Brewing Success In the Borough of Churches

By Matt Giles
47Hops Guest Writer

Since 2013, Brooklyn’s hottest ticket hasn’t been any of the bars in Bushwick, or the underground dinner parties dotting throughout the borough – it’s been on the border of Red Hook, in the shadow of the Brooklyn-Queens Expressway, behind a McDonald’s take-out window, and without any signage.
That’s where Sam Richardson – formerly of Pyramid Breweries and Greenpoint Brewing Works – and Matt Monahan – also of Greenpoint and an alum of French Culinary Institute – founded Other Half Brewery. In under two years, the brewery has become the darling of the city’s nascent, but quickly growing, craft beer scene, brewing 45 beers in the first twelve months. The co-founders recently graced the cover of an issue of Beer Advocate, and had write-ups in Serious Eats and Food & Wine magazine.
In early 2015, Other Half, which had recently begun canning their offerings in limited batches, began to sell these 16-ounce, modernist-looking cans up to twice a month. It was an immediate success: Other Half’s ‘release parties’ were mobbed with folks and the cans often sold out within hours of its start time.


“We really like cans,” says Richardson. “I know there will definitely be people holding on to stuff longer than they should. It’s a leap of faith. But we also don’t make enough for it to be a scenario where we are saturating the market.”
Those cans showcase Other Half’s unique take on one of America’s most celebrated beer style: the IPA. The brewery has distinguished itself by brewing some of the city’s – and country’s – most exciting IPAs.
There are Citra and Nelson, both single-hopped IPAs, followed by the multi-layered complexities of brews like Hop Showers, All Green Everything and Green Diamonds, each of which artfully blend multiple hop varieties . There are other beer styles served at Other Half’s appropriately sized draft room – it’s about the size of a Chinatown one-bedroom – but the brewery has cemented its a big presence with its IPAs.

“We brew mostly what I like to drink,” explains Richardson. “We make the beers that we like, but it also happens to be fortunate that is where the trend is for small breweries. It didn’t used to exist as a possibility, but you can now open a small brewery and make all IPAs, and it’ll work and do well.”

“The first thing we did, 
after we signed the lease to our building, 
was sign hop contracts.”
                                     – Sam Richardson
Before Richardson arrived in NYC – the Portland native had also worked for a brewpub chain in Seattle – he knew that opening a brewery was a goal firmly on his horizon. “I moved here with that intention,” he says. “I already wanted to do my own thing, and the city was extremely deficient in breweries at that point.”
For years, the Big Apple’s craft beer banner had been waved by only a handful of breweries. Sure, there was Brooklyn Brewery, the city’s sole remaining outpost from a time when building a brewery meant dealing with the mob, but the city was starved for other options (the opening of Sixpoint in the mid-2000s did help slack the demand). But over the past several years, the city once referred to as the Borough of Churches, has exploded with craft diversity — From Big Alice to SingleCut, Gun Hill to Bronx Brewery, and Rockaway Brewing Company to Other Half.
“NYC still has a small scene compared to other parts of the country,” says Richardson, “and it is that deficiency that has been helpful for us. We were able to launch and then go as hard as we have from the beginning.”
An expanding palate has also been a boon for Other Half. Growlers are fun, but that’s up to five beers to enjoy, and since the median of Other Half’s ABVs is about seven percent, it can be a commitment. “Growlers are great though with a can, it’s easier for someone to just have one,” explains Richardson. Thanks to the city’s ever-changing population, Other Half is reaching more people than a brewery of a similar scale could have impacted previously. “We definitely have a more diverse tasting room that anywhere else,” says Richardson, “and that includes a lot of older folks who have gotten interested in craft beer, and a lot more women are involved on the consumption side.”


On a recent Friday night, there was even a bachelorette party that stopped by the taproom for a few pours. When told of this unheard anecdote, he elaborates, “That’s awesome. I’m a little more used to it being from Portland, where, for a longer time, no one thinks twice about women and craft beer. Now it’s becoming more common here too.”

