What a 5% Short Crop Means for YOU

When I first graduated from college, a friend of mine and I took a 1965 Ford Mustang I had on a trip across the US. We plotted all our stops on a map and had big plans. The first day out, driving through the Mojave dessert, temperatures reached 109 degrees and that poor old mustang overheated. After a while, it cooled down and we could drive a bit further before it overheated again as we tried desperately to get to the next city, Kingman, Arizona. We met a lot of kind people who stopped to help us along the way. A couple days later, I had fixed it, or so I thought, and we were on the road again. Unfortunately, the gremlins were already in the car. We were plagued with problems the rest of the trip. Six weeks and 10,000 miles later, once the car was safely back home in the garage, I figured out the source of the problem was a clogged heater core that was contaminating the rest of the motor causing our overheating problems. Not sure why I didn’t think of that on the trip. I guess I was distracted with all that was going on. I replaced that heater core and the car ran just fine for years. What does that have to do with hops?  The road we plan to travel is pretty clear. We even know the points on the map, 20X20, US style craft beer in Europe, for example. Most of the hop industry is using old, tired equipment. They’re running it at or beyond capacity, pushing it through difficult conditions. Many of the machines weren’t meant to pick so many acres and be driven so hard. Just like with that old Mustang, they can’t take the heat and there will be breakdowns along the way. It’s inevitable. There will be fixes that will get us a little bit further down the road, but don’t actually fix the problem. We may even be able to get pretty far. Until the core problem is fixed though, the industry will not run the way it should.
Not that we can take it for granted, but we all know the craft industry is growing by 18% this year just like it did last year … yadda yadda yadda. This spring, American growers planted an additional 3,168 acres, or 8.9%. True, not all craft beer is made with American hops. Most likely, nobody even knows what the number is, but it seems pretty high based on the calls we get from brewers and the percentage of them asking for foreign hops. Whatever the number is … pretty safe bet that the 2014 acreage increases don’t cover the growth in demand. That doesn’t sound good already. Hang on a minute … it gets worse. Agriculture being what it is, some yields are already down significantly while others are only slightly off. Let’s assume overall a very mildly-reduced crop that is only down 5% from anticipated yields, although some varieties, as we mentioned in our Harvest Half Time Report are down quite a bit more than that. Five percent doesn’t sound so bad, does it? Normally, it wouldn’t be. With the craft demand, some varieties are sold near (or even over) anticipated yields, which means there may not have been enough to satisfy demand to begin with.  Let’s have a look at the numbers and what a crop that is 5% short means in 2014.
You don’t want to cross a river that is on average 4 feet deep. Averages don’t usually tell us much about anything specific, but they give a good overall picture and over time they show trends. The average yield across Washington, Oregon and Idaho in 2013 was 1969 pounds per acre. You can find that on page 5 of the 2013 Hop Growers of America (HGA) Statistical Packet.  In 2014, in the same three states, there were 38,392 acres strung for harvest. You can find that number in the 2014 USDA NASS Acreage Strung for Harvest Survey.
Put those two numbers together and you come up with an anticipated yield for the 2014 US crop of 75.59 million pounds. Now, let’s assume we are 5% less than that number, it means roughly 3.78 million fewer pounds of hops were produced than anticipated. That equates to a US crop of 71.81 million pounds, a gain of 2.47 million pounds over 2013. That’s still a lot more hops, right?  True, but that’s an increase of only 3.5% in the supply of US hops in 2014!  Compare that with an 18+% increase in the demand for craft beer. One more thing … those hops being harvested now have to last until October or November of 2015! We haven’t even started talking about the demand for US style craft beers outside of the US yet. Houston, we have a problem!
