5 Things that can Destroy the Hop Industry

You would think times are good in the hop industry with prices at their current level. Hop growers are rock stars. People buy beers with the names of hop varieties on the label just because they love that variety. Being involved in any way in the hop industry makes you instantly the person with the coolest job in the room. In fact, I’m sitting in a hotel breakfast area as I write this wearing my 47Hops shirt and a stranger just asked me what the shirt was about. When I told him, he thanked me for doing my job. We proceeded to talk about hops for the next 10 minutes! I love talking to hop enthusiasts! This happens more and more lately. It’s easy to get distracted by the popularity of hops these days. Despite the positive juju out there and the high prices, the future of the hop industry has quietly slipped deeper into jeopardy than ever before. The only time in recent history when the industry was in a similarly precarious position was about 12 years ago when nobody wanted hops and they sold for less than the cost of production.  Let’s take a look at five of the most serious threats to the industry today.
 
Debt
How can the glory days of 2016 and the biggest craft beer boom ever possibly be compared to 2004, a time when few people knew or cared about hops? One word … DEBT. The hop industry is spending money like a drunken sailor to keep up with brewers who are trying to keep up with the public’s craving for craft. One of our competitors reportedly just spent $4 million on a pellet mill! All of the infrastructure development in the hop industry costs millions of dollars. Because of the chicken and egg nature of the hop industry somebody has to take a blind leap of faith, take a risk and go first. Back when nobody appreciated hops, everybody was losing money in a neglected industry, and it showed. Expectations were low and the future of the industry looked grim. Today’s industry is managing the biggest expansion in history. All that growth has caused a lot of financial stress. It is just well hidden from view behind a flurry of expansion projects and high prices.  There’s a lot of money coming in, but there’s a lot of money going out too.  There is more debt in the industry today than at any time in its history. Nobody is going broke today, but all that is keeping that from happening is the stability and durability of high priced contracts. 
 
Right now, you’re probably thinking, “Oh geez, an article from a hop dealer supporting high prices. Surprise surprise! Of course he’s saying that. This guy wants high prices because he can make more money.” I hear that a lot. Actually, that’s not true at all though. In today’s market there are no opportunities to find bargains.  Today, every grower wants top dollar for their hops. With low contract prices, there’s much less risk involved with taking a speculative position. With low contract prices, the ROI is much higher than it can possibly be today. Some brewers and most growers seem to think that hop merchants just take hops from growers at dirt cheap prices and sell them to brewers while adding a $h!t ton of margin along the way. If it were that easy, a LOT more people would be doing it.
 
Instability
It will take years of stability to repay the debt the industry has amassed. In theory, that’s why we have hop contracts, so everybody can estimate who needs what and when and so they can agree what they will pay for them.  That’s hops 101.  The American hop industry is more heavily contracted today than ever before, which on the surface seems like a great thing. So, what’s the problem? A lot of brewers don’t seem to understand or don’t care about the effects of a contract beyond fixing the price of hops for both parties. Some are hoarding quantities they don’t need and later ask to renegotiate the contract or sell them on secondary markets. For the moment, there’s no cost to sign a contract. Some brewers have figured out they can get the merchant to reserve their hops for them at no cost.  One problem with this strategy is that hoarding and over contracting sends the wrong signals to the market, cost hop growers millions of dollars and can cause result in low spot market prices, which can be a dangerous thing.
 
Renegotiating Contracts
Why are low spot market prices so dangerous? Everybody likes a good deal. The problem is that nobody wants to think they are paying more than their competitor. When breweries with relatively high contracts prices see the price on the spot market decrease, which it does when there is even a slight surplus of hops, naturally, they want to escape from their high-priced contracts to save a buck. In a market as opaque and unregulated as the hop market, a contract serves the purpose of creating stability, price discovery and guides the market so growers and merchants can know how to scale their businesses. All of those things are actually of greater value than the money received from the contract. Stability helps the hop industry to finance the creation of all those fun new hop varieties everybody seems to enjoy today. It finances the high quality of the hops brewers receive. It pays for the thousands of people who work in the industry to produce the hops. If you’re a brewer and you want to contract for hops, you should only contract for what you need. It’s a contract after all. It’s a binding agreement. 
 
