Why 2016 hops should go to the landfill

The hop market exists in a perpetual state of imbalance. It never finds the sweet spot of equilibrium where supply equals demand causing a never-ending series of boom and bust cycles. Every cycle is different, of course. I have a book written in 1828 in London about the history of the hop industry that goes back to the 1500’s that talks about the same boom and bust cycles. The current bull market, although it has persisted now for several years, is only an anomaly. It is not immune from the mistakes of the past. The prices increases of the past 5 years were necessary to cover the hundreds of millions of dollars growers and merchants borrowed to build and modernize production facilities. Nevertheless, some brewers think the industry is gouging. While there have been profits, the majority of the revenue was used to develop the infrastructure that enables the current level of production.

High hop prices, a quick rate of growth in the industry and the trend toward craft beer attracted the attention of institutional investors and farmers from other industries, some of whom decided to invest in hops … further fueling expansion. The hop industry is living through a period of irrational exuberance, a term Alan Greenspan made famous in the 90’s when describing the dot-com bubble. That did not end well and neither will this if it continues. The beer market is not a bottomless pit and cannot absorb all the hops growers want to produce year after year. 2017 must be time for restraint.

The hop industry today is in a precarious position. Many brewers contracted growth upon growth years into the future spread out across multiple merchants resulting in them having contracts for more hops than they needed due to future growth that never materialized. Well over half of the craft brewers in the industry today were not around 10 years ago. They don’t realize how delicate the hop market is. They haven’t known the consequences of not contracting correctly. They entered into hop contracts that were easy to sign. Most merchants are unwilling to officially share information about customers’ contracts and deliveries with one another. Therefore, from the merchant perspective, no one merchant can identify the scope of the problem and it is not fixed, but it is still salvageable.

It is apparent that brewers’ appetite for hops was, in many cases, unrealistic. Thankfully, there is still growth in the craft beer market so cuts in acreage are not yet necessary. Over time, the problem can work itself out without any serious consequences since brewers can slowly use the hops for which they have contracted even if they don’t require those varieties any longer. Thankfully, the 2016 crop was millions of pounds short of pre-harvest expectations in Germany and the U.S., or the situation today would be much worse. For an adjustment to happen, the expansion in hop acreage must stop with 2016 for a couple years and be allowed to normalize. 

This year most likely fueled by optimism, and probably a little greed, some growers produced hops that were not sold prior to harvest. They’re sitting on those hops now waiting for the market to improve. They should dump those hops in the landfill rather than dumping them in the market. Given the circumstances, growers should grow only for what they have contracted … not a little extra to make sure they fill their contracts, not a little extra just in case there’s bad weather. The hop industry should pause and let the craft beer industry catch up. That would be the proper thing to do to maintain the health of the market moving forward.

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The complicated part of this puzzle is that some varieties are long while others are in short supply. Substituting for varieties in short supply with available varieties is one solution. Aspiring hop growers around the country are still eagerly jumping into the game. They seem to think that just because the demand for craft beer seems insatiable so too is the demand for hops. Nothing could be further from the truth!

Have you heard the one about the Florida Department of Agriculture and how they funded a grant for $158,000 to study the feasibility of growing hops in Florida? If so, you’ve probably also read that there’s private equity money investing in a farm in hop Michigan. Just today, I read this article on Salon.com that details the plans of several breweries to grow their own ingredients, including hops. Everybody and their dog wants to be a hop grower today. It’s like Pets.com all over again … irrational exuberance … and it has the capacity to get out of control. The hop industry is at a tipping point. If you don’t remember what Pets.com was, Google it. 

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Some proprietary varieties that have been improperly managed have caused silos of supply that isolate valuable information from the industry making an already opaque industry even more secretive, if that is possible. This causes growers not involved to make choices they might not otherwise make thereby accelerating the likelihood of a market collapse. Some in the industry are actually arrogant enough to believe they can manage the entire market even though they represent only a small piece of the pie. Even the largest players cannot manage the hop market. It is too opaque and there are too many players each heading in their own direction.