What do you think that could do to the price of hops?  Well, thank you for asking. Let me tell you … It’s likely to drive the prices for spot aroma hops significantly higher for those who can get them. There will continue to be variety specific shortages while other varieties are in surplus. Depending on which merchant you’re working with, the size of your brewery, and maybe even the day of the week and the mood of the sales manager, you may not be lucky enough to even get what you contracted. It seems some merchants are playing favorites, taking care of bigger customers at the expense of the smaller guys. I’m just bad mouthing the other guys you say? Not true. We get calls from brewers abandoned by other merchants every week. We’re kind of like Brewer Rescue that way. At 47Hops, we won’t abandon brewers. We want to help. Everybody will get the hops they contracted despite the short crop. The short supply will mean the 2015 and very likely 2016 crops will be fully contracted before we ring in the New Year so waiting isn’t a good option. Don’t worry though, 2014’s crop won’t create a panic and increase prices a-la 2008. That’s the right hook that’s coming after we take a few more left jabs first.
Prices that look high today will seem like a steal two years from now. We have seen this already with several of our customers who contracted with 47Hops early in 2013, when prices were half of what they are today. They’re already saving tens of thousands of dollars!  In this market, and for the foreseeable future, it is very risky to plan to buy any hops on the spot market.
If you haven’t already gotten the message, what you need to do to protect yourself … Contract Contract Contract … and then contract some more. By that I don’t mean hoard hops or buy more than you need. Nobody likes a hoarder. I mean you should contract for everything you need and keep contracting for more every time you see your needs increasing. Contract early and often, like I mentioned in my earlier blog “How to Avoid High Hop Prices”, and you’ll avoid the worst prices out there.  
Maybe you’ve noticed the silence in the hop industry other than this blog. Nobody likes to say anything market related. There’s money to be made in uncertainty and there’s a lot of uncertainty right now. The wolves always have their sheep’s clothing ready. They’ll say they’re being cautious and don’t want to alarm anybody. That sounds very PC. They probably wonder why the heck I’m sharing all of this with you. When it comes to hops, people both in the craft beer industry and definitely in the hop industry seem to enjoy the cloak and dagger discussions in dark corners of obscure restaurants all the while scanning the room for key people who may overhear the details of your conversation. All that secrecy and people playing one against the other will hasten another crisis. It’s one of the things caused the cycles of the past. I’ve always believed it’s best to be informed and to get bad news out of the way quickly. Then, you can pivot, adjust your plans and move on. Nobody likes last minute surprises. If you’re a brewer, you can’t afford that in your supply chain. Openness and access to knowledge and information levels the playing field.
Some armchair quarterbacks may comment on Facebook or Twitter, “Stop brewing those damn IPAs”. I’m curious if they understand we’re living in a relatively capitalist society here. IPAs sell beer. That style of beer is one of the reasons craft is taking off the way it has. If people want IPAs and are willing to pay for them, that’s what they’ll get. You can’t kill the goose that laid the golden egg. Killing demand is not the answer. The answer is creating more supply to meet the demand. That’s going to take creativity. The market is an efficient thing and it will find an answer.
Of course, it’s too early to know a final number for the crop since the harvest isn’t finished. It’s not too early to know that things are looking bad. We’ll know by the first week in October though. The 5% number is just an estimate based on the current performance and optimistically assuming that the harvest will improve as it progresses. Most aromas are down, but alpha hops have yet to be harvested in the US. All of that only worsens the problem. Agriculture acts and reacts no faster than nature’s cycles. Changes take time. Even if the crop had come in as expected, there would have been a deficit in the supply of hops relative to demand since acreage increases weren’t close to matching the increase in demand for craft beer. If the supply of hops is to keep pace with the demand for craft beer, the players in the hop and the craft beer industries will have to communicate a little better with one another and lay all their cards on the table. The alternative will be ugly. 

