Greedy Growers and Dirty Dealers!

It seems lately there are a lot of articles referencing rising hop prices and how dramatic the changes have been.  Usually, the articles reference the statistics regarding season average price collected for the hop industry by the USDA. As the former head of Hop Growers of America, the organization that, as you might guess, represents hop growers in the United States, I can tell you that these price numbers are useless in and of themselves. They are a mixture of spot and contract prices for aroma and alpha hops and as such provide no real useful information except that they demonstrate a trend and show in which direction that trend might be going.  They don’t represent actual current hop prices, spot or contract, aroma or alpha, unless by coincidence. Everybody in the industry knows this, but it’s something that’s not often talked about.

Actual hop prices these days are calculated in growers minds by using a desired return per acre, which today is somewhere between $9,000 – $10,000 per acre and then dividing by the yield the grower expects to receive per acre. Eighteen months ago, that number was $6,500 per acre.  Many proprietary varieties today are returning $12,000 – $14,000 per acre and that is dragging prices for all hops higher as they compete for valuable picking time.  The higher prices for the elusive proprietary hops, are due to a restricted supply caused in part by one-desk selling and more demand than that one desk can handle.  Not all proprietary hops are sold this way, but the few that are are sending prices higher for all varieties.

“Growers are being greedy” or “Dealers are making a killing” … Those may be some of the things you hear out there when brewers are talking about buying hops.  However, that’s not really the case.  It’s expensive and very risky to produce hops. Kennedy had it right when he said,

The farmer is the only man in our economy who buys everything at retail, sells everything at wholesale, and pays the freight both ways.  – JFK


The truth is that traditionally hop market prices are below the cost of production.  That’s BS you say? They wouldn’t still be in business you say?  The economic term for the whole thing is “inelastic demand” … which basically means when there’s one hop too many the price is terrible and you can’t give them away.  When there’s one hop to few they’re worth their weight in gold and prices soar.  Cyclical imbalances in the alpha market create price spikes that drive the prices for hops very high very quickly.  In 2007 and 2008, the last time this spike took place, prices increased 40x in 8 months only to crash back down to zero shortly thereafter.  Those price spikes enable reinvestment in the expensive infrastructure needed to produce hops.  That existing infrastructure is nearing capacity in 2014. In 2015, it will reach capacity. That has never happened before without an alpha market price spike. Therefore, additional investment is necessary if the industry is to grow to produce the hops that craft brewers need to give Americans the flavors they want to taste in their beers.  How much investment?  47 Hops estimates the US industry as a whole needs to invest between $500 million and $1 billion in the next 5 years if craft beer growth stays somewhere between 10-20% per year.  Banks want their money back in roughly 5 years +/- a year or two.  Current prices are simply not high enough to pay for the continued growth of the industry.  To reach that level of return plus a reasonable 15-20% return on investment for the grower, prices will need to roughly double from where they are today.

It’s not that growers are being greedy or merchants are being nasty.  Hop prices have been too low for too long creating difficulty for many farms to keep their head above water.  That’s why in the 1930s there were nearly 2000 growers in the US and today there are just over 100.  Big brewers and even some big craft brewers have become good at using their status to drive prices down to the lowest possible point, using their purchasing power as leverage.  How can a small farm stand up against a billion dollar brewery when his neighbor will cave (that’s the subject of another article).

If the quality hops that we all know and love are to stick around, prices must increase.  A doubling, or even a tripling of hop prices, however, may only translate to a 5-10% increase in the price of a good craft beer at the pub though … if you feel it at all.  Certainly, supporting local brewers and having great beer is worth paying a sustainable price.


2014 STATE OF THE U.S. HOP INDUSTRY

Originally published prior to the 2014 CBC in April of this year, the 2014 State of the US Hop Industry Report becomes more relevant with each passing day.
The state of the U.S. hop industry is strong today, but turbulent times lurk just around the corner. The industry is experiencing a period of sustained increasing demand and struggling to keep pace. The capacity to produce a continually increasing supply will not exist without significant investment, which, in short, means increasing hop prices. Traditionally, the hop market is either in surplus or deficit. It is not stable when it is in balance and it has never experienced such balance as the aroma market sees today.
Prices are on the rise, in part because of limited production capacity and rapidly increasing demand. In part, memories of an industry history filled with boom and bust cycles are still fresh. Empowered by good returns on aroma hops American growers will say NO to low prices now because they can. It’s important to understand the way growers think. If you do, you can understand what will happen in the hop market next. Growers look at their farms and measure their return per acre of hops by variety. Naturally, they want to maximize that number. In a market like we have today, that causes something we can call Growerthink. If you like economics, opportunity costs are the official name for one of the causes of what we are calling Growerthink.

Law of Growerthink – In a short or balanced hop market, the return per acre generated by the most expensive variety dictates the return per acre of all varieties. Varieties returning less per acre will not be produced.