The hop industry has always endured bitter turf wars for market share brought about by the intensity of the bad times. The cutthroat dog-eat-dog mentality is alive and well and is driving the push toward proprietary varieties. Meanwhile, the hop production machine continues to churn away … ka-chunk ka-chunk ka-chunk. The hop industry needs to better understand its current position or the times when growers can receive a price that covers the cost of production will quickly come to an end. 

As the old saying goes … “Money talks”. Merchants are not buying the extra varieties in surplus because … simply put … there is no demand for them … at any price. Meanwhile, brewers are trying to sell two-year old inventory at high prices online. They overbought. Nobody wants to write down the prices just yet hopeful that they will recoup their investment. The ones who sell cheap might actually sell their old inventory. There are still pockets of demand in the industry so all is not lost.

The theme of the Hop Growers of America convention in January should be “Moderation and Restraint”, but that’s nowhere on the menu. Nobody likes to hear the message that they need to be proactive and think of the greater good before they think of themselves. Many growers have plans to expand acreage in 2017. At the moment, rumors are that there will be an additional 4,000 acres of hops in 2017. Given the current situation, that’s crazy!

That’s not all though … There is an Idaho cattle rancher planning to invest $20+ million into a hop farm in 2017. He has missed the boat, but he doesn’t even know it yet. Another well-financed member of a hop growing family from Oregon has moved to Idaho to start a new hop farm because he wants his own piece of the action. Idaho is a beautiful state, but it doesn’t rain manna from heaven there. It seems they’re just living in a consensus reality fed by incomplete market information.

The market does not need additional acreage to support the current level of demand considering the moderate growth expected in the craft industry going forward. Their plantings and others like it around the country will hasten the collapse of the hop market if they continue unabated. If either of those guys or any of the people who are only now thinking of getting into hops are reading this, I encourage them to reach out to me. I’d be happy to offer a perspective on the hop industry they probably haven’t considered and one that might save them a lot of money.

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Let me be blunt … The hop industry should stop expanding for a while. Let’s say we’re taking a break. What the industry needs to satisfy demand is an adjustment of the existing acreage so varieties in the ground more closely resemble demand. Considering there are plenty of contracts already signed for highly desirable varieties, but against which no hops have been delivered or paid for, increased acreage is the last thing the industry should be considering. An additional 8 million pounds of aroma hops will not encourage brewers who already aren’t taking delivery on existing contracts to take them and pay for them sooner. If somebody doesn’t Wake up and smell the aroma soon, all the happy times in the hop industry will soon be just a memory.

 

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Hop Harvest 2016 – Half Time Report

EACH DAY BETTER THAN THE NEXT!  

That sums up the 2016 hop harvest in Germany and the U.S. The weather we mentioned in our previous blog Hop Harvest 2016: What to Expect would become problematic has been a nightmare for growers. Weather has affected yields of aroma and alpha varieties. Two full weeks of hop harvest remain for many American hop growers while German growers have fewer days left to endure … and the crop outlook worsens with each passing day. The world crop will come in significantly lower than anticipated just one month ago. There will be variety specific shortages while a some varieties are oversupplied. Weather affects every hop variety differently, making this a very challenging and multi-faceted market on which to report, more so than ever before. 

UNITED STATES (estimated yields down 4-5 million pounds from pre-harvest estimates)

Growers harvested some varieties earlier in the season that yielded less than expected despite a beautiful crop hanging in the field. The cause is that the cores of many varieties have not weighed what they should. Many speculate that is caused by unseasonably high temperatures early in the summer. You may remember a similar problem during the 2015 crop. Later maturing varieties were destined to suffer a different fate. High humidity and cold temperatures have caused problems across the Yakima valley in particular. Powdery mildew and early maturity are the results. Humidity has been higher than normal for the past month. As a result, powdery mildew is rampant in many fields waiting to be harvested. That will certainly affect an already-stressed alpha market. It is still a bit too soon to know what the ultimate yield will be on late maturing varieties, but early harvest results are not looking good with alpha and yield both down. The coming alpha crisis is a topic for another blog though. Growers affected by early maturity and powdery mildew are literally racing against the clock to harvest their hops before it is too late, but with farms picking at capacity there is little anybody can do to speed up the process. Meanwhile, unfavorable weather for hop harvest will continue in the Pacific Northwest through the rest of September.

