2015 Pre-Harvest Crop Report – Hops

Part of the 47Hops crew just attended the International Hop Growers Convention (IHGC) in Germany.  It’s almost the beginning of August, which officially marks the calm before the storm.  Harvest will begin in just over two weeks for the earliest hop varieties and just like before a big football game you can feel the tension in the air.  A mere eight weeks from now, though the results will be in and the chaos that is harvest will once again be behind us. Until then, the anticipation regarding crop 2015 and what it will bring builds with each passing day.

EUROPE

Driving around the Hallertau it was obvious that the German crop, which constitutes approximately 40% of world hop production, is a very mixed bag. There were some healthy looking fields. There were also some fields that looked terrible. There was also everything in between. Most fields we saw were at the late bloom or early cone development stage. This is one of the most fragile times during the German growing season. Weather can often make or break a crop between the third week of July and the middle of August. The weather in 2015 is not cooperating. In short, above average temperatures and a lack of rain have taken what was a beautiful crop with enormous potential just 6 short weeks ago and turned it into a crop that has the potential at the time of this writing to be one of the worst in recent memory.

During the Economic Committee session at the IHGC at which estimated yields from hop producing countries around the world are typically discussed, one European country after another took the stage. They announced with solemn faces that the numbers they reported to the organization just a few short weeks earlier were now inaccurate. The prognosis had worsened since then. The norm amongst those reporting was that the crop would be down 10-15% from average yields. Germany, which had an above average crop in 2014, expects yields to be down 16% from 2014 levels (The 2014 German crop was excellent, however, and yielded approximately 10% above average).

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The problems developing with the German crop, and to a certain extent, with the entire European crop in 2015 are many. Some varieties that typically produce their hops at the top of the vine were very thin on top and Christmas tree shaped … meaning that there won’t be much of a yield there. Arms on the vines of many varieties are short. If hops don’t “arm out” there’s less room for hop growth lower down the vine. The drought that has plagued Europe the past 6 weeks continues, but that is not all. The past 5 days have brought winds to Germany, which wreak havoc on hops at this time of year bending and even breaking arms and further drying out the already thirsty hop vines. Many yards were visibly stressed.

There were, of course, hop yards that were surviving Mother Nature’s torturous treatment. Those with irrigation are finding that investment is paying for itself this year. Only about 16% of the total German acreage is currently under irrigation. Soil type plays a significant role as those with sandier soils, which don’t retain water so well, are suffering. Weather around the Hallertau specifically, and Europe in general, varies greatly from village to village. Every hop variety, of course, responds differently to weather conditions. The result is a LOT of variety out there, but overall a poor outlook for hop production on the continent. Unfortunately for growers in the Czech Republic with irrigation, they are not finding irrigation systems to be their salvation. They are restricted as those systems draw from nearby rivers, the levels of which are being protected. The exception to this wave of bad news across Europe was England, where growers expect an average crop and whose growers have enjoyed ample rainfall this year.

As we mentioned, delegates at the IHGC Economic Committee meeting reported anticipating lower-than-average yields. Worse still was when they reinforced that the coming weeks will be crucial to the development of the hops. They warned that unless there is significant rainfall during the next week or two, yields would suffer further losses. Some estimated yields could be down 25% or more from average yields. The longer the drought continues, the deeper the deficit will become. With no rain in sight, the prospects for a normal hop market in 2015 are dim. The hop world is never boring.

During a conversation with a German grower following the Economic Committee meeting, he explained how, in his opinion, the estimates presented were overly optimistic. He stated he did not understand how people could present the estimates they presented with the current conditions and the existing weather forecast. Without significant rainfall soon, he continued, the bloom and cones that are only just developing would not continue to develop to a normal maturity. What would result without any additional rainfall, he continued, would be cones that do not grow to their proper size, are of poorer than normal quality and that contain little to no alpha. He suggested we could be on track for a year much like 2003. In short, it was a disaster of hopocalyptic proportions. Only time will tell of course, but we do not have long to wait before the verdict is in. Naturally, varieties that harvest later develop later and enjoy the luxury of more time to benefit from much needed rains. There is still hope for them to yield closer to average than the earlier-harvested varieties. That hope fades with each passing dry day.

For those who don’t remember, 2003 was a year during which the German crop was down approximately 50% and alphas were very low.

At the time of this writing, according to Weather Underground (www.wunderground.com) there is only a 40-50% chance for several millimeters of rain in the forecast for the Hallertau area for the next 10 days. We all know how accurate weathermen are though so we will keep an eye on that situation as the days pass. The elephant in the room is that many European countries are over 90% sold based on average yields. Already with the anticipated reduced yields of 10-15%, it seems there will be supply problems that will require some creative solutions.