Harvest Half-Time Report

We’re nearing the half-way point in this year’s harvest. The hop vines are coming down all across the valley, and so are the yields. This year’s hop harvest is a good reminder that agriculture is not predictable and only somewhat controllable. Despite the way they look, hop farms aren’t factories that can produce more hops by flicking a switch. It’s a long expensive process that relies on plenty of skill, a little luck, and Mother Nature.
Most growers are experiencing yields that are down between 5-40% from five-year averages. That, combined with an already highly sold market due to demand by the craft beer industry, has caused prices for varieties already harvested to shoot up, over $10 per pound for raw hops to the grower. Many growers speculate the extreme heat during the month of July is responsible. Harvest in the US has now moved into Cascades. The results so far are difficult to interpret because that variety is not finished being picked, but already it is clear that Cascades are falling prey to the trend that has prevailed this harvest. At the moment it seems yields are only 5-10% lower than 5-year average yields. For Cascades though, that’s a pretty big number! Baby yards have been hit the hardest. Some Cascade baby yards are significantly lower than expected. Since typically a baby yard can deliver a relatively high yield in the State of Washington, growers often sell the majority of expected production on those acres too. That is further complicating the supply problem and exacerbating the variety shortages that are popping up with each passing day.
Early estimates are that proprietary varieties are also coming in a bit short. We don’t have any variety specific information to report. It seems most of the popular proprietary varieties are yielding below five-year averages. According to our sources some merchants oversold those varieties prior to harvest and therefore will not be able to deliver in full on their contracts this year. We can only speculate as to when their brewer customers will learn of this, but it won’t be good when they do. If I were a brewer, particularly not one of the 50 largest craft brewers in the country, I would try to get written confirmation that my contract will be delivered in full or get a written estimate how much I will be shorted.  With force majeure in all the contracts and a low-yielding crop coming in, there’s no recourse to being shorted, but the advance notice would give me time to find alternatives so I could keep the taps flowing.

Brewers with contracts at 47Hops will ALL receive 100% of their contracted hops despite the crop situation this year. We contracted keeping in mind that we’re working with agriculture and that there needs to be a reserve in case of shortages like the ones we’re seeing right now. 
The short crop of 2014 comes at a most inopportune time, a time when demand is extremely high, farms are already at or near capacity, and the price of hops has not yet increased to a level to finance new infrastructure developments. This year will be the one where brewers might not get what they contracted for, but they should contract what they can get. 
Some Q & A:
Q:  What will be the impact of this year’s harvest results? 
A:  Prices have already increased. Hops from crop 2015 are almost all sold now.
Q:  What should I do to protect myself against things like this in the future?
A:  Don’t contract forward with a merchant that doesn’t take good care of you. There are other options … like 47Hops. We have plenty of hops available.
Q:  How will this short crop change things in the future?
A:  Given the uncertainty going forward, contracts for 5-years or more will become common as brewers seek to secure their supply chains.
A:  Once variety specific shortages become more widely understood, brewers will alter recipes and contract for hops that are available rather than what they would prefer to buy.

A:  Prices will begin to rise, not as in 2008, but to levels that can support infrastructure development.

Letter to a Potential Hop Grower

In the various roles in which I’ve served in the hop industry, I often received messages from people who want to get into the biz.  I love the hop industry.  It’s a fun and challenging place to be, but the advice I give always seems to be roughly the same, it’s not an easy game and there are lots of barriers to entry.  Below is a reply to a DM I received earlier this week from a guy in Georgia, where craft beer is booming now.  If you’re also contemplating growing hops, I hope this will help.  The advice might seem discouraging.  That’s certainly not my intention.  It’s also not intended to be an all-inclusive list of what you’ll need to do or even of all the potential pitfalls.  The message just hits the highlights, but it’s a start.

“Problems you may run into trying to grow hops in Georgia would be short day length in the summer, humidity causing both downy and powdery mildew and some pests that may not be prevalent in the Pacific Northwest.  None of those are insurmountable obstacles, but they are all challenges to be aware of.  You should consider buying a Wolf picking machine from Europe.  The one you’ll need depends on how many acres you plan to harvest.  You’ll also need a dryer, also likely from Europe unless you build your own kiln there, which is very doable.  If you have access to natural gas, it’ll be more efficient.  If not, propane would be the way to go. You don’t want to use diesel. Some say it leaves an off taste in the hops.  You’ll need a baler or pellet mill to put them into a form that is more easily stored and delivered.  You’ll also need some cold storage for what you produce.  We’re building those now.  They’re not cheap.  If you have a pellet mill, cold storage will be easy to find.  If you’re baling your hops, the insurance will be a bit more expensive.  For all of that together, not including the land, for a small scale operation, if you’re crafty (no pun intended) you can probably get by at around a half million dollars.  You can delay some of the expenses until production gets closer.  Regarding production, you won’t get a crop you can bank on to sell until your 3rd year.  Then, if you’re going to sell them to brewers, you’ll need a sales team, some inventory tracking software and somebody to keep your books straight so you don’t short any of your customers ever. 