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Industry statistics combined with information gleaned from people in the industry combined with the trends we see regarding 47Hops deliveries, lead us to believe the American crop is already down approximately 5 million pounds from long-term average yields for the varieties harvested thus far.  As the harvest is not yet over, the damage will most likely be much worse than that by the time we have access to the official final data in December. The increase in American hop production will likely be lower than the increase in American craft beer production from 2015-2016. 

GERMANY (estimated yields down 4-5 million pounds from pre-harvest estimates)

“This year we have the perfect weather for growing hops so we expect excellent yields for hops and alpha.”  Those are the words of a German hop grower to me a little more than one month ago. Way back then, German growers were preparing for one of the most beautiful crops in recent memory. When things seem to be going perfectly, there’s only one direction they can go … down. That grower friend of mine didn’t knock on wood or spit three times or any of those other things you’re supposed to do to keep from jinxing yourself. During the past few weeks, the Hallertau has endured unusually high temperatures and no rain … until this week when they received the entire average rainfall for September fell in 3 days. As a result of all of that heat and no rain until this week, spider mite populations exploded. If you don’t already know, spider mites turn any remaining hops many different colors as they gradually suck the life out of them. 

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The colorful result is a painful sign of what will soon become obvious in the bale … reduced yields. Only about one week of harvest remains for many German growers. With spider mites, it is also, literally a race against the clock to get the hops off while there’s still something left to harvest. The deluge earlier this week, however, proved too much for harvest to continue. Many growers decided to stop harvest and wait for the rains to pass and their fields to dry out, delaying the harvesting of the already-troubled fields remaining to be harvested. Despite all these troubles, it still seems the German industry will produce an average crop … but only an average crop. 

You can’t count your hops until they’re in the bale.   

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How to lower hop prices!

For the past two months, I’ve been hearing how everybody is waiting to buy hops until after harvest so they can get lower prices. To some extent, that’s normal at this time of year. This year, however, I think the copious articles running since spring touting the fact that there will be a record crop in the U.S. exaggerated the trend. If journalists were writing about deficits and short crops, I imagine the situation might be different. The words “record crop” make for great headlines that we all want to read. What does that really mean?

There are more acres in the ground than ever before and the U.S. will most likely produce more pounds of hops than ever before even if yields are poor. When I read “record crop” though, my reaction is, “Wow, there’s going to be a LOT of extra hops around!” Maybe that’s my mistake, but I think that’s the way a lot of other people interpret it too. There’s also a record demand for hops driving that supply forward. The result of all this hype over a record crop is that brewers now expect prices to crash in the fall.

American hop growers and merchants would be happy to cut prices. When prices are higher, there’s more risk involved and more at stake for everybody on the supply side. It costs more to grow, process and store hops. Unfortunately, profit margin and ROI doesn’t grow proportionately as prices increase because the market is very competitive. The perception seems to be otherwise. Growers and merchants have always responded to brewer demands in the past. They have no choice really. Brewers are the only significant source of all the money in the hop industry. If prices should be lower, brewers should just decide which things are not so important to them.

Where to start? For the past 4 years growers have been borrowing hundreds of millions of dollars from banks to grow more hops for all the brewers who have signed contracts. The banks probably won’t agree to cut those payments, so we have to take that off the list. Washington and Oregon have the two highest minimum wages in the country. The Governors probably won’t agree to roll minimum wage back just for the hop industry, so there goes another one. Below is a short list of things that are entirely within grower power and could be cut. It would be helpful if the brewers wanting discounted hops after harvest could identify the things from the list that are not so important to them so the industry can cut them right away and start giving every brewer the lower prices they need.