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UNITED STATES

Things in the U.S., by comparison, don’t seem so bad, although 2015 has been a difficult year to say the least. Blistering heat has rocked the Yakima valley and has severely affected several varieties. That same heat however improved the outlook for other varieties like Cascade. Again, it’s a mixed bag due to different varieties and how they react to varying weather conditions. Reporters are talking and writing about the drought and the current water shortage in the U.S. At the moment, it’s a non-issue for most growers and there is plenty of water for hop production. If the 2015/16 winter is weak, the 2016 crop year could bring with it serious water shortages that can drastically affect production … but winter seems an eternity away with harvest only on the horizon.

By and large, Oregon, Idaho and the rest of the country have escaped the punishment Mother Nature has unleashed on Yakima. They seem to be on track for an average yield. Yakima, however, with nearly 80% of the American hop acreage, is a different story. Several aroma varieties, open source and proprietary, are anticipated to produce light yields, which, when totaled easily add up to several million pounds of hops. That equates to roughly 4-5% down from average yields.

Newly planted acreage in 2015 was already not on track to produce enough hops to meet brewers’ anticipated demands as growers struggle to find ways to harvest the additional needs of brewers. The short crop might actually help relieve some of the pressure of harvest for some growers. That pressure will shift to brewers who will have a difficult time sourcing hops if they are not fully contracted already.

OUTLOOK

When compared to the anticipated growth of the craft beer industry, it seems the American hop industry will fall short of satisfying that demand, another sign of the industry being at or above capacity. With the conservative estimates we have at the time of this writing, we can already see that the worldwide crop in 2015 will produce approximately 15 million pounds fewer hops than the 2014 crop. Should the outlook for European yields worsen in the coming days and weeks, that number could easily double, and depending upon the length of the drought in Europe, even possibly triple … although we believe that is much less likely.

OPTIONS

Relationships, substitutions and flexibility will be the name of the game in 2015 if the outlook for the European crop continues to worsen. The deeper the deficit, the more dramatic the solutions required to survive. Hopefully your source for hops will have set aside some sort of reserve to make sure they can deliver on all their contracts even in the event of a below average crop. Let’s take a worst-case scenario though, a worldwide crop that is short by 30 million pounds of hops … or more. There are alternatives since there are alpha hops being produced out there that may be available. I’m talking specifically about CTZ, Herkules and Magnum. Those are excellent bittering varieties. German Herkules and Magnum are a bit foreign to the American market (pardon the pun), but there’s no good reason for that as they’re excellent varieties. Perhaps 2015 will finally mark their grand entrance into the American market? They can be substituted the hops brewers use for bittering at the beginning of the brew to make hard-to-find aroma hops stretch further. If you’re a brewer and you go that route, you can finish off with the hops whose flavor you’re looking for to make those difficult-to-find varieties stretch further.

Why German Herkules and Magnum? Why not CTZ? True, there still is some CTZ out there, but it is harder to find as American growers remove it to use the acreage for aroma hops in high demand. Conversely, Germans are planting Herkules every year despite the enormous demand for German aroma varieties. Go figure! For that reason, supply will be easier to insure. Contracts are more easily available and prices are more affordable.

Hint: It would be a good idea to make German Herkules and Magnum a part of your regular plan going forward as a solution to the inevitable upcoming varietal deficits in future years due to the lack of excess production capacity.

In addition to German Herkules and Magnum, we also hear there are still very limited quantities of crop 2014 in different dealers’ inventories. That would be an excellent substitute for the short 2015 crop … if you can find them.

SUMMARY:

  • Stay tuned and keep an eye on what’s happening with the crop. At 47Hops, we’ll keep you up to date with information you won’t get from other sources. We call it like we see it, no BS. We think it’s about time for that in the hop industry.
  • Make sure you will have enough hops. Contact your dealer every couple weeks for the next 2 months to find out if you can expect a full delivery on your contracts. The situation may change so don’t rely on old news.
  • Be flexible. Consider alternative varieties like German Magnum and Herkules to make scarce aroma hops go further.
  • If you can find the variety of hops you need, or a good substitute, buy them right away. Don’t wait because they will likely be gone. There won’t be a spot market in 2015 because there aren’t many hops available.
  • Finally … Chillax. Use this as an opportunity to make adjustments to recipes and prepare for the years to come, which will be full of variety shortages, strange weather and spot deficits as the industry tries desperately to reach beyond its current capacity.

