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I keep hearing about how we should try and keep our conversion efficiency high, but what exactly does it affect? Is a lower conversion efficiency beer bad?

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It affects mainly the quantity of grains you need to produce a particular beer. Beers come out great with low efficiency, you just need to use more grain to produce them. On a homebrew scale, efficiency doesn't really make significant cost issue.

Some people maintain that lower efficiency (e.g. no sparge) can taste more malty than beers where higher efficiency is obtained.

The efficiency, and the quantity of grain required for a beer also determines the biggest beer you can brew if mash tun size is a limiting factor.

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Great answer, but I wanted to stress that while absolute efficiency is not important, knowing the efficiency of your setup is. If you know your efficiency, recipe formulation becomes a lot simpler as you know how much grain to mash to achieve the desired original gravity. –  Tobias Patton Jun 29 '13 at 1:06
    
So true - knowing your efficiency and hitting it consistently is better than sometimes getting a high efficiency. –  mdma Jun 29 '13 at 1:09
    
A good question, a great answer, and an even greater comment. –  Scott Jun 30 '13 at 4:47
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You can compensate for lower conversion efficiency by sparging more, which will raise your overall efficiency. By keeping your conversion efficiency high, you don't need to sparge as much. It's largely believed that the earlier wort is of higher quality, so by being able to not sparge as much you get better tasting beer. At least that's the theory. I believe it based on my own experience, but it's hard to quantify something as subjective as "better taste".

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