Leveraged Hop Farms & Short Supply Lead to Higher Hop Prices in 2015

“Not one grower in this valley feels threatened by all the little hop farms popping up around the country”.  That’s a quote from a Yakima area hop grower I met with at Starbucks last week. He mentioned the last blog post and wanted to share that with me. I don’t want to beat a dead horse, but that is what the big guys think of all the new little hop farms sprouting up around the U.S. Sorry if that seems harsh. Chalk it up to tough love. The big guys are happy there is a growing industry around the country and that they are doing well, but they don’t really pay too much attention what’s happening there. It honestly just doesn’t affect their business directly.  Mainly they’re pretty busy these days trying to keep up with the demand for aroma hops.

I enjoy meeting with that grower friend of mine, when we can both find the time to get together. He reads the blog from time to time, but mainly he is busy managing the expansion of a few hundred acres of hops for the 2015 crop. To put that in perspective, he’s planting the equivalent of about half of the total U.S. hop acreage outside of the Pacific Northwest (PNW). That’s one guy! That’s a few million dollars worth of expansion! What’s even more amazing, is there are plenty of farms doing even more than that right now.
The hop industry is doing all it can to keep up with the growth of craft beer, but it’s being stretched to the limit.  The consensus at the moment is that there will be another 5,000 acres in the PNW in 2015. German growers are expected to plant an additional 500-1000 hectares (1,235 – 2,470 acres) in 2015. That sounds like a lot, but that’s probably about the right amount to keep the hop industry from falling too far behind the craft industry. All of this assumes we get an average crop.
If we assume it costs about $9,000 to put in new trellis in the U.S., the number most growers will tell you, that 5,000 acres represents $45 million in investment, which is happening right now. That doesn’t even count a few new picking machines that are going in this year at over $1 million each. There’s also a lot of “cheaper” expansion on farms of kilns, recleaners and dribble belts, which only total a few hundred thousand dollars per farm. We can safely estimate another $25-50 million there. We’re up to $100 million in investment for 2015 alone … just in case you’d like to keep track. Figure in another $9,000 per acre to grow those new acres this year and you come up with another $45 million before anybody gets paid. Add it all together and now we’re talking about some real money. That’s just the expansion! Looks like we’re getting closer to that $1 billion investment figure I mentioned in “Why Your Hops May Cost $1 Billion more by 2020!” a while back. 
Prediction: In 2020, we’ll look back and my $1 billion
investment figure will be an underestimate.
All of this is only a drop in the bucket of what will be necessary if craft grows to 20% of U.S. beer consumption by 2020.  That’s just borrowed money you say?  Of course it is. Hop growers don’t have that kind of money just lying around. Bankers want to see a plan for a relatively quick return on those capital investments too. They want to see creative solutions to this expansion so it’s not all on their shoulders. The current market is developing much more slowly than a normal hop cycle, but the bankers believe it will still be cyclical nonetheless. If the bankers are right, in the best case, it may take 10-15 years before we see the downside of this hop cycle. Another very likely possibility, is that we’re at the beginning of a generational and cultural shift in taste preferences that could last for decades to come. Knock on wood, spit three times over your left shoulder or rub your lucky rabbit’s foot now please in the hopes that it does actually take that long. Someday, when the cycle eventually does turn, all this new investment must be paid off. The farms with huge debts at that time won’t have a chair when the music stops. That’s why, if you’re wondering, the prices of hops are climbing faster than hops on a warm June day.
Most brewers get what’s happening, but some still don’t understand how it should affect their buying practices. We still get a lot of inquiries for hops. Sometimes, the brewers take their time getting back to us regarding a contract. We had one brewer with whom we were discussing contracts for 2014 and beyond back in August.  They dropped off the radar and started not responding to our emails. In hindsight, it seems they just got busy. Things are busy on the hop grower and merchant side of things too. We figured they had purchased the hops they needed somewhere else … until last week when we received an email marked urgent with lots of exclamation points from them again. They apologized for disappearing and emphasized how important it is for them now to get over 4,000 pounds of Centennial right away. Anybody who knows what’s happening in the hop market this year knows that Centennials are in very short supply due to a poor crop. You’d be surprised how often this happens. Fortunately, we saved a few for CBC and should be able to help our busy friend. It may not be a Christmas miracle, but that sort of thing won’t be so common for people who procrastinate. 
I’m not trying to bag on the brewers. I understand you guys are busy and probably under staffed too making life even more chaotic. I know all too well what that means.  Don’t lose sight of your hop needs in the chaos of growth.  There are so many brewers calling every day. If you wait too long to make a decision even a few weeks or a month, those hops will likely not be available when you call back.  As things get tighter in the market, the length of validity for offers on hops will turn from weeks to days.
Variety shortages are popping up every year now in different varieties from year to year because growers can only expand their farms so fast. Which varieties growers plant depends on how many squeaky wheels are calling for a certain variety and at what price.  You need to be one of those squeaky wheels if you want to get hops for your brewery.  It’s best not to hesitate. If you know what you need, contract it forward now.  It’s getting to the point as we predicted in our article “Greedy Growers and Dirty Dealers!” that the prices for all varieties are being driven by the value of the most expensive variety and that price is increasing due to the scarcity of existing picking capacity and the expenses involved with expansion. 