The instability created by contract renegotiations and unsustainable prices has a ripple effect all the way to the bank. Why?  Infrastructure and debt! The US hop industry collectively invested over half a billion dollars in infrastructure during the past 3-4 years. To keep pace with the craft industry between now and 2020, another $500-700 million investment is necessary. Most of that money will be borrowed and must be repaid with interest. Everybody is banking on the current prices sticking around for a while and for existing contracts to be honored. If you’re a brewer and want to renegotiate your contract because you see lower prices for the varieties you have contracted, keep that in mind.
 
Short-Game Players
Traditionally markets that create high hop prices don’t last long. Like kids grabbing candy as it falls from a piñata, hop growers and merchants are used to grabbing all they can while it lasts. Nobody in the hop industry is accustomed to being the prettiest girl in the room and having all the boys chasing them. It seems to be a new reality that will take some time to which to acclimate. When you’re the prettiest girl in the room, you don’t just share your cookies with everybody who comes along. You also don’t go walking around on every corner asking people if they want some of what you’ve got. You let the people who want what you’ve got come to you and sort through the noise. What does all this have to do with hops?  Plenty! The hop industry needs to adjust from a one-night stand mentality to a long-term relationship. If I were still Executive Director of Hop Growers of America, the theme for the 2017 convention would be PLAY THE LONG GAME.  We would have a mix of economists, football and baseball coaches who can talk about the value of playing the game all the way to the end. I’d invite bookies and professional gamblers in to talk about how to evaluate the risks of gambling, strategy and how to read your opponents. I’d bring in archeologists … what?!? What? No, I’m not smoking recreational marijuana. Archeologists are masters of patience! Imagine you’re an archeologist and you’ve just found what seems to be a lost city from ancient Sumer.  What do you do? You painstakingly scrape away each layer of dirt revealing the city beneath in an operation that could take decades. It’s definitely not as dramatic as Indiana Jones grabbing the gold statue and making a run for it, but in the long game the short term gain is not the goal. Imagine the patience and vision necessary to restrain yourself like that. It’s the long game that counts. Why?  The long game is infinitely more valuable than the short game.
 
This is a common theme you’ll see when you start looking for it. There’s a great scene from the movie Colors in which experienced cop Robert Duvall tells new cop Sean Penn a joke to convey to him the value of focusing on the long term goal rather than being distracted by short term gains. It’s an awesome lesson and reflects the thinking hop growers and merchants need to have in today’s hop market.  
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Speculators & Hoarders
Does it sound bad to suggest that everybody in the hop market should forego their own personal greed in the short term and work to keep prices stable in the long term by only planting and selling for the demand in the market, and not an additional pound? No, I haven’t been reading Das Kapital, but a little unity among growers would make a huge difference. Does it sound bad to tell brewers they shouldn’t hoard hops and should only buy what they plan to use and not a pound more? Do what you want, but you’re destroying the hop industry if you’re a hoarder.
 
During the 2016 CBC, several hop growers approached us asking if we wanted to buy any hops.  I told them all that we are just fine for now. Growers offering hops was a change from the pattern of the past few years so I did a little digging. What I learned is that some growers have planted a little more than they had contracted. They are starting to speculate on the market, which is why I am writing this article today.
 
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If you’re a hop grower and produce a little extra to speculate on the market, you’re sawing off the branch that you’re sitting on.
 
 
A potentially good crop in Europe and articles proclaiming slow growth of the craft beer industry and the return of equilibrium to the hop market can create the perception among brewers of surplus all by itself, regardless of the facts. That, in turn, could create isolated opportunities for discounted hops. The perception of a shortage or deficit can cause as much damage as the real thing.
 
During the time of low hop prices, some growers left hops hanging in the field.  They couldn’t afford to pick them so they didn’t. When times are good, growers harvest extra hops because they believe they can afford to. They figure they have made their money on that field with what they’ve already sold and that anything else they get from it is like icing on a cake. Harvesting that over production is more costly than harvesting hops when prices are below the cost of production. What if they just left them hanging? That sounds like a crazy idea, but why should a farmer produce a surplus for a market that will punish him later when they can afford to regulate his own production.
 
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The Irony of the situation is that $h!T rolls downhill. Low prices are attractive and we are designed to respond to them. The money in the industry comes from one source and flows in one direction. If low prices emerge on the spot market in today’s market, it will have a ripple effect and there will be less money flowing through the industry. Those low spot prices will act like a cancer undermining the strong contracts financing the growth and variety of the industry. If you’re a grower or a merchant, that means you can’t pay your bills.  If you’re a brewer, you are jeopardizing the source of a very important raw material. Either way, it’s a lose-lose. If people can’t resist the temptation of low prices, that will be the fall of the hop industry.