In good times and bad, the price of hops is not strongly related to the cost of production. The return per acre in a surplus market is determined by the price per pound the grower receives. In a slightly short or balanced hop market, the price per pound is determined by the desired return per acre of the grower. At the time of this writing, a grower can earn $10,000 – $12,000 per acre growing one of the industry’s more popular varieties. If a buyer wants another variety picked during the very limited “prime time” for picking aroma varieties, September 1 – 21, the grower will expect the same high return per acre. This makes sense since he could plant the higher revenue generating variety instead. The buyer must, therefore, match the same high return per acre, or out the lower returning variety goes. Varieties that yield more pounds per acre are cheaper. As price increases for the most expensive variety, so will prices for all other varieties picked during the same picking window. Resistance to high prices will push demand to the fringe picking times and into alternative varieties, creating demand there too. Hops are hops though and soon it is not the prime time picking window that drives the price, but picking hops at all. The high return of the prime time varieties extends beyond that highly competitive picking window to ALL varieties, regardless of when they are picked. Today, the industry is not quite to that point, but it soon will be … again. We believe prices to brewers will likely be over $10 per pound for every aroma variety by year’s end.
There will be no shortage of aroma varieties that higher prices cannot fix. Articles you may have read claiming the sky is falling and there will not be aroma hops in the future are not true. Temporary shortages by variety already exist, but they will only last until the price increases to the point where new production capacity can be introduced to increase production. In some early cases, that will mean new hop yards, more kilns or a new picking machine. Later, it will mean entirely new farms. All are very expensive options. Without additional capacity, however, additional hops cannot be produced and real shortages will result. The solution is a question of money, not of ability to produce. Today’s grower can produce more hops if they can pay for the necessary infrastructure. Once prices rise for varieties produced on new acreage though, Growerthink insures they will rise for all varieties.
If you own or work for a brewery, the best thing you can do now to protect yourself is sign a five-year contract while prices are still reasonable. Consider asking for seven-year contracts at volumes you know you will need if you want to secure them. Contracting forward for an amount of hops you are certain you will need is an insurance policy against the challenging times to come, not as a liability. Some may still remember the high prices of 2007-08. That was caused by the cyclical nature of the surpluses and deficits of the alpha hop market. The effect the alpha market has on hop prices dwarfs anything happening today in the aroma market. Today many large brewers, the top 40 of which control 85% of the world’s beer production, are not in the market for alpha hops. Meanwhile, acreage of alpha hops continues to disappear. Those breweries will likely return to the market in the next 18 months or so shopping for their alpha needs. The production capacity necessary to respond quickly to those additional demands will not exist. An event horizon is approaching. Prices for alpha hops can quickly rise beyond the highest current aroma market prices. These brewers, unlike their craft brewer brethren, make billions in profits each quarter. Growerthink again will rear its head. This time, it will be alpha hops setting the high water mark. Aroma acreage that has not been contracted must match the alpha acreage returns or it will be removed to plant alpha hops. Only contracted hops are protected from this threat.
Brewers large and small have been accustomed to buying hops when they need them, like you buy flour at the store when you make a cake. The store always has flour so you don’t buy your flour for next month’s cake today. Those days may return to the hop industry someday. For the rest of the decade, however, it seems they are gone. It is already necessary to anticipate needs for the next five years and contract forward for those needs now. The landscape of the next five years will be drastically different than it is today. Five-year contracts will become the norm rather than the exception. Large brewers will consider purchasing interests in new farms to secure their hop needs. Brewers will use hop backs, variety substitution and other creative brewing methods to make limited quantities of scarce varieties stretch further before paying prices that could be double what they are today. If brewers don’t contract forward, they won’t get whatever they need. They’ll need whatever they can get. Challenging times are ahead, but we believe the solution is simple. Contract your hops today!

What’s going on with European Hops?

OK … I know I just said that I wouldn’t be posting too often, but that first post doesn’t really count does it?  Let’s say it doesn’t.

Now that we got that out of the way, We traveled to Europe last month to visit hop friends all over Europe in order to get a better feeling about where things are now and what we might be able to expect from this year’s crop.  We learned a lot.

In short, we learned there’s a growing demand for American aroma hop varieties all over Europe, from Belgium to Yugoslavia (that was as close as I could get to looking like A to Z using the countries I could think of in under a minute – yes, I know Yugoslavia doesn’t technically exist anymore) 🙂

A lot of German Wolf hop picking machines are leaving Germany, some for warmer climates and quite a few are heading across the pond to start a new life in the US.  One of the inscriptions on the Statue of Liberty says it best:

“Give me your tired, your poor, your huddled masses yearning to breathe free.”

We welcome these new hop picking machines that have immigrated to the US with open arms as the growing trend of hop growers around the US is a great trend in the right direction to supply brewers with fresh hops and locally grown hops as there is definitely going to be more difficulty getting enough of these from traditional Pacific Northwest sources going forward.  The question that lingers is what does all this movement of hop picking machines do to the potential production capacity for Germany in the coming years?  That’s a separate blog post all by itself.  More on that later!

Unfortunately, A lot of European hops are already spoken for, but some still remain.  If the hot dry summer that is predicted comes to fruition, there may be a little trouble getting your favorite European hop varieties as some countries are quite heavily sold.  We’re not saying there’s going to be a deficit of hops this year because it’s way too early to tell what’s going to happen, but if there are any hiccups along the way, that’s a possibility.  We’ll keep our fingers crossed for good growing conditions so the hops, aroma and alpha make it through the summer to harvest.

THERE’S A SHORTAGE, of hop market information that is.

Information about the hop world is hard to come by.  So are aroma hops nowadays!  47 Hops offers access to market information, as well as aroma and alpha hops. In our constant effort to rock the boat and disrupt the system, we’ll be posting somewhat regularly from now on. We’ll keep it to at least once a month so you don’t feel like we’re too spammy. Sometimes, we’ll have to be a bit more active to keep you informed.

We’ll post all the pictures we’d like to share on our Pinterest page so definitely check us out there!  We already post a lot of news from the hop and beer worlds along with some trip related information too on our Facebook page on an almost daily basis.  Then, of course, there’s Twitter … Honestly, we’ve not been that active on Twitter yet, but we’ll be ramping that up this year so you won’t want to miss that either!
Of course, all the things we’ll be writing here are only our opinions based on the information we encounter during our travels. Please don’t rob your granny’s pension fund and speculate on hops based on anything we write here. It’s all for informational purposes only.You shouldn’t rob granny anyway!! 
Subscribe to this blog if you want to be kept in the know. If you like what you read, spread the word and share it with a friend. 

To find out what we’re all about, check us out on the 47Hops web site.