As this renaissance continues, demand grows for a revitalization of the state’s hop industry, which, before Prohibition, was one of the nation’s most vibrant. The number of craft breweries in New York grew by nearly 60 percent within the past year. There are now reportedly over 200 craft breweries statewide. The local infrastructure has to advance to keep with this demand. “It’ll really take a big investment from a few hop growers that really want to do it bad enough,” says Richardson. “What grows best here, and what of those hops that grow best here do people want to use.”
Mention a hop variety to Richardson, and he likely has used it in one of his creations. “When you are a new brewery, having the hops you need is challenging,” he says. “The first thing we did, after we signed the lease to our building, was sign hop contracts. If you are going to be an IPA brewery, you have to be on top of that.”

During its first year, Other Half partnered with a New York State hop farm to create one of their brews. While Richardson maintains that partnership is still fluid, he wasn’t aware of the state’s hop scene when he first arrived on the east coast. “I didn’t think there were any hops growing here,” he says, “and I really believe if the industry wants to exist here and differentiate itself from Oregon and Washington hop farmers, it needs to have something unique, like new varieties.”
Although the luster won’t dim from Other Half any time soon, the increased attention has made the brewery a target for people trying to hack the system. The brewery sells four-packs and cases of 24, with a set maximum for each customer, but that didn’t stop a local craft beer store from stocking up on Other Half’s cans during a recent open sale. The brewery took to Instagram to protest and was vindicated by the dozens who beer-shamed the offending store.

“NYC is a difficult place to open a business in general,” Richardson says. “It’s been hard, but it hasn’t been the same sort of grueling punishment that I expected.”

Is Water Threatening the Hop Supply?

If you’re a brewer, you’re used to thinking about water.  You use a lot of it.  Some of our brewer friends in California have to think about it a little more than the rest of us these days.  That’s a concern that’s starting to trickle into the hop industry too.  Last week there was a local news story about the Roza Irrigation district (one of the irrigation districts in the Yakima valley) and how they will be shutting off the water for 11 days this month to ration water. Check out the story for yourself here.  The Roza district is infamous for being at the end of the line, meaning that they are the first to get shut off in times of trouble … the canary in the coal mine if you will. There are other districts that are senior to the Roza and are always guaranteed water.

There’s a lot of concern out there about water now. It seems reporters are thirsty for a story about how water will doom the industry. We know that about 25-33% of the Washington State hop acreage is grown within the boundaries of the Roza irrigation district. That’s a significant number! A lot of growers there have access to wells, and there are other irrigation districts around some farms. It’s definitely not a black and white issue. The water irrigation system has reserve capacity built into it so a short supply does not equal a shortage. There are a few other options for some people. It’s too early to predict exactly how the short water supply will affect the 2015 crop. It’s not too early though to predict, that if we have another warm winter with very little snow in the Cascade mountain range like the one we just had, 2016 will bring with it serious water problems that will negatively affect the hop crop. That’s how serious the situation is at the moment. That’s a concern among hop growers today.

drought pic

The Balancing Act

A table normally has 4 legs, but it can also stand on just three if you take one away. Sure, it’s less stable that way, but it’ll stand. Although it’s standing, that table will fall over if you put some weight on the wrong side once that fourth leg is gone. Once you’ve taken away that fourth leg, you lose the stability built into the table. The result is that you are at greater risk and more vulnerable to the next problem that comes along. That is where the hop industry is now with its water problem, a little closer to tipping over. A heat wave, or another warm winter with very little snow, and we’re in a serious drought situation that could drastically affect the supply of hops.

3-legged table

Farmers always have a lot of risk. Considering that, I’m surprised how much they like to gamble in their free time. You would think they get enough at work. I guess next to farming a little game of dice or poker doesn’t seem very risky at all. After all, all they can lose is the money on the table. Something farmers also like to do … they also like to complain how they can lose the crop. I often hear criticism from brewers that growers and merchants are trying to drive the price up by creating things to worry about. Some people may be doing that for sure, but by and large the things that come along, like today’s water situation, can develop into real problems and the crop can really be affected. Those are the things growers have to be concerned about. If brewers understood all the risks to the crop that happen every year on the farm, they would be thankful there are hops at all.