Hop research programs

Fair wages for employees

Clean warehouse facilities

Filtering out metal material

Random sampling by USDA

Low temperature hop drying

HACCP and ISO certification

Food grade production facilities

Separating leaves from cones in the kiln

Portable Toilets in the fields for the workers

Picking hops during the ideal harvest window

Hops in cold storage within 48 hours after harvest

Cold storage kept at freezing temperatures year-round

New food-grade polypropylene bale material each year

Never send to know for whom the bell tolls, it tolls for thee.

– John Donne (1572 – 1631)

If you’re a brewer, please send an email to somebody at Hop Growers of America or to the Hop Quality Group.  Let them know which things are not important to you so they can get the ball rolling and change industry standards.

Back in the days when Cascades were two dollars per pound (AKA: about a billion dollars of investment ago) the hop industry was different. There were things we value today that apparently were not so important then. Brewers made some great beer back then too somehow. Were the brewers back then more talented? Today, there’s attention to safety and cleanliness on the farm and at the merchant’s facilities. We’d like to think that’s a good thing. A billion dollars ago, hop kiln temperatures were 30% higher meaning a grower could pick more hops in the same time. The minimum wages in Oregon and Washington States increase with the rate of inflation each year. That has added over 24% to the minimum wage in the past 10 years alone. A lot of people think that’s a great thing. Unfortunately, that makes labor-intensive crops like hops more expensive. It’s not realistic to think we can turn back the clock on price alone. There are actually plenty of cheap hops out there for people who want them. They come from China and a few other countries around the world. Many of the farms there don’t bother to do any of the things on the list above because they don’t have to. As a result, their hops are much cheaper.

In this life, you get what you pay for.

– Kurt Vonnegut, Cat’s Cradle

Ironically, the price of hops is higher today than in the past because the very people who demand lower prices and would benefit from them have caused prices to be high. It’s wonderful that brewers today are so passionate about hops. It’s great that brewers care enough about hops to get involved in the process of growing and processing them and require the things from our bell-shaped list above. Every straw added to the camel’s back makes its load heavier, but we should all be willing to bear our share of that load if it makes us better. At this year’s Hop Growers of America convention, for example, there was a brief discussion about requiring the use of food-grade tape on the bales after USDA inspection, something that would cost 10 times more than the existing practice of using regular duct tape. This was the result of one grower voicing one brewer’s request. In principle, food-grade tape is not a bad idea, but it has additional costs associated with it. This harvest, as a result, the USDA has altered its normal practices and no longer uses duct tape. Up go the costs again by a few extra pennies per pound of hops. If prices of hops should be lower, then let’s figure out where we can start cutting together.

PS:  Please subscribe using the link above if you enjoyed this blog. We’re preparing something new for later this year that will also be free and insightful, but only available by email. We plan to share it, and other fun projects we are working on, with the people on those lists first. To put yourself on one of those lists is free of course. You can visit our web site www.47hops.com and sign up today. 

Hop Harvest 2016: What to expect

Now that we are in September, here is what we expect for the coming harvest. We will focus primarily on the U.S. and Germany, which make up approximately 80% of the world’s hop production in 2016. Except for some risk loving Washington hop growers planning to pick into October, one month from now harvest in the Northern Hemisphere will be over, but it promises to be a long month ahead.

United States (Est. 38% of 2016 World Hop Production)

A barrage of brewers will storm Yakima over the coming weeks. The fields they will see during their tours of the valley will be very mixed. Everybody strives to put their best foot forward and show only the good stuff, but that will be increasingly difficult as the days progress. For the moment, there are good fields that seem they could deliver amazing yields and there are others that don’t look very impressive at all. Yakima enjoys a high desert climate, but untimely weather, from heat to cold to humidity, have played a role in Washington’s crop so far this year. It has been a roller coaster ride so far and we’re not even to the fun part! Extreme heat early in the year caused early bloom across most varieties. That typically means reduced yields. Up until one week ago growers were very optimistic about the coming yield. Perhaps they were a bit too optimistic. There was talk of above average yields in most varieties. Some on social media were even calling it a bumper crop. Growers were starting to search for extra storage and places to sell their over production. That has all changed now that we are in harvest. Early varieties that have been harvested at the time of this writing are yielding very mixed results with regards to quality and quantity. As a result, production estimates and optimism are coming down.

