very light pilsner would be approx. 7 EBC units, an English bitter maybe 25, whereas a stout can be as dark as 350 EBC. The latter would mean that the beer is opaque.

Duvel 7-9 EBC
Robert Bush Plain Pils 11.8 EBC
Einbecker Bock Hell 15 EBC
Schneider Weisse 19 EBC
De Koninck 22-23 EBC
Einbecker Maibock 25 EBC
Frankenmuth Bock 32 EBC
Grolsch Amber 32 EBC
Caledonian 80/- 30-32 EBC
Spaten Ur-Märzen Oktoberfest 32.5 EBC
Kilkenny 30-33 EBC
Rauchenfels Steinbier 32-33 EBC
EKU ‘28’ 35 EBC
König Ludwig Dunkel 40 EBC
Einbecker Bock Dunkel 40 EBC
Newcastle Brown Ale 50 EBC
Schlenkerla Rauchbier 52 EBC
Ayinger Altbairisch Dunkel 52 EBC
Rodenbach Grand Cru 60 EBC
Liefmans Goudenband 60 EBC
EKU Kulminator 65 EBC
Samichlaus 65-75 EBC
Sapporo Black Beer 100 EBC
Kulmbach Eisbock 130 EBC
Samuel Smith Oatmeal Stout 150-160 EBC
Courage Imperial Russian Stout 235 EBC

The ingredients shown below can be used to obtain the required colour. Some of the ingredients are only available in some countries (I have never found Amber malt here in Sweden for instance) and might be named differently in different places (Crystal malt is also known as Caramel malt).

The figures under “Extract” are the highest possible extract (expressed in °kg/litre) one can expect out of an ingredient, and that’s in a laboratory.

“80% ME” stands for 80 percent mash efficiency. I usually achieve 80-85% when I brew at home. Some people might reach a higher value, some a lower value; it all depends on your equipment and/or processing methods. Experiment until you know what figure to use in the formula. Start with 70% if you’re a beginner and go up 5-10% when brewing your next batch. Click “Formula”-button to see the formula I use.

“Colour” is expressed in EBC units. Sorry, but it wasn’t available for all ingredients.

Ingredient Extract 80% ME Colour
Pilsner malt 296 237 1-3
Lager malt 296 237 1-3
Munich malt 296 237 15-25
Pale malt 296 237 4-6
Mild ale malt 292 234 7-8
Enzyme malt 296 237 ?
Amber malt 280 224 35-65
Wheat malt 310 248 7-10
Crystal malt 268 214 10-300
Chocolate malt 268 214 850-1200
Black malt 265 212 1200-1500
Roasted barley 270 216 1000-1500
Wheat flour 304 243 ? little
Flaked wheat 279 223 ? little
Flaked barley 253 202 ? little
Flaked maize 313 250 0
Flaked rice 310 248 0
Torrefied wheat 273 218 ? little
Torrefied barley 253 202 ? little
Torrefied rice 304 243 0

Bitterness

Bitterness of beer is expressed as European Bitterness Units (EBU). The higher the alpha-acid content in a hop variety, the higher the EBU in the finished product (your beer)!

The EBU varies between different beer styles. A Bavarian wheat-beer might have as little as 10 EBU, whereas an Irish stout might be very bitter, 45-55 EBU.

“Utilisation” in the formula below depends on how long you boil the hops, how high gravity the wort has and the vigour of the boil. Normally, with a good rolling boil, it would be approximately 25% and if you use pellet hops instead of whole cones you get maybe 35% out of it.

I don’t think beer is beer unless it has hops in it! So use this formula to add the correct bitterness to your brew. Be careful in the beginning. A beer that is 95 EBU’s is not pleasant! You need a pocket calculator to figure it out, at least I do.

Formula:

EBU × 10 × volume brewed in litres = Hops needed in grams

alpha-acid × utilisation

Example: You want a beer with a bitterness of 30 EBU. Take that times 10. Take that figure times the number of litres you want to brew (in this example: 25 litres).

Check the alpha-acid content of your hops (in this example: Fuggle with 4.2%). Your utilisation is 25%. Take that times 4.2. Divide, and see how much Fuggle hops you need in order to brew a beer with a bitterness of 30 EBU.

Thus:

30 × 10 × 25 = 71 grams

4.2 × 25

The table below shows the difference between some of the most commonly used hops. The longer the grey bar is, the more bitterness it will give to the final beer. Note: These figures are by no means exact. The alpha acidity varies from region to region, from year to year. The figures are approximate.

Low alpha-acid varieties, mostly for aroma:

Tettnanger Aromatic, Flowery
Golding Aromatic, Fruity
Fuggle Aromatic, Spicy
Saaz Aromatic, Spicy
Hersbrucker Toffee-ish, Spicy
Styrian Golding Sweet, Spicy, Aromatic

Medium alpha-acid varieties, all-purpose use:

Brewer’s Gold A bit harsh, Spicy
Cascade Citric, Flowery
Northdown Aromatic, Dry, Woody
Northern Brewer Peppermint-ish
Challenger Aromatic, Fruity

High alpha-acid varieties, mostly for bitterness:

Target Rough and very bitter
Chinook Slightly vegetable-ish

This list is not complete, there are several more varieties but it gives you something to start with. This list is also very subjective; it is my opinion, what I have detected with nose and mouth.

Converted to HTML by Ray White, August, 2003.

Simplicity of Beer 2

HOPS

hop stilts

Seeds. Rhizomes. Plants.

For plants: http://www.greatlakeshops.com/hops-info.html

And has good information.

Where do you get rhizomes–as opposed to seeds.

Where to Buy Hop Rhizomes

By

buy hop rhizomes Where to Buy Hop Rhizomes

Where to buy hop rhizomes.  I have been asked over and over so I figure I would just put together a post and answer the question of where to buy hop rhizomes online.  I got my 2009 hop rhizomes from a local homebrew store Northern Brewer (ordered online even though they are local – still 20 mile drive) – as it turns out, they get their hop rhizomes from http://www.freshops.com.  You might as well go straight to freshops.com and cut out the middleman.

You can sometimes find a local homebrew shop or hop grower selling rhizomes, but generally, online buying is more convenient, better selection and you can compare shop.  Don’t forget friends and other local hop growing enthusiasts, they may be willing to part with some rhizomes.  Barter a couple of homebrews to your friends that are growing hops for some hop rhizomes!

It’s 2010, 2011, 2012    Let’s Do It Again!