I don’t want to boost grower egos too much because some of them already drink their own Kool-Aid, but it comes down to the fact that most of them are experts with generations of experience behind them. With farming, that’s important. That enables them to overcome the challenges they face every year to produce an average crop more often than not. Farming isn’t as sexy as being an astronaut, but most of them do the equivalent to what the pilots of Apollo 13 did when they brought their ship home … but they do it every year. Some of them read this. It’s good for them to know that they are appreciated. I don’t want them to start thinking they can walk on water though so I’ll stop saying nice things about them now. Sometimes though, despite the day and age in which we live, there are still surprises. Let’s not forget, it was just last year that Centennials and every early-harvesting variety in the U.S. were short 30-50%. Nobody saw that coming. The crop looked good, but the cones just didn’t weight out. How do you plan for that?

Sometimes it’s Better to be Lucky than Good

Let’s say the crop is down 5-10% across all varieties this year. It doesn’t have to be from a water-related problem. There are threats to the crop all around. It could just as easily be because of a heat wave that shut down the growth of aroma varieties and bring on spider mites. A short crop could also be due to cold temperatures that don’t allow the crop to mature quickly enough. The crop can suffer from more rain and humidity than normal. That increases the chance of powdery mildew and other diseases. In the Hallertau region of Germany, there are several areas that seem to be particularly susceptible to hail storms. I could go on, but I think you get the point.

Fun Fact: Did you know many aroma hops don’t like when the temperatures get over 100 degrees Fahrenheit. They stop growing in response and need even more water.

Growing a great crop depends on a lot of knowledge and experience … but also a bit of random luck. As the saying goes, the harder you work, the luckier you will get applies here too. The lucky ones choose to be proactive rather than reactive regarding circumstances that may affect them. In the pricing of hops, it seems we take for granted the experience and wisdom and discount the value of luck.

On the Edge

Due to the popularity of hops from the craft beer revolution, the hop industry has been pushed to its limits.  That means, unfortunately, there is very little room for error. For all intents and purposes, you can say the 2015 and 2016 crops are fully sold. Crops 2017 through 2020 are heading in that direction quickly. Quite a few European hops are contracted beyond 2020. The trend is moving toward longer-term contracts. Any of the threats to the crop mentioned above could result in a decrease in yields of 5-10%. Five or ten percent is not much. It’s definitely not unrealistic to consider the crop could be off by that much. To put it in perspective though, that’s roughly 4-8 million pounds of U.S. hops that could just not materialize. That is significant. That probably doesn’t even represent the growth in hop demand for the craft beer market this year alone.

Many people have some reserve set aside in case the crop comes in short. With so much demand in the market though, it’s tempting to grab the business when it comes along. As a result, some are selling dangerously close to 100% of what they expect to receive from an average crop. That’s risky! Consider that the crop in the growing regions in the rest of the world are much more dependent on weather than growers in the Yakima valley and you start to grasp the full scope of the risk involved. Germany has long had a rule that they do not contract more than 80% of their crop due to the fluctuations in yield from year to year. According to the most recent IHGC data, They have already exceeded that for 2015, and those numbers were collected in April. A world crop that is 5-10% down could be 10-20 million pounds short.  That’ll leave a mark.

Fortune favors the prepared mind.

-Louis Pasteur

 

Right now you’re thinking, “Sure, this hop merchant is telling me how the crop can be short. I know it goes the other way too. You can have a bumper crop in any given year too. Then maybe I could save some money.” That’s absolutely true! Bumper crops don’t happen very often though for a reason. There are a lot of things working against huge monocultures of crops succeeding to begin with.  Hoping for a bumper crop is like betting on green at the roulette table.  It hits once in a while, but it’s not as safe as some of the other bets you can make. It all depends on your appetite for risk as a brewer. My guess is you probably have car insurance even if you know you’re a great driver because you never know when something out of your control will affect your path. Do you do that because the State requires it, or would you buy it on your own too?

blackswan

The farther we look out on the time horizon of the hop industry, the greater the odds that there will be some black swan event that can touch each of us directly. Can the water supply affect the 2015 crop in Washington State? Yes, It can. The answer to that question is usually NO. Unfortunately, it’s too early to know with any certainty whether it will or not. We should be always prepared for anything because this is agriculture and agriculture depends on random things we can’t control, like the weather. We will just have to wait and see what Mother Nature has in store.