All good hop yards are alike, but all bad hop yards are bad in their own way.

– Had Tolsoy been a hop farmer, I think he would have said that.

The hop world is like a puzzle. Upon closer inspection of those lower yielding varieties, there is plenty to look at. Only when you have all the pieces together can you clearly see the entire picture. Unfortunately, nobody knows where all the pieces are, so we do the best we can. For the moment, some hops look great in the field, but some cones are not weighing out, which is the grower term for cones not being as heavy as expected, translating into lower yields overall. The problem is that everybody only finds out about light cones when the growers are making the bales since it takes more hops to make one bale. That’s kind of late in the game to learn that your crop is 10-20% short! Other growers are having trouble with powdery mildew due to the weather, which, in Washington State, has been more humid than normal. That can lead to lower yields. Still others are maturing quicker than normal due to the heat the past couple weeks. That maturity means hops dry out in the field prematurely, which means higher HSIs. When they get too dry, hops can shatter in the picking machine. That too can lead to reduced yields. You’re probably starting to sense a trend here. Many fields are already starting to show some color, which is a grower term to nicely say they’re turning a color other than green. As any hop enthusiast will know, that is not the goal. It means they’re ripening quicker than expected. Equally concerning is the weather forecast for September. During the next couple weeks, nighttime temperatures in the Yakima valley will reach into the 30’s (Fahrenheit) and there is rain forecasted by the middle of September. That’s a long time from now for a weatherman’s prediction to be accurate, so we will see if it actually happens. Suffice it to say that rain during September combined with the colder temperatures would not be a good thing.

Our estimate, at the moment, is that we will likely see a below average performance for the crop overall. There can still be a “record crop” as so many journalists are eager to point out for the click bait headlines it provides. Brewers hoping for discounted hop prices after harvest though should be very careful interchanging the words “record” for “surplus”. They are not synonymous. The hop world is more fragmented now than ever in its history. Some varieties will perform better than expected and there will be a surplus of those varieties. Other varieties will experience a deficit. There will be the usual propaganda by the owners of some of some proprietary varieties in their crop reports to paint the performance of their varieties in a positive light while highlighting the weaknesses in the performance of the public varieties they so desperately seek to replace. It is in their interest to do just that. Let us not forget, they own those varieties and will receive tens of millions of dollars in royalties alone each year if people continue to drink their Kool Aid.

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Germany: (Est. 38% of 2016 World Hop Production)

When we were in Germany a couple weeks ago, we heard from growers that the crop would not set any records, but it is not so bad either. That’s a nice way for a good conservative Bavarian hop farmer to say he thinks it might be a good crop without jinxing himself. In fact, the crop there looked beautiful everywhere we looked with only the very rare field having any trouble. Since our visit, we hear things have only improved. The weather forecast is for more ideal weather in the German growing regions through the remainder of harvest. If that happens, we expect above average yields from Germany across the board. This, in contrast to last year, when yields were down significantly, demonstrates how variable the crop can be from one year to the next and how much risk is inherent in the system. 

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Slovenia: (Est. 2.3% of 2016 World Hop Production)

We will also single out Slovenia as an additional country to mention, although it is one of the smaller hop producing countries, because we ended the report on Germany mentioning the weather and risk. This week the Slovenian growing regions experienced a violent hailstorm that devastated part of the crop. Prior to the storm, growers there expected above average yields overall. Afterward, they will likely only see average yields at best. This just reinforces the old hop grower saying that you don’t know what you’ve got until it’s in the bale.

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Photos: Courtesy of SLOHOPS