Growers may be able to put in thousands of acres for 2015.  Will they be able to do that again, and again … and again until 2020?  That’s what it will take for hop supply to keep pace with craft demand.  Think Europe is going to help out?  Think again!  After 2016, Europe’s hop production capacity is maxed out.  It’s all on the shoulders of American growers, large and small. 

An American Approach for European Hop Growers

In my previous blog, I wrote about Europeans taking a conservative approach to the hops market and why they should be more aggressive in planting hops.  The coming years will be turbulent with regards to hop supply and demand, which can mean crazy, fluctuating, unpredictable prices. The problem, however, will not be equally distributed across the industry. We’ve put together some strategies to help both brewer and grower navigate the difficult times ahead.
For the Grower: A strategy to maximize profit from the current market while insuring stability on the farm.
  1. Act now to plant new aroma varieties on 5-year or even 7-year contracts.  Contract 80% of your estimated production.  Save 20% to play with on the spot market and to cover bad crop years.
  2. Price new varieties in the short-term at a price that will compensate for potential risks you believe may happen in the long term. If you don’t believe there are any risks and craft beer is here to stay, prices that return your farm 10% profit are probably fine if you are content with your current acreage. If you believe craft is a fad, not a trend, price your hops higher so the income pays for changing varieties twice and provides a healthy profit in the meantime. Perhaps instead of 6 Euros per kilogram, that means 10 or even 15 Euros per kilogram.  The number will be different for every farm. Find out what the market will bear and ask for it. It’s better to shoot for the moon and miss than shoot for $H!T and hit.
  3. Be aggressive in the market. If you don’t like your current options, seek out merchants that will pay the prices you need.  They are out there!
With these strategies, even if demand for these new hop varieties disappears after five years, which seems unlikely at the moment, the grower will make enough money to compensate himself for the risk.
For the Brewers:  A strategy to insure your hop supply, European or otherwise, during the turbulent times to come.
  1. Contract your base. Your base is what you know you need. Top up each year.  Don’t buy assuming 50% growth for the next 5 years. Be realistic. If you buy on the spot market today, you’ll regret it tomorrow.
  2. Get the longest contract you feel comfortable signing for the varieties and quantities you know you will need, 5-7 years out would be best.  A longer contract can sometimes mean a lower price.  Hops grown anywhere but Washington, will probably require a contract to begin 1-2 years in the future due to natural growing cycles.
  3. Pay a fair and sustainable price. Because of the demand for all the inputs, the cost of producing hops is genuinely increasing every year. If a farm is growing, it needs profit for the hops it’s growing and also enough money to continue to grow. That may seem like a lot of money compared to just a few years ago. Remember, you can’t just turn up the hopometer to produce more hops.
These strategies will help you secure most of your hop needs without putting you too far out on a limb.  Sure, you’ll have to think about contracting more hops every year, but hops are kind of important. Shouldn’t you buy your hops from a merchant who also wants you to be aware what’s going on in the market? 

Relevance in the Future
Of course, nobody knows what will come in the future. I am looking into getting a crystal ball right now though. Nobody would have predicted two years ago that we would be on the brink of another war in Europe currently playing out in the Ukraine. That still seems ridiculous. They need to chillax over a good beer together. The only thing constant is change.
Here’s something to think about … What if we are at the beginning of a trend that does not slow down for 40 years? Sound impossible? It’s unprecedented in the hop industry! You only have to look at the California wine industry or coffee consumption across the United States though to see examples of other beverages that have sustained upward trends for decades. If European growers sit this one out, it creates more opportunity for American growers, who are naturally more inclined to take advantage of just such an opportunity. Of course, there will always be hops in Germany and in the U.S. What is really at stake today is the future landscape of the hop industry and the relevance of the players within it.

Early adopters of the strategies above and those informed about the market will benefit. We will continue to be a source for quality hops, but also, we’ll continue to be the ONLY source for relevant information on the hop market in the future.  Share this blog with a brewer or hop lover today. Knowledge is power.  

Long live the hop revolution!