I’m not trying to frighten you off or anything like that.  There is definitely a need for more hops and hops from Georgia would be nice for Georgia’s brewers.  You’d definitely satisfy a niche market for which you could probably get a little more money.  It’s just good for you to know the whole picture going into this instead of just looking at the prices and thinking you can make that work.  I’m not suggesting you’re doing that, but I’ve spoken with plenty of people who did see high prices and thought they could make a killing only to realize 3-5 years down the road it was lot more work than they originally thought and the money doesn’t really pay for it unless you’re at scale.  All that said, passion is a powerful motivator.  If you’re really wanting to do it, go for it.  Please let me know if I can be of any help along the way.”  

I obviously didn’t get into any of the economics of the business, but the farm would most likely be small and even with higher prices for fresh and local product would not break-even for several years after the first crop due to the high costs to get started.  There’s definitely a market for local hops and for fresh hops, which command a much higher price due to the complexity of delivering a very perishable product. That would remove the need for a pellet mill and maybe for cold storage, but it complicates things in many other ways.  Growing hops is definitely a labor of love and the people who do it deserve to be well compensated … you won’t hear many hop merchants say that openly.  It’s true though.  Hoppin’ ain’t easy.  

I’d love to hear your thoughts in the comments below if you’re considering becoming a hop grower in the near future.  

How to Avoid High Hop Prices

Back in 2003, it was simple to get more hops whenever you needed them. You could just call up the merchant and ask for what you wanted. Chances are they had it sitting around, just like a bottle of Pepsi at the grocery store. Plus, brewers could get them for $2.00 a pound. A good friend of mine once told me, “the best thing about the good old days is that they’re gone.” It’s easy to go nostalgic to a time when we were all younger, but I think he was right. People weren’t drinking so much craft back in the good old days and hops available for $2.00 a pound hasn’t paid the bills since the 70’s!  