How to Have Hops When Others Don’t

  • Buy Early and Buy Often. It’s just like with voting in Chicago, but we’re talking about buying hops so it’s legal. Buy your hops early in an increasing market to take advantage of prices before they increase further. Buy often to take advantage of dollar cost averaging, meaning you take advantage of every price, blending the low prices together with the high prices. Over time, this will work to average out the costs of your hops. The big guys do that. So should you.
  •  Plan Ahead – Don’t wait to buy hops until you see you’re running out. OK, that sounds really obvious, I know. You’d be surprised how many brewers call us when they actually run out of hops. When they do they have no choice but to pay a fortune for overnight shipping. I remember two cases within the past 6 months where the brewer spent more on shipping than the hops themselves cost. We’re happy to overnight hops to people when they need that, but it’s a shame to see all that money going to freight when it could be spent on hops instead. Plan ahead and save money.
  •  Sign Contracts – Contract for your hops instead of relying on the spot market. OK, I’ve mentioned this one before. I know you’re probably thinking it’s a broken record, but it’s so easy. You don’t have to pay anything upfront just yet to sign a forward contract and you know you’ve locked up those hops. Why would you not contract forward for hops you know you’re going to need. True, prices may seem high now relative to where they were a few years back, but they are on the way up. The supply of certain varieties isn’t stable from year to year due to surging demand. Contract prices, historically are more stable than buying on the spot market. Buy your hops at least 18 months in advance to get the best prices. Contract as far out as you feel comfortable, 7 years would be attractive to get a nice contract these days. Five-year contracts are the norm. It’s still possible to get 3-year contracts, but remember you’re competing against the guys ready to sign a 5-year deal. Nobody’s going to do you a favor if all you’re willing to do is sign a 3-year contract in the current market.
  •  Perfect Timing – Buying at the right time of year can save you 25% in a good year whether we’re talking about contracts or spot purchases. For example, in January and February, a lot of brewers aren’t thinking about their needs for the coming year. Prices tend to take a jump in the spring and early summer when demand starts to squeeze everybody’s planned reserves tighter and tighter. At the time of this writing, hops in the current year are all spoken for so the prices we’re talking about are for the next year. In a short year, the prices of hops can double or even triple overnight. You don’t want to get caught without the hops you need when that happens.
  • 5)  Flexibility – Be flexible on price and contract terms to get the best terms that will fit your business. OK, that sounds cliché and very MBA business schooly. Sorry about that. In a nutshell … In this market, you need to commit to longer-term contracts to be attractive. You might want to think about starting a 5-year contract two years down the road to get some of the cooler varieties that just aren’t gettable in the current year. Also, if you always buy the cheapest hops you can find, don’t be surprised what you end up with … or when you don’t end up with anything at all.

Insider tip: Sometimes you can get hops because another brewery isn’t interested in extending their contracts and that leaves hops open in future years.

  • Stay Connected – Developing a relationship with a hop merchant will usually get you the inside scoop first. Some brewers aren’t even to that point. They have a little trouble staying connected during a negotiation. If you’re talking to somebody about buying hops for your brewery, please don’t drop off the face of the Earth in the middle of the email exchange. Time after time we have brewers contact us sounding as if it’s urgent that they buy hops right away … a few emails get traded back and forth then they disappear into an abyss. The disappearance itself is not really the problem. We all get busy. The problem arises when the brewer reappears after some time (it can be weeks or even months later) as if there was never an interruption in the conversation. They expect everything to be the same as when they left. Trust me, it won’t be. When a brewer disappears, we usually figure they bought their hops somewhere else. As the supply side tightens the length of time an offer will remain valid will shorten. Back in 2008, I remember 24 hours was a normal validity time for an offer. Once an offer has expired, you can’t sign it, send it back and expect it to be valid. Unless we have an open offer outstanding, the hop merchant is not setting anything aside for anybody if there are other people demanding those hops.

Pro Tip: If you drop off the face of the Earth in the middle of a conversation about buying hops with the person from whom you’re hoping to buy them, you shouldn’t assume those hops will be there when you get back.

  •  Consistency – Brew using hops you know you’ll be able to get consistently. With variety shortages happening every year lately, you should know some substitutes you can use in case you’re not able to get the hops you need. Some proprietary varieties out there have very restricted supply. You probably know the ones I’m talking about … the ones you can never get. Unless you’re comfortable with your brand being dependent upon somebody else’s business plans, you might want to think twice about basing one of your beer brands on a hop variety that’s not Open Source.