Blue Point Brewing Company – Life After Acquisition

By: Matt Giles

On April 1, 2011, Blue Point Brewery sent out a press release that seemingly heralded the end of the bastion of craft beer on Long Island’s south shore.
The Patchogue-based brewery had sold out, negotiating a buyout with MillerCoors.
Expecting craft aficionados might throw up their arms, preparing to unleash vitriol without noticing the date, the April Fool’s prank, which was published on the brewery’s web site, ended with the tongue in cheek statement, “Blue Point Brewing Company would like you to have a happy April Fools’ Day! Blue Point Brewing Company – independently owned with no corporate ties. Ever.”
Fast-forward nearly three years, and the brewery – founded in 1998 and famous for its Toasted Lager, Hoptical Illusion, and annual cask ale festival – put out a similarly worded release that wasn’t a prank this time.
Purchased by Anheuser-Busch InBev for a reported $24 million last February, Blue Point joined the beer giant’s ever growing craft stable, including Goose Island, 10 Barrel and Elysian. “Life changes,” says Mark Burford, Blue Point’s co-founder and brewmaster when recalling their April Fool’s declaration. “At that time, it was just a joke. I would suggest people not read too much into our jokes.”
The brewery, which remains in Patchogue, has been busy this past year ramping up production. Blue Point is synonymous with craft beer in Long Island and New York City – there isn’t a bar or bodega that doesn’t stock at least one Blue Point six-pack – but since the brewery now has the resources of a conglomerate with revenues approaching $50 billion, Blue Point has significantly boosted its profile.
“The past year has been a transitional one for the company,” explains Burford. “We are just now starting to take advantage of InBev’s resources, like contracting with InBev’s breweries and using certain hops if I need something I can’t get.”
Blue Point has expanded and upgraded its main brewing facility, decisions that helped the brewery’s market growth. “Obviously we are an east coast brand,” says Burford, “but we’ve now filled in the pieces we couldn’t before in a more pre-organized way.” Soon, South Carolina and Kentucky will be able to purchase Blueberry Ale and Sour Cherry Imperial Stout, and Blue Point will begin shipping to Maine and Tennessee by the end of May.
“We’ve been at this a long time, and we went from the point of trying to find anyone to carry the beer to now being in the InBev network and put into places where we didn’t exist before,” says Burford.
While the amount of barrels Blue Point annually produces will certainly rise – at the time of the sale, Blue Point was around 60,000 annual – Burford believes the brewery is still very much craft. “Come to Patchogue and watch us make beer,” he says. “If you don’t think that is craft beer, well, that’s a decision for you to make.”
He continues, “I deal with the brewers at InBev, and they are, at the end of the day, still brewers. Even though they make beer in vast quantities, and in different tanks, they are still brewers.”
This kind of talk is, of course, different from Elysian’s Dick Cantwell. After AB InBev purchased the Seattle-based brewery a few months ago, Budweiser spent a few million to release a 60 second ad – called ‘Brewed the Hard Way” – during the Super Bowl. The ad mocked the craft movement and beer that is “fussed over”, which included a ‘pumpkin peach ale’ (Elysian brewed a Gourdgia on My Mind Pecan Peach Pumpkin Amber in late 2014).
Cantwell, who indicated he voted against the sale, later ranted to the Chicago Tribune, “I find it kind of incredible that ABI would be so tone-deaf as to pretty directly (even if unwittingly) call out one of the breweries they have recently acquired, even as that brewery is dealing with the anger of the beer community in reaction to the sale.”
Burford says he personally wasn’t offended by the ad, but notes he would be angry if one of his beers was mocked, adding,  I felt for the guys at Elysian. They had just been announced, and then that weird coincidence with the beer they used in the ad.”
“For us,” Burford says, “the nasty emails have subsided.” He observed, “For there to be a Super Bowl commercial that discusses craft beer, whether it is positive or negative or anything, that’s a sign of things to come.” Buford concludes, “As far as I am concerned, that was craft beer’s first Super Bowl commercial.” The irony is that it was paid for by the world’s largest brewer.