While times have changed, one thing has stayed the same … how long it takes to produce hops. It seems a lot of brewers don’t understand when they should contract for or buy their hops. You can’t blame them. They’re brewers, not farmers. When a brewer thinks of a year, it’s the calendar year. When a grower thinks of a year, it’s harvest to harvest. If you’re a brewer and you want the best selection, there are some things you should know. You want hops for 2015?  That means 2014 crop until October or November of 2015. If you want those 2015 hops, you should have ordered them already. Here’s why:
Washington and Idaho are the only places on Earth where hops can produce a full crop in the first year of production. The rest of the world needs 3 years before they expect a full crop. Even in Washington and Idaho the grower doesn’t always get a full crop the first year, particularly with aroma varieties, but it’s possible. Even with that incredible advantage, it’s not so simple for a grower to get a yard into production. He needs to have an empty yard just sitting around, something we don’t see too much of these days, and money, let’s not forget money. It takes lots of money.
If a brewer wants hops from Washington and Idaho for the 2015 crop, they should already be contracted, or they may not be there when he needs them. Why?  The grower needs land and poles. Land is everywhere you say?  True, but it’s not all for sale, especially the land within harvesting distance from picking machines. Also, the ground that is for sale is getting more expensive with each passing month it seems. Back in 2008 an acre of land cost $6000. That was considered a crazy price. Today, that price is $10,000!  Supply and demand!  After figuring out financing, land and poles are the first two things that need to be done … assuming the grower has enough picking capacity to pick the hops the brewer wants. If not, things get a whole lot more complicated. Let’s assume for now the grower can pick the hops needed. Ideally, those poles need to get to the farm so there is time to treat them before they are put into the ground. Treated poles can last 20-25 years. Untreated poles will rot out in 5 years. Hop yards are not usually a short-term investment. Growers are pretty busy with harvest this time of year. Those poles should have already arrived back in June or July to be treated, or they should arrive sometime during harvest so they can be treated right after harvest while the crew is still around.
Growers want to put up a yard in the spring before planting the roots, which ideally happens in March or April. The roots will need to be dug during the winter of 14/15 once the hops have gone to sleep. Of course, the grower needs to find the roots if he doesn’t have them himself. Roots aren’t available to all growers equally and the quality of some roots can really suck if there is a lot of demand. Some growers don’t like to sell roots to other growers, so growers are limited to buying roots from their grower friends. Yes, it is like high school. Most proprietary variety roots aren’t available for the grower to buy at all at any price because the owners own them ALL. Those are probably the same people who, as kids, wouldn’t let you play with their toys. If all goes well and the weather cooperates, a Washington or Idaho grower will have his trellis up and hops planted by April or May. They can go in later, but the results usually aren’t so great.
All together, including drip irrigation and all the other expenses that go into a hop yard, growers will tell you it costs somewhere between $9,000 and $10,000 per acre just to establish a new acre. There are lots of ways to shave off costs from that number, but that’s the number people are using today, so let’s go with it. Don’t forget that acre of land also cost about $10,000 in today’s market. So that’s roughly $20K already out the door and we don’t have a crop yet. Growers today estimate that cost is around $9,000 – $12,000 per acre depending upon the variety. From that acre, they’ll get somewhere between 1,000 and 2,000 pounds of hops for most aroma hop varieties.
Question: So when do you order your hops if those hops come from Washington or Idaho for the best price? 
Answer: In the summer OF THE YEAR BEFORE the hops will be harvested.
“WTF … a whole YEAR in advance” … you may say. “That’s impossible. I don’t know what I’m brewing next week!” We hear that a lot. Brewers call up in the spring or even in the summer needing hops from that year’s harvest. That’s not impossible, but it has consequences. It causes the market to get tighter. Why?  Growers always plant a little extra to be sure they don’t short their contracts. The merchant may buy a little extra for the same reason. That reserve gets smaller and smaller as more people come in to buy hops during the 9 months before harvest as everybody tries to accommodate the brewers’ needs. If the crop is not average or better, you had better have a good relationship with your merchant because things can get pretty tight. When that happens prices shoot up. That’s what’s happening right now! 
That doesn’t seem so bad though. “If I have to, I can plan out a year in advance,” you say. I’m sure my European hop grower friends are reading this now and thinking how lucky those growers in Washington and Idaho are. The rest of the world is not so lucky. They can expect to get 10-20% yield in year 1, 50-70% yield in year 2 and 100% yield in year 3 if Mother Nature cooperates every step of the way. Usually growers in the rest of the world don’t count on the 1st year’s production because it isn’t guaranteed. Year 2 can be a little more reliable. So … Growers in the rest of the world have to invest in 2014 for hops they can’t realistically see a return from until 2016!  They can delay the trellis expenses until 2016 if they don’t have the money, but that can hurt production so it’s not such a great idea.
Mother Nature is responsible for slowing European growers’ responses to market signals, which is why acreage expands and contracts more slowly in other parts of the world than in Washington or Idaho. That would seem to be an advantage for the Washington and Idaho guys, but, more often than not, it has a curse rather than a blessing. Their eagerness to take advantage of a market leads to overproduction, which causes the crazy swings in prices with which we’re all familiar. No bueno.
Question: So when do you order your hops if those hops come from anywhere other than Washington or Idaho for the best price? 

Answer: Up to THREE YEARS BEFORE the hops are harvested! 
Yep!  I did just say that!  Now you’re really thinking WTF!!  That’s not going to fit in well with Craft Brewers who like to switch things up, keep it fresh and try something new. That also won’t fit in well with a craft brewer who exchanges 5 or 6 emails back and forth, a phone call or two and maybe even a personal visit with a merchant and then disappears for three or four months before reestablishing contact to try to make his purchase (honestly, we see that all the time). In this market, those hops will disappear, sold to somebody else who understood the risks of waiting and who acted quickly. That goes for brewers big and small … there is somebody else out there who will buy the hops you want if you don’t contract for them quickly.

Somebody has to take the first step to get the new acreage in the ground. If it’s the grower or the merchant, the prices will be much higher as there is more risk involved. If it’s the brewer, prices can be lower. Since all the acreage is full now, regardless of who takes that first step, we’re talking about building new trellis. To justify that, growers need contracts that are 5 years or more so they can repay the enormous loans they’ll be taking out to get hops to the market that we mentioned in our previous article “Why Your Hops May Cost $1 Billion More by 2020”. Under the current market conditions, the spot market is the worst place to buy hops. You will pay the highest prices on the spot market right now. There’s a lot that goes into the hop growing process. Unfortunately, you can’t just flip a switch somewhere and make more hops. So what does that all mean for you if you need hops?
Contract Early, Long and Often to Avoid Paying Higher Prices!