Where to Buy Hop Rhizomes Online:

www.NorthwestHops.com – Choice Hop Rhizomes and the best prices. Don’t pay reseller markup! Family owned and operated Northwest Hops is your only rhizome connection.

www.barleyNvine.com – Our southern connection.  Check ‘em out, any southern climate questions – they will be better able to answer than I.

www.willamettevalleyhops.com – We offer hops and hop rhizomes. All product grown and obtained from generations old Willamette Valley, Oregon hop farms.

www.freshops.com

Highhops.net – 30 varieties of hop plants 48 US states

www.americanbrewmaster.com

www.homebrewing.org

www.thymegarden.com – 2010 – Taking orders now for our organically grown hop rhizomes while they last. Also wholesale varieties available. Shipping begins in order received approx. March 1st depending on the weather.

www.thebeeressentials.com

www.hopsdirect.com

www.beer-wine.com

www.midwestsupplies.com

www.gorstvalleyhops.com (lots of 10 to 100+)

www.coloradoorganichops.com/?page_id=19 – 2011 update – We will be offering Cascade,Chinook,Nugget and Willamette rhizomes, http://www.coloradoorganichops.com/  Certified Organic for the 2011 growing season. Pre Orders will start the 1st week of January Cheers Glen

www.mainbrew.com/pages/rhizomes.html

RNV Enterprises Yakima Valley – Vickie.rhizomes@yahoo.com

http://www.rnventerprises.com/

http://www.ebrew.com/beer/hop_rhizomes.htm

www.fourhorses.ca <== Canada Hop Rhizomes

There are more hop rhizome sources, this is what I found Googling “buy hop rhizomes” and supplied links from readers.  If anyone has a hop rhizome vendor they have used and are happy with, let me know and I will include it in this list.  There you have it, not much time left to get your hop rhizomes planted for the 2009 growing season(now 2010).

Cheers

 

GROWING HOPS

From first source. Great Lakes.

Picture

Creating the optimal hop yard that produces maximum yields with minimal infrastructure, labor, and inputs is critical to long term success & profitability of a hop yard.  Hopefully the following discussion can help improve understanding of how to achieve the optimally yielding hop yard for those just starting.
Choosing the right Trellis design begins with and ends with an understanding of the hop plant itself.  It is very important to understand how hops grow, what makes them produce optimal yields, and what the differences are between varieties and genotypes.
Some thoughts to immediately discard:

  • “Poles are expensive so let’s really space them out”
  • “don’t need such long poles if I don’t put ‘em 3 feet in the ground”
  • “This thinner wire should work . . .”
  • “the rows have to be really wide ‘cause I got a big tractor”
  • “let’s grow 10 varieties in 4 rows”
  • “we won’t need irrigation”
  • “fertilizer is just too expensive.”
  • “healthy hop plants don’t get bugs or disease.”
  • “I’m gonna plant the hops first and then put in the trellis and irrigation  . . .”

If you can’t get past these – stop here to prevent wasting a lot of time and your life savings, otherwise continue reading!


Picture

The first and simplest idea is to match the correct trellis design and hop plant density per acre to the hop varieties being considered.  Hops will thrive in a mature hop yard when this is done correctly because it creates a very favorable microclimate in the hop yard.  The hop yard is a three-dimensional environment like a forest.  Think in terms of upper canopy, mid-canopy, and lower understory; or floor.  Hop plant and row spacing has impacts at each level and will vary by cultivar and genetic type.  A one-size trellis design does not fit all. Spacing between rows and individual hop plants in the row is determined by a combination of plant size, sidearm length, and disease considerations.  If planted too closely the hop sidearms will intertwine with neighboring hop plants and strings; resulting in a tangled mess at harvest time. Spacing too closely also creates higher moisture levels and less air movement in the lower canopy; creating an environment that mildews and fungal diseases thrive in.  Spacing hops too far apart creates its own evilness. It exponentially lowers yield per acre, increases weed problems, and creates hot conditions in the lower canopy and soil.  Hot and dry conditions in this zone will increase mite and pest problems and restricts the development of the shallow root system and mycorrhizae that hops depend on for their rapid growth.  Overly-spaced hop yards often experience summer shock, yellowing, and stalled growth from over-heating and do not reach wire height or develop cones properly.

For purposes of this discussion, I am putting hops into 3 main growing groups  – American types (A), British types(B), and Continental Europe type (C).  This is a gross over-simplification, but this generalization is necessary to keep your attention!
American type hops (A type) tend to be large robust, high yielding hops with rather long sidearms; some approaching 48 inches in length.  They have vigorous root systems that match their bine size and are quite tolerant of different soil types, pH ranges and growing conditions.  “A”-types would include Galena, Willamette, Chinook, Brewers Gold, Columbus, & Zeus.   These large hop varieties require space and are usually planted in 14 foot row spacing with 42 inches minimum between plants.  Cascade and Centennial are also often planted at this 14 foot row spacing because of their finer plant habit and susceptibility to pests and diseases if crowded too closely.  Both of these varieties have shorter side arms so they are normally planted at 36 inch spacing in the rows.   “B” & “C” types-(British & Continental Europe types) differ genetically from American types.  In general, they are smaller plants with matching smaller, finer root systems. The finer root systems are not as tolerant of different soils, pH levels, and excessive moisture levels.  Yields and cone size tend to be lower and smaller per plant; with shorter side arms.  Although the yield per hop plant is lower, they can be grow at much higher densities per acre; resulting in about the same yield per acre as the more widely spaced American types. What is the difference between “B” & “C” types? “B” types originate from Britain, where they have been grown for centuries in a more alkaline chalky soil (think cliffs of Dover) that is high in calcium phosphates.  These hops are adapted to a well -drained soil that has relatively higher pH range – 6.5 or higher.  Some B types include: Fuggle, Challenger, Viking, and all the Golding types.  They will tolerate heavier fine soils if grown in raised rows.     “C” types originate from Continental Europe and come from countries like Germany, France, and Belgium. Some of these varieties would include Magnum, Perle, Hallertauer types, and Glacier. These hops have been grown for centuries in well drained soils that have a low pH 5.5 to 6.2.  This soil type is a more forest-type soil rich in humic acids derived from decomposed leaves or peat moss.  Pretty much the opposite of type B hops and even type A hops. (These differences and adaptations between types- A, B, and C’s is what perpetuates the notion that some hops can’t be grown here successfully. (Great Lakes Hops currently has over 75 different hop varieties growing successfully in Michigan trials.) Usually the source of this information comes from growers who have attempted to plant a hop yard that contains all these types together and yet try to treat them all the same – a huge mistake!) B & C types should be planted in trellis configurations with narrower row spacing – 12 foot or even 10 foot or less between rows in some cases. It is critical to form that “forest effect” described earlier.  Spacing between hop plants in the rows is again determined by the variety’s sidearm length – the shorter the sidearms; the closer they can be spaced.  Many of these varieties can be planted with in-row spacing ranging from 24 inches to 36 inches between plants.  These plant spacings are considered high density hop yards here in America, and some special techniques are used to grow them.  Hops are grown raised or hilled a minimum of 6 to 12 inches.  Lower foliage is removed from the bottom 3 feet of bines to ensure good air movement.  Rows less than 10 feet wide are clean-tilled; not inter-planted with a cover crop like clovers. (Row covers elevate the incidence of mildews by 30% or more.) Weeds and mites are often not as troublesome because the higher plant density creates a cooler, shaded mid-canopy and understory that is unfavorable for them.  Also, predator and beneficial insects move from plant-to-plant more effectively. The majority of hop varieties are B & C types -all the Noble type hops, and most aroma types fall into this category. Hop growers can really limit their opportunities with craft brewers when they lock into a typical 14 foot row space trellis design.