While Blue Point no longer possesses the independence they celebrated in 2011, the transition was one Burford felt necessary to make to ensure the brewery’s continued success: “I am still bullish on the craft industry, but with this move, there is much less uncertainty now, and the quality of the beer won’t change.”

5 Reasons Why The Next Hop Crisis is Coming & How to Avoid it: Part 2

In our last blog, we presented 5 reasons why we are headed for a hop crisis. Today, let’s explore the solution.

Bank support is dwindling. A grower friend of mine is having trouble getting financing from his bank as we speak! He has hop contracts for almost everything he plans to grow … still problems. The bank tells him they’re not comfortable with the level of risk. Merchants have financed some steps are unlikely to finance the next step of expansion. There are few financing options that allow for a rapid increase in production capacity. Venture capital and private equity would be other options that could enable a quick expansion. Some of those guys read this blog. Unfortunately, even with the current market, hops don’t provide the type of returns that attract most professional investors. They’re more likely to invest in breweries.

So why does everybody think there so much risk? This market looks like a no brainer for people from the outside looking in. It is anything but simple. Enduring a risky high priced spot market during a shortage is one thing. Deals come and go quickly. You’re in, you’re out … badda bing, badda boom! It’s a spot market so you’re only gambling with the chips that are on the table. Usually, the buyer has his money on the table and ready to buy when you’re buying the hops. A high-priced contract market based on brewery projections for growth and farms that are stretched to the limit, on the other hand, that lasts for years. That is another game all together. Sure, there are profits built into the prices at both the merchant and grower levels. Those potential profits represent only a fraction of the potential losses though if the market falls apart. For that reason, some people are getting a little nervous at the speed of the expansion as we approach this next very expensive step of expansion.

To A Mouse

But, Mousie, thou art no thy lane [you aren’t alone]

In proving foresight may be vain:

The best laid schemes o’ mice an’ men

Gang aft a-gley, [often go awry]

An’ lea’e us nought but grief an’ pain,

For promised joy.

– Robert Burns 1786

robert-burns_with_sun_glasses

As with the mouse’s nest in the poem above, the problem comes and the house of cards falls apart if the grand plans for the future are not realized. For that reason, some are cautious. The length of the market and the risk involved creates chronic risk, the type the hop industry has not seen before. Rather than a card game, it’s like playing Russian roulette over and over and over again. The longer you play, the more likely that something can go wrong.

FORWARD PAYMENTS

Without banks that are willing to finance growth, the next step in the evolution of this high stakes game is very likely forward payments. If growth and infrastructure expenses continue, risk will continue to grow as the industry falls deeper and deeper into debt. That debt is only repaid when everybody down the line fulfills their obligations. Some people certainly won’t have an appetite for so much risk and will take only the risk with which they are comfortable. That risk needs to be minimized for the industry to continue to grow as a whole. The safest way to do that is to transfer that risk to its source, hence the idea of forward payments. Forward payments are just what they sound like, payments prior to receiving the product. Any people 35 or older out there might remember when stores used to put something on layaway. Forward payments are like a layaway program and will curb the temptation by brewers to buy hops speculatively on growth about which they are not certain. There is some of that going on right now. In addition to reducing risk, forward payments for hops inject stability into the system so the brewer can be sure he will receive his hops. Mother Nature can still turn the table over and mess up everybody’s cards, but that can happen with agriculture at any given moment. In the worst-case scenario, if a crop was severely short, a farmer might have to return some of the money to the merchant, who might have to return some to the brewer, but that’s as bad as it gets.

