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Have you heard about the 2015 European hop shortage? I’d be surprised if you had unless you follow our blog regularly and read our blog back in July when we warned this was coming. Unless you’re in the hop industry … even if you’re a brewer … nobody around you is talking about the fact that European hop varieties will likely be at least 30% down this year. To put that into real numbers, that’s over 25 million pounds of hops that won’t be there. How does that affect the rest of the world’s hop market? That’s the million-dollar question … literally.
Harvest isn’t quite over yet, so it’s a little early to say exactly how bad the carnage will get. It’s not just Europe. The U.S. has had it’s share of difficulties too. In the most extreme cases, some early aroma varieties are down 50%. That’s not to say the entire crop will be that bad, but there are mixed results depending upon the location and variety. There are varieties that will have normal yields this year. Overall, the U.S. will appear on the surface to have an average crop, but that apparently calming statistic conceals the underlying truth, which is there are shortages of some varieties and surpluses of others.
“Don’t cross a river that’s four feet deep on average.”
– Nassim Taleb, The Black Swan
Merchants are scrambling to buy available hops before a potential panic begins … better safe than sorry as they say. Of course, nobody is sure whether there will actually be a panic, but the winds seem to be blowing in that direction. Unfortunately, there are many breweries that still have not realized they should contract forward for hops to protect themselves from exactly this situation. We try to convince them of this, but it sounds like a self-serving message and is often discounted by people who think they know the market better. The panic, if there will be one, will begin when they all come into the market thinking everything is normal only to find out the hop world has gone all topsy turvy since they last checked in. If you know one of those people, do them a favor and forward them a link to this blog so they won’t be surprised by what happens in the future.
Prior to harvest, most aroma varieties planted worldwide were sold at 95% or more of their 5-year average yields leaving very little room for error. Most American alpha hops have been removed in favor of aroma hops leaving that market in a deficit even before the season began … and therein lies the problem. German merchants have encouraged German growers to produce alpha hops because they’ll do it for a lower price than American growers. Alpha acid is a commodity, which usually sells to the lowest bidder. With few other options available, German growers have flocked toward alpha hopsin recent years. Ironically, European growers who traditionally specialize in fine aroma hops are producing alpha hops at a time when aroma hops have never been more popular, further tightening the aroma market. Are you starting to see the problem? If you squeeze one end of a balloon, the other side expands. If demand for European or alpha varieties can’t be satisfied, it will increase demand for American and other varieties, which were all sold before the season began.
Spoiler Alert: 2016 will NOT be better than 2015.
Many brewers haven’t heard about all of this yet because there’s no avenue for information other than the hop merchants and it seems most merchants believe it’s not in anybody’s interest to announce hop shortages until they’ve got their house in order. This is what we Americans would call “Inside Baseball”. I can understand why merchants are being so tight lipped, since any remaining spot hops will certainly become more expensive as a result. It’s all part of the game. Merchants would prefer to continue scrambling to get hops everywhere they can cheaply before a potential tsunami hits. This is also when people start to get nasty. At least one U.S. merchant has reportedly threatened to sue several growers if they don’t deliver in full on their contracts. I guess they don’t know the old saying, “You catch more flies with honey than you do with vinegar!”
If you’re reading this and think it sounds like there won’t be any hops in 2015, that’s not entirely true. We don’t want to lead you in the wrong direction. There will be hops, of course. Substitutions will be the name of the game. This shortage will create demand where demand did not previously exist. With the current shortage the markets for aroma and alpha hops are now dramatically over sold.
There are three things that will happen that will further exaggerate the effects of this shortage:
1) Hoarding: Growers, merchants and even brewers start to hold back inventory from the market in order to get a higher price for their spot hops later. Some morally challenged individuals will short their contracts so as to have hops to play with on the open market. That’s not nice, but the hop industry is not full of choir boys. Slovenian, Polish and Czech growers have the worst reputations for this in the industry. The reality is that it happens everywhere. Prices increase in response to hoarding.
2) The Ripple Effect: Shortages in one variety cause demand for different varieties that would otherwise be in balance sending their prices upward. Cascade demand increasing in response to a Centennial shortage is a good example of this. Centennial prices increase until the market can’t bear anymore and then substitutions become more attractive. We’ve heard of growers already selling Centennials for $17/pound to one merchant and $15/pound to another. We’ll see how far that goes until it spills over and affects the Cascade price, which seems inevitable. When it comes to an alpha shortage, no variety is immune since all hops contain alpha acid. Expect to see that again in the near future too.
3) Favoritism: Everybody likes to help a friend. We know for a fact that some merchants prioritize their customers into A, B and C groups. That’s pretty self-explanatory … You want to be on the “A” list if you want to receive all your hops. Other guys distribute the pain equally across the board. There’s no right or wrong way really. If you’re on the short end of the stick, though, you probably think otherwise.
If you think this all sounds like a bunch of textbook supply chain mumbo jumbo, all you have to do is look at the “shortage” of 2007-2008. There were plenty of hops still out there. There was no shortage of hops in 2007. You just had to know where to find them. That wasn’t easy. We’re heading for a very similar situation with the 2015 and 2016 crops. I know I probably sound like some scheister hop merchant when I suggest that contracting can help you get around these problems, but it is really that easy. That, combined with plenty of communication with your hop supplier so you’re on the “A” list is the best way to know that your hops will be there when you need them.