Picture

1   Now, the actual design strategy. Questions: What hop(s) are my potential customers willing to purchase? A, B, C or a mix of types?   (It does not make any sense to grow hops nobody wants . . .)  Can the different types be separated or grouped into individual growing areas or zones to meet each hops specific needs? Can I grow these hops on the land / soil type I have to work with?  Can I amend the soil or use other techniques to be successful? Am I familiar with the sidearm lengths and cultural requirements of each hop variety chosen? Have I chosen any hop varieties with unusual attributes like very long sidearms or high susceptibility to disease/ pests if over-crowed? (These types may do better in clump-style planting trellis designs). Is there a newer variety of the same hop type that performs better? If you can answer the above questions then . . .

PictureTaken by Dornoch Hops Ltd.

2          Pole Height Pole height is recommended to stay with a standard trellis height of 18 feet under the wire/cable unless you have consulted carefully about which hops can be grown hedgerow or on short trellis designs.  Hop varieties vary as to where cones develop – low, mid, or high on the bines.  Growing a high cone set variety on a short trellis would be a disaster!  Also plan how you will harvest and process non-standard bine lengths. Most processors with Wolf- type pickers won’t accept non-standard bines.

PictureTaken by Blake Mazurek, Carr Creek Hops

3         Row Spacing Type A, B, or C?   A mix of hop types A, B, C will require a compromise on less-than-optimal spacing and growing conditions for some varieties. This translates directly into less-than-optimal yields overall!  This is why most experienced growers limit the amount of hop varieties they grow; choosing hop varieties that grow similar to each other; or set up different trellis configurations and separate yards for individual hop types.  In some instances, hops can also be planted mid-aisle and utilize the same existing trellis support wires.  This creates a high density planting with a third more plants per acre; boosting yields without additional trellis structure.  Consult with GLH or growers who have these types of hop yard plantings before trying this alternate growing style.

PicturePhoto taken by Hop Head Farms, llc

4         Pole spacing in the row  This is determined by hop plant spacing in the row (density) and the cultivation style you are going to use.  Growers using evenly spaced plants will space poles at up to 42 feet apart for long sidearm varieties like Willamette, Chinook, & Galena; which are spaced at 42”-48”.  Types like Cascade and Centennial ; which are planted at a 36”, should have pole spacing reduced to around 36 feet  to prevent excess sagging.  If uneven, or clump spacing is used the following formula is helpful.
# of 3 foot hills plus 7 foot minimum between each hill plus 4 to 6 feet = pole space < 44 feet
Clump, uneven or hilled growing is another specialized hop yard design that allows cross cultivation of the hop yard in the 7’ cross row spaces and offers some economy in mechanical weed control and Spring field cultivation, rhizome removal, and reduced amount of hop twine required. Consult with GLH or growers who use this growing style for the pros and cons.
Pole spacing in higher density hop yards can also use an alternating stagger row-to-row; creating a diamond pole pattern which reduces the total number of poles required per acre.

Picture

5         Choice of Irrigation Styles Suspended, laid on the ground, buried dripper tape or overhead sprinkler.
Dripper lines suspended  14”- 18” above rows offer the advantages of easy inspection/maintenance; stay in place year-around; give a coir twine fastening point; and avoid damage from mechanical cultivation.  Possible con: cannot cross cultivate hop yard.  On the ground drip lines are easily rolled up each season; allow clump-style growing & cross cultivation.  Possible cons: harder to inspect, no tie spot for coir twine; prone to more mechanical damage from cultivation. Buried drip tape –not recommended.  Cannot inspect, often damaged during rhizome removal, not designed to match the longevity of a hop yard.  Overhead sprinklers.  Overhead irrigation or center pivot can be used successfully by growers who understand wet leaf diseases and time irrigation cycles to minimize wet leaf periods.  Possible cons: has to be elevated to pole height; somewhat uneven distribution of water; cannot be used effectively in windy weather, and is difficult to create different watering zones.  Overhead sprinklers are best used in conjunction with drip irrigation to cool leaf temps on varieties susceptible to heat stress.


As you can see, designing a hop yard for optimal production and yields involves a lot of careful thought and planning.  This was a discussion of just the basic considerations. There are a lot of very specific conditions and even some hops species (like H. neomexicana ) that are not discussed here. Don’t make the mistake of just slapping some poles in the ground and expecting that picture perfect hop yard with great yields.  The costs per acre to install a hop yard trellis system are very high and payback is several years in the making. Great Lakes Hops works with new hop growing customers, reviews hop yard designs, and supports their existing hop yard growers for free- so take advantage of our experience!  We want Hop growing in the Great Lakes region to be a total success!

Simplicity of Beer 1

Malting your own barley. Looks pretty simple compared to wine.

Malting Barley Grain at Home

by Brad Smith on December 5, 2009 · 42 comments

beer_barley_web

For the adventurous home brewer who wants to take all grain beer brewing to yet another level, you can malt your own grains at home.  While most micro and home brewers start with malted grain, it is possible to purchase unmalted grains and go through the malting process at home.  The equipment required is modest, and bulk unmalted grains can be purchased at a fraction of the cost of malted ones.

Unmalted barley is widely used for animal feed, so a good place to purchase unmalted grains in bulk is likely a local feed store.  Usually it is sold in large quantities – typically 50lb to 100lb bags.   Smaller quantities can be purchased from some brew stores, pet stores or equestrian specialty shops.

There is a lot of variation in unmalted barley quality.  If possible, you want to choose a barley that is low in protein as high protein will result in cloudy beer.  Inspect the grains if possible before buying to look for minimum broken grains, absence of mold or bugs, consistent color and general overall quality.