Forward payments could be structured as follows:

Payment of a 1% signing fee at the time of signing the contract,

Pay 33% of the contract value in the spring before the harvest,

Pay 33% of the contract value in the summer just prior to harvest, and

Pay the balance of the contract value by November 1st, after harvest.

pay-it-forward-dvd-cover-56

 

I guarantee you … right now, after reading those 5 lines above, EVERY hop grower and EVERY hop merchant out there is thinking what a relief that would be, but how unlikely it is to happen. See how happy Kevin Spacey and Helen Hunt are in the picture above. Obviously forward payments makes you feel good too … so there’s that too. Many brewers say they care about the hops they purchase and want to support the industry. This would be a concrete way to demonstrate their concern for the sustainability of the hop industry and make a difference. Sure, it can just be that nobody has asked for forward payments yet, which is why nobody is paying this way. Maybe it’s an idea that will take some time to digest. It’s not all about money either. The closer relationship that would develop from this payment system would increase communication and stability as hop growers, merchants, brewers and beer drinkers will all be in the same boat. It would create a type of partnership between growers, merchants, brewers … and the beer drinkers. In that way, it’s a bit like crowd sourcing for the hops used by a brewery, but with an immediate deliverable to the end customer, the beer they’re drinking. That’s better than the promise of something down the road that may or may not materialize such as on Kickstarter. Granted, all of this seems like a pretty big leap from where we are today, but every idea must start somewhere.

Complicating things is that it all needs to happen very quickly given that the hop industry is quickly approaching a cliff. Continuing down our current path does not mean the end of hops as we know them of course. That would be ridiculous. There are other ways for the industry to grow, but they involve drastically higher hop prices and more extreme sharper turns down the road.

If brewers want to continue to receive a secure supply of hops as the craft market passes 20% of the U.S. beer market by 2020 forward payments or something very similar will be necessary. Unless some other source of money steps in like venture capital or private equity, banks are the only option at the moment for the scale of financing necessary at the moment. Remember that $1 billion dollars I mentioned the hop industry would invest by 2020? Conservatively, the U.S. hop industry spent $200 million for the growth in 2015. We’re well on our way and the expensive part hasn’t even started yet. Another $500 million must be spent in the next 2-3 years by hop growers to keep pace with the craft industry.

dr-evil

The reward for this shift in the payment schedule will be lower prices than are available on the regular market and, of course, guaranteed supply. In the old days, merchants used to advance growers money in the spring and prior to harvest. In the apple industry, packing houses give advances prior to harvest. Today, merchants financing farms where banks will not take the risk is happening. That’s not enough! Some merchants are getting low hop prices in exchange for that financing, making interest from the grower on the money borrowed … and a wider margin from the brewer at the same time. While that’s a great way for a merchant to make a side investment in the hop industry, it’s not a sustainable solution. It adds even more risk into the equation and puts both merchant and grower at risk. That’s a strategy that could work indefinitely if the industry was stable, but not at the current levels of growth. Not even the wealthiest hop merchant can finance 8-9 new hop farms at $20 million each. That’s how many new farms we need each year for the next few years.

ONE WAY OR ANOTHER

Brewers will pay the price to sustain the growth in the hop industry one way or another. They can choose to pay as they go, or they can pay all at once. I know that sounds harsh, but the money only flows from one source and that’s the way it always happens. Some will choose the former. Others will choose the latter. Who can say which is more correct? I suppose that depends on where you sit. Chances are though that if you don’t like $15-20 per pound of hops for the next 5-7 years, you really won’t like the idea of $100 per pound for those same hops for a year or two. It’s harder to make such high prices cash flow. Somebody has to take the next step. It would be nice if that step was one that reduced risk instead of increasing it.

It all starts at the beer drinker. Are consumers willing to pay 5-10% more for a glass of beer to finance the expansion of the hop industry? Honestly, I have no idea, but that’s all it would take to finance the necessary expansion. Can brewers collect that extra money and pass it along? I’m sure that can happen. If not, we better get used to drinking less hoppy beers, and forget about that whole craft revolution thing.

hop revolution

5 Reasons Why The Next Hop Crisis is Coming & How to Avoid it: Part 1

Last weekend, while at dinner with some hop friends, an interesting scenario came up during conversation. Granted, it’s partly hypothetical at this point, but the possibility should concern every brewer in the world.

WHAT IF?

