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The following is a letter I sent to a large American corporate craft brewer in the wee hours of the morning last month. It was after a long day at the Brau in Nürnberg, Germany followed by a dinner with some customers that lasted until midnight. The brewer to whom I wrote the letter asked to make significant changes to their contract during the past year that would have reduced their hop contracts. They offered nothing in return for what amounted to approximately half a million dollars worth of hops. They acted as if they were doing us a favor by releasing these volumes back. Fortunately, it seems we will find a solution to the contract issues and are still working out the details. Along the way, we sent them our most recent terms and conditions and asked them to sign if we were planning to make any changes to the existing arrangement. That’s something we do with any new contracts or any contract revisions. In early November, the brewer told us payment was on its way. In mid November, we received an email that the company controller was reluctant to send payment and wanted to know why our most recent terms and conditions now contains regular equal monthly payments. Apparently, the payment was not on the way at the beginning of November after all. Honesty and trust are very important to any relationship and the hop industry is built on relationships. Enjoy the response:
“I thought I’d respond to your email about why we are now requiring monthly payments myself since the changes to our terms and conditions have been largely my doing … with some legal counsel. You may not be aware since you are relatively new to the industry that in recent years a lot of brewers around the country over contracted hops. It seems they anticipated the double digit growth in the craft industry would continue for a while longer. Some brewers have contracted hops they struggle to pay for. Some brewers in this position are even reluctant to lower their contracted volumes because they do not want to lose the hops … the same hops for which they have not yet paid.
The late or absent payments obviously causes financial stress in the hop industry. For a year now, the new terms that you received have been the terms and conditions we use with all new contracts we sign and any amendments we make to existing contracts. The reason is simple. Growers need to be paid on a fixed schedule. The growers expect to be paid on time. Because the growers have borrowed tens of millions of dollars to finance expansion to keep up with the contracted growth in the craft beer industry and must repay the banks, there is little flexibility on our payment dates to them. We set up the payment schedule you see in our latest terms and conditions in an attempt to create a more regular and predictable cash flow from our brewery customers. I’m sure your controller would appreciate that idea. We are not forcing this on any of our existing customers. As the opportunity arises during contract renegotiations or new contracts, however, we require that the new terms and conditions are part of that arrangement.
To be blunt, your plan to delay your payments roughly 10 months from your usual payment schedule will cause financial hardship for us as a hop merchant company and would create great hardship for the growers from whom we have purchased the hops if we passed the delays on to them. We do not want to do that. Of course, under your original terms and conditions, you are well within your rights to pay the regular price and delay your payment, as you have indicated you would like to do. If you would prefer to stick with your original contract and its terms and conditions, we will be happy to drop any proposed changes we have discussed thus far and any other future potential changes as well and respect your wishes.
Sustainability is a word often associated with the green movement and activities happening in the name of saving the environment. Another important part of sustainability though is financial sustainability … being paid on time. We have appreciated your timely payments in the past. You have always been wonderful to work with. I understand that your recent brewery expansions on which you have spent tens of millions of dollars have required that you more closely manage your money. I’m sure your controller needs to know you have a regular income from your customers to manage your own cash flow properly so you can honor your obligations. Hop growers and hop merchants need that same predictability and stability. That’s all we are really trying to accomplish with the changes to our terms and conditions. That’s sustainability. I’m sure this is not the response you hoped for. I imagine it might get 47Hops blacklisted from any future hop sales opportunities with you. If that is the cost for doing what we believe is the right thing to do, then that is the price we will have to pay.”
In early November, I heard about a group of growers that met with a large brewer who was in Yakima for the evening. The subject of the meeting: cuts in contracted volumes going forward. As a consolation, there were promises for additional business several years down the road. The growers, seeing few apparent options before them, agreed to the demands. The problem is that on the grower side some have significant debt that needs to be repaid in the short term and the cut volumes were important to that plan. Did the brewer ask about what kind of financial hardship the cuts might create for them? Honestly, I wasn’t in the meeting so I don’t know all the details. Maybe they did. If they did, it didn’t seem to change the outcome of the meeting as the result was cuts to the contracts. The brewer came to visit to discuss cuts and cuts were what they left with.
When I talk with growers and other hop merchants, I often hear frustration and even anger over renegotiation talks with corporate craft brewers and how one-sided those negotiations often are. Nobody speaks openly of these things because it would get in the way of brown nosing potential customers and they don’t want to do that. The promise for volumes in the future is little consolation to a cut today. After all, if you don’t get through today, you don’t live to see the future.
The hop industry is very fragile. It bears an disproportionate amount of the risk of providing hops to brewers. The likely reason … There’s only one source of money in the hop industry, the brewers. Nobody wants to deny the brewer requests, particularly the multinational brewers or the large corporate craft brewers, for fear of losing their business. In part, that imbalance is partly what drove my response.
Don’t get me wrong … I don’t think any brewers intend to harm hop growers or merchants with their requests. Far from it. They are just trying to fix the situation the problems on their books or adjust things so they are more aligned with their needs. They just aren’t taking the time to find out what the consequences of their decisions may be on the grower and merchant side of things. Contracts, of course, are binding, but sometimes they need to be renegotiated. For any brewers wanting a good guide to renegotiating contracts, check out our blog from November 7, 2016 entitled THE SEVEN C’S: HOW TO NAVIGATE HOP CONTRACT RENEGOTIATIONS.
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