Steeping the Raw Barley

The first step in home malting is to steep the barley in water to begin the germination process.  Start with a large bucket that can handle the grains plus enough water to float all of the grains.  Add water until all of the grains are floating, and let the grains sit in the water for 2 hours.

Remove the grains from the water (a strainer is good for this) and let the grains air out and dry for about 8 hours.  This step is important as if you leave the grains in the water they will drown and eventually die.

After the grains have dried for about 8 hours, steep them again in a clean batch of water for another two hours, and dry them again for 8 hours.  You will likely have to continue this for a third cycle.  Within 24 hours of starting, you should see small roots start to grow from the base of the kernel (called chits).  Stop your cycles of steeping and drying once you have 95% of the grains germinated.

You should have added approximately 40-45% moisture (water) at this point.  Assuming you started the dry grains with ~9-10% moisture content, adding 35% moisture will result in a weight gain as follows: 1 kg of grain has ~100 g of water before steeping.  Adding 350g of water (45% water content) results in a total of 1.35kg.  So if you started with a given weight of grains, you can stop steeping when the grains weigh 30-35% more than when you started.

Germinating the Grains

The grains must now be germinated in a cool, slightly moist, but well ventilated area to grow the small leaflet inside the grain called an acrospire.  This generally takes 2-5 days.  The ideal temperature for germination is 64F, or about 18C.

You want to keep the seeds cool, spread them out well and moisten them periodically with a little spray mist.  The germination process generates heat, which can lead to bacteria or mold growth so its important to aerate the grains and turn them every few hours in a cool location to avoid infction.  Many early malters actually spread the grains on a concrete “malting floor” to keep them cool and make it easy to turn them periodically.

You continue malting until the small leaf (acrospires) within the grain is approximately 80-100% of the length of the grain.  Note that the acrospires is inside the grain, so you need to actually split the grain open with a knife or razor blade and look for the white leaf that is part of the endosperm and attached to the rootlets.  Typically the external portion of the rootlet will be about 2x the length of the grain when it is finished, but checking the actual acrospire length is the best method to determine when to stop.

Drying the Malt

Drying the malt can be difficult as it requires a steady temperature of between 90-125F (31-50C).  Drying at a higher temperature will destroy the enzymes needed for mashing.  If you are fortunate enough to have an oven with temperature control that can go this low, then leaving it in the oven for ~24 hours is an excellent way to go.  In some cases, even the oven light is sufficient to reach the 90F temperature needed, though it may take some time to finish.

If you live in a sunny dry climate, sun drying is also an option. Some care is needed to keep birds and other small scavengers away, but you can leave it out in the sun for 2 days which should be sufficient to dry the malt.

A third option is to use an actual food dehydrator.  Inexpensive home food dehydrators are available for as little as $30-40 and work quite well.

You are targeting a finished moisture content of approximately 10%.  Assuming you have not lost much material in the first two steps, this would mean the finished weight of the grains with their rootlets attached should be close to the total weight of the unmalted grains before you started the steeping process.  Recall that we started with about 10% moisture content in the original unmalted grains.  Therefore you can stop drying when the grains plus rootlets weight are back to approximately their original unmalted weight.

Finishing the Malt

The last step is to separate the dried, malted grains from the rootlets growing out of them.  After the grains are sufficiently dry, the rootlets will simply fall off them with a little agitation.  You can use a colander or some screen to shake the grains around and separate the dried rootlets.  Note this is a bit of a messy process, as the rootlets tend to get on everything, so you might want to do this outside.

At this point you have pale, malted barley equivalent to that which you would normally purchase from your brew supply store.  You can crush it and use it just as you would any pale barley base malt.

If you wish to make specialty malts from your pale barley, you can toast the malts in the oven to make varying shades of crystal, toasted, brown malts.  For the lightest of crystal type malts, try toasting at 275F for one hour.  For a medium crystal, try toasting at 350F for 15-30 minutes.  If you toast at 350F for an hour you will come close to a commercial brown malt.  You can also get different variants by toasting wet vs dry malts.  A wet toasted malt will impart a slightly sweeter toasted flavor.

For more on home malting, her is an article on Bodensatz by Dan Carol which I used when malting on my own for the first time.   Geoff Cooper also has a short article on roasting malts.

Thanks again for joining us on the BeerSmith Home Brewing Blog. If you enjoyed today’s article feel free to use the buttons at the top of this article to vote for it or subscribe for regular email or RSS delivery

{ 36 comments… read them below or add one }

thargrav December 7, 2009 at 6:18 am

Great article. And no, I’m not trying to bash you – I believe that everyone should try malting his own grain at least once to understand how the process works.

But the commercial maltsers have gotten their process down to such a science that I don’t believe any of us can get close to their consistency. They control their process all the way out to the farmers, expecting them to grow & deliver grain with a protein content not above a particular percent and an exact moisture content range. Barley that does not meet these standards usually becomes cereal or cooking additives or animal feed.

Dee December 30, 2009 at 12:07 pm

I have a HVLP painting compressor that I use to dry the malt.  I attach a garden hose to the compressor and the other end to a plywood disc with holes covered with window screen at the bottom of a 5 gal bucket.  The clean compressed air (this is a turbine pump) flows up thru the malt and drys it in no time.  You can put an engine block heater in the hose if you want more heat.

Too simple.

brewer February 6, 2010 at 11:02 am

Thought others might like this.

http://www.ehow.com/how_5956849_malt-barley.html

jay November 7, 2010 at 8:06 pm

Given my knowledge of the cereal grain growing system, the best place to purchase your grain is at a seed plant.  Basically a seed selling company that sells to the farmers.  The variety of grain is certified, and it is cleaned better than feed grain.  They will know exactly which of the many varieties of barley are best suited for malting.   They also size the  grain so it is uniform and give a percentage of germination and timeline.   The price is a little more than feed, but we are still talking about 10 to 12 dollars for fifty pounds.

Brad Smith November 7, 2010 at 9:00 pm

Jay,   Thanks for the info – I appreciate the great tip on getting grains from seed plants!

Brad

Yanqui Mike February 17, 2011 at 11:13 pm

Keep the comments comin´, guys!  This is all excellent stuff.

I´ve tried my hand at malting before a couple times and have failed …but that´s not going to stop me.  Success teaches you nothing.

Down here in Argentina, I have excellent access to beer barley (cebada cervecera) from “seed plants” that service all the giant breweries here.  Malt extract here is all imported and the price is prohibitive.  Barley malt is much more inexpensive.  Malting your own is the key to free beer.