The question was this … “What if, due to the risk involved with expanding quickly, growers and merchants let their own appetite for risk drive the pace of growth instead of letting the demand from the market dictate the pace … and what if those two things are not aligned?”  What??  That’s crazy!!!  Right???  Hop prices are going up.  Why wouldn’t everybody grab the new business? Isn’t it the American way, or capitalism, or greed … or something inherently in people that makes us naturally crave more, or for a better life for our children … or something like that?  Why would anybody in their right mind not take full advantage of the current market?

It’s not as crazy as it might seem on the surface to envision a situation where the market enters a perpetual state of shortage of necessary varieties.  It comes down to a question of RISK … Who is willing to take it, how much, when and what will it cost to for growers and merchants to be compensated adequately for taking that risk. Everybody has a certain risk/reward tolerance level. The next step of development in the hop industry is about finding the comfort level for the two powerhouses of the global hop industry, the American and German hop growers, so they make the investments necessary to expand.  Everybody from brewers to beer drinkers should care about this next step as it affects hop availability in the future.

In case you think I’m heading down some hypothetical rat hole exploring this line of thought, there already exist concrete examples of the appetite for risk affecting supply in our hop world. The reason our Czech grower friends seem unwilling to plant more hops is reason #1 why we’re headed for a hop crisis.

They are not confident in the longevity of this market.

What they want, it seems, are 10-year contracts at sustainable prices before they’ll consider expanding acreage.  Some of the Czech merchants are starting to get what they wished for but only after 2 years of near zero availability on the market.  We recently learned that some volumes of Czech hops are now contracted until 2025! Even with these new contracts, there are no grand plans for acreage expansion, although some excess capacity remains.

Another example I like to mention from time to time concerns our hop friends from New Zealand and is the reason #2 we’re headed for a hop crisis.

They won’t get too excited and ramp up for just one popular variety.

They seem to be relatively content with their current level of production. I have to admit, I thought that was crazy when I first heard it (no offense Doug Donelan). Since then, I’ve come around. Now, I understand exactly what they’re talking about. What would they like before they increase acreage?  They want customers interested in their entire basket of varieties, not just one. That makes sense! You wouldn’t marry somebody just because they think you have a nice smile. Similarly, you can’t build a new farm for one popular variety that people may or may not like in a couple years. Whose to say three years from now preferences won’t change yet again? People’s tastes change pretty quickly these days.  Do you even remember “What Does The Fox Say?”  New varieties can take 5-10 years to develop. With a market that prefers new flavors, can you blame growers for being cautious about assuming risk? So, if you want Nelsons, you better also start liking Dr. Rudi, Motueka and a few other New Zealand varieties.

what-does-the-fox-say-video

35 MILLION BARRELS

There was a statistic floating around the CBC that there are roughly 35 million barrels of beer production capacity in the US.  There are roughly 22 million barrels produced now. At the current growth rate, they proclaimed that entire capacity should be used within the next 3 years.  If that much more beer will be produced in that short of time, American growers need 12000-13000 more acres by crop 2017.  That’s a LOT of new farms … inconceivable you might say. If I had to guess, I’d say there are 3-4 new farms in the works for 2015. They are the talk of the industry because nobody else can afford to think about doing that yet despite the fact that prices have risen quite a bit in the past few years. To keep pace with that level of demand, we should be already know of plans for 8-9 new farms going in for 2015 with enough extra financial capacity and plans on the books to do it again for 2016 and again in 2017.  The fact that that growth is not there represents a risk for brewers.  The hops they think will be there might not actually be produced. Then, of course, there’s the inherent threat of water and Mother Nature.  It is agriculture after all, not a Apple iPhone factory in China.

Brewers assume that hops will be there when they need them. They assume the main variable is price. Sure, hops may cost more, but they’ll be there if you pay the price. Sure, higher rewards make everybody more willing to take risks. The rate at which prices are increasing has been enough for growers and merchants to assume the necessary risks the past couple years.  A more serious level of expansion is upon us in the next 12 months and with it comes more risk. There’s a need for higher prices or greater stability to make people willing to assume the risk associated with the next step.  Do you remember the blog where I mentioned that between then and 2020?  I claimed American hop growers would need to invest $1 billion? I still stand by that number, but the spending necessary in the next 3 years are the cause for reason #3 we’re headed for a crisis.

