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Washington State hop growers have long enjoyed an unfair advantage over hop growers around the world. More often than not, however, it has been more of a curse than a blessing. That advantage has been the ability to plant and produce a crop in the same year. It may sound like a great advantage. In fact, it has been a double-edged sword that has allowed them to quickly take advantage of, and destroy, hop markets. Those days, at least for the foreseeable future, seem to be gone. No, it’s not climate change or even the changing of the varietal mix. It’s simply because Washington State growers have to plan for the next crop or the crop after that rather than the crop that is immediately before them.
If you’re saying to yourself, “Oh God, not another crazy article about how everybody’s at capacity and how much it’s going to cost to fix that problem”, read on because It’s not about that. You are in for a treat. What does this all have to do with production you may ask. Of course, growers can still plant and harvest a crop in the same year. That hasn’t changed. True, it is still possible to plant and harvest a crop in one year in Washington State. The weather hasn’t changed THAT much. Without surplus infrastructure to harvest and process any new crop, the machine that was once able to quickly respond to events is forced to think more long term. Maybe that’s a good thing! Producing hops is about so much more than just growing them. Sure, that’s the sexy part and hop growers are rock stars again. That’s great. There’s a lot that happens after those pretty hop vines leave the field. With the Washington State industry at or near capacity, the ability to expand acreage (i.e., plant and harvest a crop in one year) disappears.
If you’re a brewer, you need hops all year round. You usually need more hops during the warmer months but you may have seasonal beers that need a lot of hops even during winter. Typically brewers have been used to balancing their needs on a monthly basis. All that is changing with the surge in demand for hops produced by craft beer. Agriculture is a seasonal business with natural cycles into which the orders must flow. In the past, hop merchants have been the buffer between shortage and surplus. Through speculation they were able to overcome the discrepancy between brewer and farmer cycles. As long-term prices to hop growers increase and the margins between merchant and brewer remain largely the same, the profit that can be made by the merchant does not warrant the same level of speculation. That is one reason why the hop industry is closer to equilibrium than ever before.
Let’s say it’s spring, you’re a brewer and you need some hops. When can you place an order for those hops and expect to get them? In the good old days, a merchant might have some extra hops lying around that weren’t sold. He probably bought some “overs” from a grower at a pretty low price just in case a brewer needed some extra hops. No problem … whenever you call, you’d get the hops you needed. If you’ve tried to do that lately, you know that’s not a good strategy. Unless your beer is named “RANDOM”, that will not work out so well anymore.
Here’s how it works today. You’re a brewer again and it’s still spring. If the merchant needs to find those hops and they know a grower with empty trellis (also not happening a lot these days) you can wait as late as the February before harvest in Washington State, but November of the previous year would be better. Already, you may have missed the boat. Merchants do still speculate to some degree, but it’s not pure speculation like in the old days. It’s a reserve they use to buffer against shortages. That may only be an extra 5-10%. As the year progresses and if it looks like it will be a good crop a merchant can free up some of that reserve to sell. That’s how hops become available after harvest when everybody is saying that the crop has been sold out forever. You may still find a merchant who can sell you hops or who is willing to borrow from their reserve to sell hops to you prior to harvest, but that’s risky for everybody.
Because the hop industry can’t keep up with demand, brewers, merchants and growers must now think out beyond the horizon. Most common today is that the grower will need to buy ground, build trellis and perhaps even invest in additional picking infrastructure. Those are the factors driving prices ever higher. Even a doubting Thomas cannot deny that fact. Those prices mean that the merchant is less likely to buy too much extra just to have a nice fat reserve because that reserve if not sold quickly eats away any potential profit. It is easier to tighten up the reserve and just claim Force Majeure if there is a crop failure. We know of at least one hop merchant that has that as their business plan. I believe we will see a lot more reserve tightening during the next couple years. That strategy passes risk on to the brewer. Without adequate planning in advance and plenty of communication, the hops that are needed will not be produced.
The incredible growth of demand for aroma hops has actually removed the amazing advantage that Washington State has over all other hop producing regions in the world. It has taken away the ability to produce hops in response to last minute orders. The hop industry hasn’t been so restrained since the 1930’s, before Washington State became a significant center for hop production. For the past century, merchants and big brewers have used Washington State’s ability to quickly respond as a buffer against shortage. Within one year any problem could be corrected. Furthermore, with the fat brewer inventories of the past, the impact of a shortage could be softened until that next crop could be produced. No more! Inventories are shrinking and the response time for production has drastically increased. That buffer is gone. We are all risk takers now.
Between merchants and growers, the conversation is already about two crops in the future and beyond. Everything being produced sooner is spoken for. The problem with all of this is that the crystal ball is fuzzy far out into the future. If the industry was growing at a stable 2% every year, we wouldn’t be having this conversation. With craft brewery growth in the double digits every year, however, it’s a different game. You know that kind of growth can’t last forever. When do you apply the brakes on the supply side? That’s literally the million dollar question on the minds of growers and merchants these days in greasy spoons all over the Yakima Valley.
Brewers and merchants cannot often predict what they will need with any certainty, but they have to contract hops to secure what they believe will happen. The roulette wheel is spinning. Where it will land, nobody knows. It can land continued “craft beer growth” and everybody is happy. If it lands on “slowed growth” we all lurch forward as the bus suddenly downshifts. The trick is that we all now must plan ahead much further into the future today for the hops we think we will need tomorrow or we are guaranteed that they will not be there. Those who are willing to take the risk that the trend for growth in the craft industry will win if that growth continues as they will be the only ones with hops to sell. The playing field between Germany and the United States has been leveled. The thing that will make the difference going forward will be who has the appetite for risk. The United States is a country of entrepreneurs and independent thinkers that seem like a natural winner for this type of contest, but I wouldn’t count the German hop production machine out just yet. Game on!