We need to learn how to do this.

When you malt your own barley, you are your own man.

It´s the next logical extention.  I aspire to be a maltster.

Please keep helping.

Yanqui Mike http://www.yanquimike.com.ar 011 -54 -9 -11 -3803 -7099 (cel) 312-235-2241 (VoIP) yanquimike (skype)

Brad Smith February 18, 2011 at 9:40 am

Thanks!   Best wishes to you and thank you for the kind comments.

Brad

William February 19, 2011 at 11:03 am

If say someone is out of work and they can start brewing as soon as their malt is finished germination could he skip the drying step (except for specialty malt toasting for an hour or so in the oven) and go straight to brewing?

Brad Smith February 21, 2011 at 12:33 pm

Hi,   No – you actually can’t skip the drying step.  It is important to reduce the amount of water in the malt before you brew with it.

Brad

dustin Busby March 25, 2011 at 2:13 pm

I malted my barley and it sprouted a lot faster than i thought and some of it sprouted a little to far.  I dried it and then roasted it at 225 for a few hours.  The only thing is it is Six row and ends up cloudy do you have any suggestions on keeping it from clouding ???

Richie Giannone March 26, 2011 at 5:48 am

Check this cool video out regarding the subject at hand.  I’m in the process of trying this out right now.  Wish me luck!!

http://www.youtube.com/watch?v=HauYECAEQ8I

Brian June 2, 2011 at 2:51 am

“Start with a large bucket that can handle the grains plus enough water to float all of the grains.” just a tip only the bad grains will float to the top witch  must be removed, the good grains will sink to the bottom.

TY August 1, 2011 at 6:41 pm

If you going to buy barley from a seed supplier, make sure it is UNTREATED!  Unless you want to be poisoned…

Robin August 23, 2011 at 6:53 pm

Thanks for the article, I just bought 3000 pounds of Metcalfe barley to feed my milk goats (almost a years supply at the rate I’m feeding) and I thought I might attempt a little homebrew with it.  (The low protein makes it better for homebrew than for goat feed.)  I’ve never done all grain just partial.  The barley looks good and should be appropriate though because the farmer sell to Coors and Miller.  I got it for 10 cents a pound which is what it’s going for on the commodity exchanges right now so pretty damn good deal.  Can’t beat commercial brewery prices :)

I took my  dads dump truck out with two bean boxes (large steel containers that hold about 1500 pounds of barley each) and he filled them strait out of his combine.  I can’t find a single image of a bean box on google which I find quite strange as they’re used quite a bit in southern Idaho.  My wife, daughter, and I got to ride with him in the combine for a couple passes which was awesome.  Those things are so fancy it makes you feel like you’re in the future.

Heidi October 13, 2011 at 3:05 pm

I am only a few steps away from making my first beer from scratch.  I know, the ‘few’ steps may turn into many paths wandered, lost, and revisited, but at least I have already a lot of experience sprouting grains!

Mike December 28, 2011 at 12:26 am

How long do the malted hops keep for and is there a recommended storage technique?

Mike December 28, 2011 at 12:26 am

Also is the technique the same for barley?

Jeff January 12, 2012 at 1:49 pm

hey Brad, Great article thanks for the info and clear steps. While I agree that commercially this is done to such precision that a home malter wont be able to come close, I am still going to give it a try. I recently started growing my own barley and other grains in very small batches, (even going to try hops) just so that I can drink a glass of beer knowing that I made everything in it. So even if I lose half of my grains to poor malting, It will still be worth it.

Thanks, Jeff

lovenit March 17, 2012 at 4:02 pm

I have malted alot of feed barley.I can never get the same resaults twice.I have some made some of the best beers I have ever tasted then the next time they are not so good.I think the most important part is make sure you get all the rootlets out.Also make sure you don’t have any mold in you malted grain.I figure I can make 5 gallons of beer for under $5.00.My beer is incredible about 80% of the time.Your can get a rich taste with some of these feed type barleys that you can’t get with the malting varieties.

Ziggy May 5, 2012 at 4:07 pm

Brad, Thanks for following up on the question about skipping the drying step, and going straight to mashing. I was somewhat confused by your answer though. Why is it important to reduce the water content in the malt when the next thing you are going to do is soak it in water during mashing?

Brad Smith May 9, 2012 at 8:00 am

You have to dry the malt for storage.  If you left it wet for any length of time it would spoil.  Now if you did a mash immediately you could probably cut out the drying time if working with simple pale malt.  Obviously any specialty malt must be kilned or roasted to develop flavor.

Dave July 19, 2012 at 10:43 pm

Seems like you might also have trouble getting the rootlets to fall out if you don’t dry it – wouldn’t you?

Kola July 20, 2012 at 2:25 am

Regarding drying the malt before use, the spoilage issues are perhaps the most important reasons, as ecplained by Brad. Thus, the reduced moisture level ensures greater shelf stability.  Beyond the storage imperatives, that is, even if you are not going to store the grains for any length of time, you still need to dry and kiln the grains in order to develop the rich malty flavor and aroma.  Otherwise the undried malt will have a grassy aroma/flavor.  Addittionally, the wet malt may not mill properly, as it may tend to be gummy.  On the other hand, the freshly malted, wet, barley grains may contain a higher level of enzymes, as some of those original enzymes are destroyed by the drying and kilning heat.  Hope that helps.

Kola.

SDbrewer August 30, 2012 at 10:46 am

Have malted numerous batches of barley.  This time it appears to have stalled with acrospire at approximately 1/2 the length of the grain.  Any ideas what may have caused the modification process to stop?  I question the moisture, but did the same procedure as previous batches.

Brad Smith September 6, 2012 at 4:17 pm

I really don’t know – usually if you give it sufficient moisture it will continue to grow.

Barry September 27, 2012 at 10:19 pm

Thanks for the great article.  I’ve been thinking about putting in a quarter acre or so of barley, and maybe eventually some wheat and oats to increase my overall options.  Any thoughts about varieties of 2 row and 6 row I should be looking at?

Brian Sal September 30, 2012 at 8:13 am

Great article and forum guys and gals, I have malted lots of Barley in the last 12 months. I steep the grains in stainless steel colanders, inside stainless steel bowls. I take them out and steep them usually 3 times, at that point the little rootlets are starting to protrude from the colander. I grow the seeds until all of them have a leaf inside, (you need to split the seed to see this), and this is usually when the roots are twice the size of the seed. I warm the seeds in an oven tray in the oven for 3 or 4 hours just warming them to 50deg c, turning the oven off and on to ensure this low temp. After this the roots and sprouts are dried out, so I transfer them to an old clothes drier where they shed their roots and sprouts. The result is a malt high in carb and low in protein, which is what you want to make good booze, cheers Brian….

Dillon October 27, 2012 at 1:27 pm

Where do you buy the barley from? Is there a website that you can buy that from?

Brad Smith November 8, 2012 at 2:29 pm

As the article says unmalted barley is often sold in bulk at feed stores where you buy grains to feed animals.  You do need to take some care to get good quality though, as not all of it has been stored properly.

Tim Westemeyer November 22, 2012 at 10:43 pm

I get my barley from Albert Lea Seed in Albert Lea, minnesota. http://www.alseed.com Good grain and clean. Conlon seed comes from North Dakota and is being used by many brewers. Give it a shot…

Mohan April 20, 2013 at 10:10 am

Having malted  barley , dried and removed the rootlets, how do you get rid of the hulls before mashing ?

Brad Smith April 22, 2013 at 5:10 pm

If you are talking about the grain hull, you just crush the grains and leave the hulls in the mash.  They help filter the wort when sparging.

jerry smith June 7, 2013 at 11:37 am

hello i am a farmer and i love beer and wine .i make lots of wine and i wanted to make beer from scratch .its alot harder than wine .anyway about the barley there is feed and beer barley they look the same on the outside but the proteins are different now you know

Yanqui Mike June 25, 2013 at 3:59 pm

BeerSmith Rocks!

Hey, guys …can you give me an opinion on this:

http://youtu.be/uXTfuMXehbs

Here´s my question: how different is this homemade grain dryer from a malting floor …if I were to add a hand-held laser thermometer?

I live completely off the grid on a place that looks just like this video.  I have access to TONS of some of the best beer barley in the world, it comes in 100 lb sacks with the name of the destination brewery already printed on it.

I can sprout the grains with no problem (I´ve done it before.)

I´d like to put in a brewing operation for me and my friends …we drink lots of beer …AND I´d like to do it on a large homebrew scale.

This tremendous beer barley right from the grain elevator is almost free.  If I can malt my own barley, I can make beer almost free.

The trouble is that I don´t have any electricity and propane is expensive …AND I´d like to malt the barley on a rather large scale so I don´t have to do it terribly often.

I´ve got LOTS of room and lots of wood and all the junk I would need to build a contraption just like in this video.

Since I don´t like to go into town very often (I´m 200 miles from the nearest big city with beer making supplies,) I´d like to malt barley with plenty of enzyme to enhance my fermentables.  If I want to toast some of it a bit more for different characters, this rig should allow me to do so …I think!

I realize that kilning is not exactly drying …but how different is it?

The rig in the video looks like a small malting floor …and that is exactly what I need.

Please gimme yer thoughts …and CHEERS! Mike

Yanqui Mike July 2, 2013 at 1:41 pm

Here’s a great primitive overview of malting barley from the great 1976 book, The Complete Guide to Self-Sufficiency, by John Seymour.  http://www.yanquimike.com.ar/maltingbarley.pdf   He suggests kilning over a perforated something or other …over a fire.  I would imagine that would impart at least a little smokiness to the malt no matter how light.  Whadda you guys think¿

Yanqui Mike July 2, 2013 at 1:59 pm

Sorry to bother but …something else just occurred to me regarding making beer from your own malt:  “Let´s say, if you were ready to make beer …and, at the same moment, your malt was ready for kilning …could you put the unkilned malt directly into the mash?”

The reason I ask is: I´m very concerned with conserving as much of the enzyme as possible.

It seems to me that kilning the malt is to stop it from sprouting more …and to preserve it by drying.

I imagine that this would be the palest malt on earth!  But the most enzymatic.  I´m sure that I would kiln a good amount to a darker more caramelized state to add to the fresh green unmalted pale malt …simply to add character.  But I wouldn´t have to worry that my mash lacked in enzyme.

Am I worrying TOO much about sufficient enzyme in my malt in my mash?  I am really, really off the grid and, as such, I won´t always have access to buying enzyme powder.

Please give me your thoughts on this …whether or not you have ever malted your own barley.

Thanks, Mike

Enbridge: Goals vs Corporate Structure. Vanderklippe.

The theme running through this article is that corporate structure and practices and the quest for “efficiency” often derail long-term goals.  The older notion that corporations are a key part of the social fabric has been shredded by the giant banks and the venture hawks and replaced by the notions of flexibility, adaptation and the quick fix.  Vanderklippe has done a good job of detailing how Enbridge is failing in an almost predictable way.

**********************************************************************************

Not far from Kitimat, B.C., on the rugged western shore of Douglas Channel, a plot of land is set to serve as the terminus of Enbridge Inc.’s $6.5-billion Northern Gateway project.

It is from this spot, if the pipeline can be built, that Alberta crude will pour on to supertankers, opening Canada’s energy industry to Pacific markets and providing a key western outlet for surging output from the vast oil sands. It’s an unremarkable tree-covered shoreline, but for Gateway it’s critically important.

And in the fall of 2011, Enbridge nearly lost it, after the Haisla First Nation staged a bold attempt to seize control of the land in question – one of the most striking examples of the rancour that has swelled around the project.

Now Northern Gateway is mired in deep uncertainty. Local qualms have blossomed into broad opposition, raising questions about its viability.

The ill will Enbridge faces in building a project identified as vital to Canada’s international trade strategy speaks to the frailty of the many multibillion-dollar new developments planned by the country’s resource sector, which are key to the country’s economic future. Gateway has made clear there’s no certain path for resource expansion, even for projects with the full weight of government support behind them.

It was, after all, just over two years ago that Natural Resources Minister Joe Oliver boldly declared: “Gateway, in our opinion, is in the national interest.”

Federal enthusiasm for Northern Gateway, however, has since appeared to cool as attention has shifted elsewhere. This week, Prime Minister Stephen Harper called TransCanada Corp.’s $12-billion west-to-east pipeline plan an “exciting” project “that will assure all of Canada will benefit from our energy industry.”

Yet the success of TransCanada’s Energy East plan will depend in some measure on the company’s ability to solve many of the same issues that Enbridge has faced on the West Coast – skeptical First Nations, politicians and activists – and avoid the tangled socio-political mess Gateway finds itself in.

In coastal British Columbia, Enbridge’s years of attempts to smooth the way for Northern Gateway have been met with a deepening sense of mistrust in local communities. In some places, the company’s efforts to win support have succeeded largely in strengthening the resolve among critics that it vanish from their province.

Northern Gateway, to be sure, is far from dead. It maintains broad resource sector support, its backers still give it solid odds of succeeding, and Enbridge still has months, if not years, to make the case that turning down this pipeline would do great injury to Canada.

But in the face of broad opposition, the prospects for Northern Gateway are decidedly cloudy. Indeed, it has become a kind of modern-day template for industrial projects gone wrong.

“It couldn’t be any worse for Enbridge. They have become a four-letter word,” says Robert Metcs, a consultant who has spent years working with B.C. First Nations on pipeline projects. Or worse. Enbridge is “sort of like the Harry Potter thing. Like the name you do not mention.”

The First Nations factor

It wasn’t always this way. Northern Gateway entered B.C. with a flourish few now remember. At the outset, Kitimat and Prince Rupert, a nearby coastal town, did battle for the privilege of landing Gateway. “The community at that time was quite anxious to have the terminal locate here,” recalls former Kitimat mayor Rick Wozney.

In the years since, however, Northern Gateway has become to some a textbook example of how not to pursue a major industrial development, particularly in the unsettled First Nations landscape of British Columbia, where corporations face great demands to employ sympathetic ears, not to mention hands willing to reshape plans wrought in faraway office towers.

Other companies interested in the Kitimat area “now come to us and they say they’ll do the opposite of what Enbridge did to talk to First Nations,” says Ellis Ross, chief councillor of the Haisla.

Enbridge executives themselves acknowledge that they have made missteps: that in its early days, the Alberta company did not fully understand British Columbia; that it leaned too heavily on outside help; that it has not listened well enough.

But the company also argues that the outsized shadow over its name is not deserved, and the record shows its Herculean effort to engage with those along the 1,177-kilometre route. Former chief executive officer Pat Daniel devoted nearly a week of his time in 2009 to personally visit a series of coastal communities, staying late in some to hear the outpouring of opinion. The company has documented some 2,000 meetings with those along the route. It has flown First Nations to multiple-day primers on how pipelines work, and brought them together to discuss ways to profit from the project.

Yet what the Haisla made clear two years ago is that for all of the company’s efforts, opponents remain willing to go to remarkable lengths to undermine Gateway. In the fall of 2011, Enbridge allowed its legal interest in the land chosen for its terminal – called a map reserve – to expire. (Although the map reserve did not give Enbridge formal title to what remains a parcel of Crown land, it did effectively cordon off the area for the company to pursue Gateway.)

In the expiry, the Haisla saw an opening. If they could convince the B.C. government to earmark the land for them instead, they would have the ability to influence who used it.

“We didn’t want the land for Enbridge. We actually wanted the land there for projects that were approved by Haisla,” Mr. Ross says.

They weren’t expressly trying to kick Enbridge out, Mr. Ross says. But the Haisla stood to deal a potentially fatal blow to Gateway, since the project’s regulatory application was predicated in part on environmental studies of that exact piece of land. The Haisla opened talks with the B.C. government, kicking off a secretive months-long process that saw the involvement of provincial ministers and, ultimately, the federal government. Enbridge eventually sent high-level executives to Victoria, to demand the land not be plucked away – and eventually, the Haisla were told Ottawa supported the Enbridge effort. Ultimately, they failed.

The Haisla did win a partial victory: Enbridge no longer has its name on the map reserve. That parcel is now listed as “neutral,” giving the Haisla some ability to influence how it is eventually used. And the Haisla themselves are eager, if there is an opening, to try again to take it over.

“We made it clear to everyone that at some point,” Mr. Ross says, “we’re coming back after that land.”

Eroding relationships

The Yekootche First Nation make their home northeast of Fort St. James, B.C., an area familiar with the energy industry thanks to its rich reserves of natural gas. When Enbridge first came to discuss Northern Gateway nearly a decade ago, the Yekootche were open to talking. First Nation representatives flew to Edmonton to tour Enbridge’s operational centre. They built trust with the Enbridge team. Things were going well.

Then Enbridge went dark.

Enbridge first contemplated sending oil west in 1998; Gateway was formally announced in 2004. But when Enbridge asked for firm commitments to the project, oil shippers balked. Building a pipeline across B.C.’s difficult political and legal landscape seemed too difficult. Besides, the U.S. seemed like a better market. So in 2006, Enbridge put Gateway on hold. The Yekootche were left alone.

That changed in 2008, before the financial crisis, when the oil patch was in an expansion frenzy and eager to diversify its markets. The regulatory risk was still there, but suddenly the reward seemed worth it. Gateway was revived. The Yekootche were back in demand.

But this time, the project was run by a new set of unfamiliar faces.

It was “relationship building, a sense of abandonment, relationship-building, assurances that abandonment would not occur again, and then a new team,” said a person on the Yekootche negotiating team.

The second team was led by Roger Harris, who for two years served as an Enbridge vice-president on Gateway. The list of failings he recites is long. Gateway is a “story of what they did that continued to erode their credibility over time,” he says. He adds: “It’s the loss of credibility that becomes the loss of your project.”

He describes an unconcerned top executive: Mr. Daniel, who only met with Mr. Harris once, he says, and only to discuss a trip to the coast that Mr. Harris says he was subsequently uninvited from after providing unwanted advice. (Mr. Daniel did not respond to requests for an interview.) Early in the 2000s, a group of Treaty 8 First Nations came to Enbridge to discuss equity participation – partial ownership – in the pipeline. Enbridge declined. When the company subsequently revived the idea amid rising opposition, it sought to tie First Nations support to their ownership share, an idea Mr. Harris had warned against. It looked too much like buying love.

Worse, Mr. Harris said, was the company’s reluctance to meet its opponents. In 2010, it developed a grid to determine which meetings to attend, assigning more points to larger rooms, the presence of media and the likelihood of facing audience questions. Too many points, and Enbridge stayed away. The result, Mr. Harris said, is that for the better part of a year, the company spoke largely to small clusters of friendly faces who didn’t ask many questions. What the company needed to do instead was “talk to people who don’t like you,” he says.

When the grid appeared, “that’s when I said, ‘I’m out of here. You guys are nuts.’”

Others watched the company decline opportunities to warm local relationships. Nathan Cullen, the NDP MP for the Skeena-Bulkley Valley, which includes the final and most contentious stretches of the Gateway route, spent months begging Enbridge to hold community forums jointly with First Nations and environmental voices. He wanted to give the public a chance “to see the pros and cons of the project and ask questions comprehensively.” He accuses the company of “ragging the puck” and eventually decided Enbridge wasn’t interested.