In the next 2-3 years, the U.S. industry must spend over $500 million.

If they don’t spend this kind of money on infrastructure, brewers will need to adjust their expectations and their recipes. An actual hop shortage, a time when there may not be enough hops to brew all the beer that needs to be brewed, may soon be upon us.

teamamerica

TEAM AMERICA

OK, Czech and New Zealand are just two extreme examples, you say. Surely, it can’t be that in the good ole US of A though, where cash is king and where people eat risk for breakfast, that growers are reluctant to take advantage of an opportunity to expand.  There may still be more appetite for risk in the U.S. than in Europe, but even American growers are starting to reach limits, which is reason #4 why we’re headed for a crisis.

Some of those limits are being imposed upon them due to a lack of money available.

To brewers paying more now for hops now than in recent memory, that may seem hard to believe.  For growers in other countries who covet the American prices they only dream about, that must seem ridiculous.  Hops are profitable now to be sure at current prices.  If there was no growth necessary, every grower would probably have a new truck. The growth, however, is eating up all that profit and more. The current profits are not enough to finance the growth necessary to meet the current demand.

The supply chain is only as strong as its weakest link.  It seems hard to imagine, but there are also growers delaying expansion. Those may, at the end of the day, be the strong ones.  They have acres they can plant in 2015, but don’t. Instead, some are waiting until 2016 when, they say, prices will be higher.  When I first heard that, I thought, “Those greedy bastards! They just want more money”.  Maybe you’re thinking the same thing now. That’s not the whole story though. Sure, some growers are just greedy bastards, there’s no denying that. You can’t throw them all in that group though.  Some want to expand, and can’t find ways to finance it. That’s a bigger problem than you’d imagine. Others are waiting because they don’t want to stretch the farm and their finances too thin.

All that needs to happen now to continue the growth is for everybody’s financial projections to materialize in the real world. Can everybody deliver on the promises they’ve made? More farms today are like a house of cards on a creaky table hoping there are no storms on the horizon. Costs to expand are fixed. Plans for expansion in the future require commitments today. Today’s profits are committed toward tomorrow’s expansion. If somehow, the current step doesn’t happen as planned, it’s impossible for next steps to happen at all. All of this means, more than normal, that there is no room for a misstep in the 2015 crop. Talk about risk!! Pull out one card and the rest of the house of cards tumbles. Loads of risk on the farm translates to loads of risk for everybody.

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As hops get more expensive, the bets that merchants place and the consequences on those bets failing increases together with price.  As the risk of them losing everything grows and the reward relative to the size of the bets placed gets smaller, those bets become less attractive. As the situation gets more extreme, will some merchants lose their incentive to participate so aggressively to supply the market? Of course, all these bets are “calculated risks”, but at the end of the day they’re still bets.  At some point, without higher priced long-term contracts, there is less incentive for a merchant to ante up for every hand that is dealt at the table. I’m not saying they’ll sit out the entire game, but they may decide not to play a hand or two. The risk/reward ratio is a factor.  There is one sure fire way to fix the problem with expansion that plagues the industry today. We’ll get into that in Part 2 of Why The Next 5 Reasons Why The Next Hop Crisis May be Coming & How to Avoid it next week. Hint: It doesn’t involve shortage-style prices or contracts that last until forever.

Wait a minute … I promised 5 reasons and that’s only 4.  Reason #5 we’re heading for a crisis, which proves that these reasons are in no particular order (if you were wondering) is simple:

World alpha acid inventories are decreasing quickly, but demand is not.

OK … maybe you’re into craft and you don’t care so much about alpha. Start caring! Hops are hops and when there’s an alpha shortage even a Cluster with 5% alpha that is available when others aren’t becomes the sexiest variety around.  The alpha market is cyclical and the stars are lining up again.  I won’t get into that in too much detail unless you want me to. Send me an email at blog at 47hops.com if you’d like to read about that.

STAY TUNED FOR PART 2: