Last month, the maker of Samuel Adams put 10 tons of hops up for sale to its craft-brewing competitors at cost—last year's much lower cost—adding only a nominal shipping fee. This took place in a hop market so tight that the Boston Beer Co. had to postpone brewing one of its one-off beers, a double I.P.A., because the hops it required weren't available at any price.

Selling the hops was a highly confident move for a company that had seen its stock drop 30 percent in one day only three months before. But Boston Beer has a good reason to be confident; it knows how to focus on the long term.

"The hops we use are very expensive and therefore have limited customers," explains founder and chairman Jim Koch. "We have to contract years in advance. You can't just show up and buy them. If you don't brew with a hop strain, if you don't buy it, they won't grow it. The way the market works now is how we've always worked." Boston Beer has similar contracts for malt and has developed proprietary malts with its suppliers.

The company is also changing how it brews in at least one important way: It's getting out of contract brewing. For most of its 24-year history, Boston Beer has relied on contract brewing, the practice of hiring breweries with excess capacity to make beer. Contract brewing brings some distinct advantages: Capital costs are much lower, labor negotiations are someone else's problem, and you can always go elsewhere. Contract brewing allowed Koch to focus spending on product development and marketing, a large part of why Samuel Adams is the biggest-selling craft beer in the U.S.

But contract brewing also has its problems: You're not first priority for production, the gross profit is lower, and you have to overcome an image problem when your "micro" beer comes from a large brewery. In Boston Beer's case, the challenge was even greater because the large breweries weren't in Boston, but the company has been mostly successful in getting past the issue.

Then there's the most critical point, which only arises as sales rise to Boston Beer's current levels—volume figures for 2007 aren't yet available, but the company should be over 1.5 million barrels (more than 47 million gallons). Finding a brewery with that much spare capacity becomes difficult, the ones that have it start to see you as a real competitor, and you can't piece together your production from too many different places without affecting the consistency of your product.

In late 2007, after inconclusive negotiations over a site for a new brewery in Massachusetts, the company announced that it would purchase a Diageo facility in Pennsylvania's Lehigh Valley. Boston Beer planned to pay $55 million for the brewery, which could potentially sustain its production needs for the next ten to 15 years. The shift in strategy bumped Boston Beer's stock to a record high of $55.30 on November 6.

Then the company issued its third-quarter statement. Boston Beer, it said, would be spending between $60 million and $100 million on additional capital improvements to the new facility. The company also expected a 10 to 14 percent increase in production costs (for hops, malt, and glass) and intended to continue investing in its brands at "high levels." Boston Beer also reported a 46 percent decline in quarterly profit because of increased production costs. The stock hit a low of $31.25 about two weeks later and is currently trading at around $36.

Profit statements like that are hard to face. But Koch strongly believes that the Lehigh Valley purchase is the right move. It will bring virtually all of Boston Beer's production in-house, he says. The additional capital investment is "more than just lunch money," he says, but the brewery needs improvements—an automated kegging line, for instance—and repairs to basics like the roof and brickwork.

Still, the bones of the place are solid. This was where Pabst Brewing made the beer that won most of its large number of Great American Beer Festival medals, and there were years when this brewery won more of them than any other. Koch noted that the facility was designed to make old-school lagers, brewed to full strength and aged in traditional horizontal tanks for longer periods of time. "It's well suited to the beers we want to make there," he says. Boston Beer even had some brews made there in the late 1990s; Koch hopes to be back in the facility by June or July.

Put it all together and Boston Beer looks pretty good. The craft-beer segment is growing steadily, and the company has costs under better control than most domestic competitors, while imported specialty beers are taking a beating from the weak dollar. Price increases—which should be less than its competitors'—in 2008 will partially offset the rising costs.

No wonder Koch is confident enough to lend a hand to his fellow brewers.