“That was a big thing for me. We’re kind of trusting people up north and if you act in good faith and do things well, you maintain it. But if you break it, it’s real hard to get it back,” he says. Mr. Cullen is today an ardent critic of Gateway.

On the coast, skepticism grew so ingrained that the company raised eyebrows even when it sought to put safety questions to bed. Last year, Enbridge announced $500-million in Gateway upgrades, including thicker pipe and more safety shut-off valves. Instead of feeling reassured, people immediately questioned the safety of the original proposal.

“What the hell did you have there to start with?” asks Richard Neufeld, a former long-serving B.C. minister of energy, mines and petroleum resources who is now in the Canadian Senate. He was “shocked” by the proposal. “That sent up a huge red flag to me – and I would assume sent up a huge red flag to anybody else along the route.”

The general view on Enbridge, he added, “is they haven’t done a good job. I’ve heard them say they’ve had thousands of consultations and whatnot. It doesn’t matter how many you have. If you don’t convince some people that you’re having conversations with, it’s not going to happen.”

Changing perceptions

In 1997, crews began to travel a 3,719-kilometre path from northeastern British Columbia to Illinois, laying the Alliance natural gas pipeline in the ground. The route cut a big diagonal line across the upper reaches of the continent, but not always a straight one. At the Alexis Nakota Sioux First Nation near Whitecourt, Alta., for example, the pipeline came up to reserve borders, then dodged across a highway, and passed beside the reserve, before again jumping across the highway and continuing on its way.

That wasn’t the original route. But after “negotiations at that time went sour” between Alexis and the builders of Alliance – now half-owned by Enbridge Inc. – the pipeline route was amended to jog around the nation, recalls Cameron Alexis, who recently stepped down as chief of the Alexis. He now serves as Alberta regional chief for the Assembly of First Nations.

When Enbridge proposed building Gateway along a similar route to Alliance, history came flooding back. The Alexis had seen this before – and the last time, they had gotten very few benefits from a pipeline whose proximity still saddled them with risk. With Gateway, they were determined not to see another pipeline “that’s not going to benefit anyone, especially our community,” Mr. Alexis says.

The Alexis asked Enbridge to accommodate its concerns. Enbridge responded by shifting onto reserve lands both the route and a pump station, a large surface facility that will, if it’s built, generate long-term lease revenue for Alexis. The pipeline itself will spin off taxes.

“I don’t think Enbridge treated us any different than anybody else,” Mr. Alexis says. But Alexis itself is different. Its people have worked in the oil patch since the 1950s. Some of its members have actually worked in pipeline construction. In addition to the Alliance experience, that familiarity smoothed a path for conversation – and led to what is now, by the standards of Gateway, a comfortable relationship.

To Enbridge, Alexis is clear proof that the company is not tin-eared, and that when First Nations take the time to talk, executives not only listen, they act.

“When people don’t engage, it’s very difficult to move a project like this forward. Where you can engage, I think you see success,” says Janet Holder, the Enbridge executive vice-president in charge of the project.

“In any relationship, perceptions play a major role. I think in a lot of cases what’s happened to us is the perception of Enbridge. And I honestly don’t believe we’ve been deserving of the perceptions.”

Enbridge may not have taken MP Mr. Cullen up on his offer to hold community forums. But it did arrange for community advisory boards, a series of groups along the pipeline route that regularly place local residents, activists and trappers into a room to discuss the project, pose questions to Enbridge and suggest change. The pipeline is now on Route V – “for victory,” Ms. Holder jokes – after more than 20 major iterations that incorporate all sorts of nods to local concerns.

Ms. Holder acknowledges missteps. At first, Enbridge may not have fully grasped “the difference between British Columbians and Albertans,” although Ms. Holder is herself from Prince George, B.C., and has moved back there to guide the project. What about the grid that kept Enbridge out of certain meetings? “You would need to look at all forms of communication to make an assessment of will it be effective,” explains John Carruthers, the president of Northern Gateway. He acknowledges that hindsight reveals other shortcomings. “I think there had to be a greater recognition of the time required to build the relationships,” he says.

But for Mr. Carruthers and Enbridge, there is another question worth asking: Would it have made any difference had the grid never existed and the company took all of the steps people had advised? Had it listened more, had it offered First Nations ownership at an earlier date, would any of it have changed things?

After all, a company cannot give in to every local demand and still build a financially feasible project. And “some people would oppose the project no matter what you did,” Mr. Carruthers says.

The most controversial element of Gateway is also the most unalterable: Enbridge is proposing an oil pipeline across a part of Canada where oil stirs up very bad memories: the Exxon Valdez. Among the 15 First Nations that backed the Pacific Trail Pipelines natural gas project, for example, virtually none were prepared to support an oil project. “There was no amount of benefits on the table for oil that would outweigh the perceived cost,” says Mr. Metcs, the consultant. “I think it really is to some extent as simple as that.”

For Enbridge, the calculation is, in many ways, equally simple: Without Gateway, all of Canada loses. Gateway’s risks have been thoroughly exposed. What is missing from many minds is proper consideration of its benefits, Ms. Holder argues. “People just do not appreciate the value that the oil industry brings into the lifestyle we have today,” she says.

Amid the uncertainty, Enbridge continues on, holding meetings, promising local benefits, attempting to assuage critics’ safety concerns. Even one of its sharpest detractors says the company has found its footing. “They’re doing all the things someone should be doing. They really are being engaging,” says Mr. Harris, the former vice-president. “The problem is they waited until 2013 to do that in a constructive way, and now no one believes them. It doesn’t matter what they say.”

But Enbridge is keeping the faith.

“I have a fundamental belief it can be built and operated safely. I see tremendous need for it, and I see it can be built and operated safely. And Canada can do it,” Mr. Carruthers says.

“I recognize it’s hard. To me, it’s not a reason not to want do it.”

*******************************************

 

Those last few paragraphs read as though a senior editor tacked them on to give Enbridge the last word.

A Great Summary of Plum Jam: Kate’s Kitchen

http://www.thekitchn.com/recipe-wild-plum-jam-recipes-from-the-kitchn-193220?utm_medium=email&utm_campaign=Kitchn+8813+-+Summer+Plum+Jam+from+Roadside+or+Market+Fruit&utm_content=Kitchn+8813+-+Summer+Plum+Jam+from+Roadside+or+Market+Fruit+CID_70a8f28dc696cfde8a422bf5437a89b2&utm_source=email_newsletter&utm_term=Read%20more%20about%20picking%20wild%20plums%20and%20get%20the%20Plum%20Jam%20recipe

This tree could be my tree.

And I have a flood of Italian plums coming on one of my Foch-trees.

kate's plum tree