Conspiracy in the Hop Market

I sometimes hear from people who must love conspiracy theories that hop merchants and growers fix prices and that some are in cahoots with one another. The truth is that merchants rarely communicate with one another. Growers get together more often. When anybody in the industry meets, it’s as much about disinformation as information. That’s probably not a good thing. There is a very adversarial relationship in the U.S. hop industry.  Fierce competition is part of the reason there is so much division, inefficiency and chaos. That makes it thrilling and unpredictable at the same time.

If a conspiracy existed, a small group of hop merchants could certainly manage the supply side of the industry better than things were managed lately. If merchants and growers would talk more openly to one another it might actually be good for everybody, even the brewers. They could talk about things like varieties brewers are long on. Where are the best and worst hops. Which brewers are paying on time and which brewers aren’t. All sorts other interesting inside baseball that doesn’t fall in the conspiracy camp could be on the table.

The industry is so secretive, however, that it’s surprising if a grower or a merchant mentions the name of a brewer with whom they are working. Some openness would be a good thing. A little transparency could help the market. Communication between merchants alone might have enabled the industry to avoid the situation today where most all of the largest 20 brewers have contracted way too many hops.

So why are merchants not already talking? There are some reasons that come to mind, greed, fear, stubbornness, hatred to name a few. The list goes on. The hop market is typically seen as a zero sum game. When times are bad they are really bad. Most growers and merchants would be happy to see their competitors go out of business. They think if the other guy goes out of business they will have a bigger piece of the pie, which might allow them to dominate the industry.

During the past two months I sent out emails or talked to several merchants. I suggested better and more open communication on the merchant side. Do you know what I heard in response? Sadly … Nothing! I enjoy a good conspiracy theory. I’ve been to Dealey Plaza and the grassy knoll. Honestly, after seeing how a few hop merchants and growers get along, it’s hard to believe in a small group of illuminati controlling the entire world. If merchants and growers are conspiring to anything other than put their competitors out of business, it would be news to me. Maybe it would do the hop industry good to work together and share a little information once in a while. If you want to call that a conspiracy to spice it up a bit, then so be it.

 

Craft Inc. – Part 2

Is craft beer a trend or is it part of the culture today? The first craft breweries today are billion dollar companies. The next wave of craft breweries followed the same path. They too enjoyed wild growth and today, they are big corporations. They traded the “local” moniker to be bigger and you can find them in almost any grocery store across the country. Craft brewers followed the examples of the only brewers that had come before them, the ones we know as the “Big Brewers” or the “Multinationals”. In doing so, David became Goliath.

What do I mean using the David and Goliath comparison? It might not be exactly what you think.  This excellent article on Inc.com describes the differences between David and Goliath and why I think the example is appropriate in today’s world.

For craft brewing to be part of our collective culture, rather than just a product on the shelf at our grocery store, the story must evolve. It cannot be about west coast IPAs brewed fresh on the east coast or in Europe. That type of brewing has its place, but it doesn’t transform culture. To be part of our culture, however, it must be about experience and story. It’s about the guy or gal brewing with their friends in the garage. It’s about the person who got the courage up to open a small place in town. That sounds pretty simple, but it’s hard when you’re chasing what you think is “the American dream” where bigger is better.

Small brewers with strong local support and content to stay local can cause a change in culture. People content on supporting a local business can cause a change in culture. The cultural revolution will depend on the uniqueness of thousands of brewers. Each of them may only have a few thousand loyal customers, but that’s enough. They’ll each, in turn, provide jobs to a handful of people. That way, through a grass roots change, all across the country, the culture will change toward one in which craft beer can play a strong role. 

To see the future of the beer culture, it is tempting to look at the top of the list of craft brewers in the U.S., the ones with the largest production. Those breweries represent an old paradigm where bigger is better. The future rests with the small craft brewer practicing his art day in day out. Today, craft beer is a trend. To become culture, however, the small craft brewery must be the goal, rather than the stepping stone it is today. How many businesses today have the goal to be small?

Craft Inc. – Part 1

Craft is an art. Even the word implies a beautiful meaning, creation. So many bearded men in flannel expressing themselves and their appreciation for flavor and creativity in ways previously unexplored can’t be a bad thing, can it? As an American who has lived overseas, I have noticed that we Americans fall prey to a few things that can lead us astray from. We almost always think bigger is better. We almost always want more of a good thing. Those sound like very similar things, but they’re not.

Investor dollars have created a drive for profitability and returns that did not exist previously. That desire for growth for profitability and for growth’s sake has led to many brewers taking the easy way out. Throwing the word IPA on anything has been a fast track to printing money the last few years, regardless of whether what’s in the bottle is good or not. The same is true with hop varieties. We sell Citra® hops so, yes, I’m happy when brewers buy it, but … come on. Grow the art of craft beer by being creative, mixing varieties, experimenting with new flavors! Don’t just make the 25,000th Citra® IPA.

If making another one of what the other guy has so you can sell more beer is all you can think of as a craft brewer, then I’m worried for the future of craft beer. Van Gogh didn’t use just one color of paint when he created his masterpieces. His goal wasn’t to be the biggest most famous painter in the world, however, his paintings are still vibrant and alive for their use of so many bright colors,  I understand everybody needs to make a buck. How will the little craft brewery distinguish itself from the multinational corporate brewery if making a buck becomes the guiding principle of the craft beer industry? If your primary goal is market share, are you being true to your craft? If money is your mantra have you not become what you supposedly despised in the first place?

Crafting anything is an art and it is the way to emphasize and celebrate uniqueness. Brewers … Explore the craft you have chosen. If you truly are a craft brewer you should push the boundaries. Color outside the lines. Mix the paints. Think outside the box. Don’t cheapen the meaning of the word in pursuit of the almighty dollar. Make money as a result of exploring where you can take craft. You don’t have to be bigger to be better. You have to be better to get bigger. Focus on being better and the bigger will follow.

Tomorrow: Part 2 and the conclusion of Craft Inc. 

Contracts vs. Cash Flow

Unbelievably, there are still hop growers increasing acreage in 2017. They say “they have contracts” or “the wheels are in motion” or that “the plans have been in the works for a while”. That was OK back in July, but the picture has become much clearer in the past few months. Time to change the plan!  Last week, a grower who lives about 45 minutes outside of the Yakima valley growing region called. He said he plans “to start a hop farm this year”. He wanted to know if we needed anything. Crazy!  Actually, I can understand his naivety. He doesn’t know the industry. He probably read some poorly researched articles in the Wall Street Journal and other news outlets saying how there aren’t enough hops in the world. The growers who have been around for a while should know better. Some of them don’t. 

What good is a contract if you don’t get paid on time? I believe the year 2017 will be the year the word “contracted” loses its value in the hop industry. Cash flow, instead, will be the operative word. There is no cost to sign contracts. Contracts are too easy for brewers to sign. When things go sideways, brewers expect merchants to fix their contracts at no cost. The hop industry is trying to help fix the problems where it can. The scale of the problem is too large for half of the equation to handle alone. Merchants and growers contracted with brewers they trusted to act responsibly. It seems that trust was misplaced. There has never been a way to check what the total contracted position of a brewer is prior to signing a contract.

I don’t remember hearing a Latin phase “Auctor Emptor” or “Seller Beware”. I guess the Romans never sold hops. There is no way for a merchant or a grower to know if a brewer is contracting responsibly. During the past few years, many of them were not. Maybe there needs to be a transparency phase prior to signing a contract.

Innovation lacking in the hop industry

Innovation is something the hop industry really hasn’t figured out yet. Sure, there are new varieties coming out of every orifice of the hop industry these days. There are so many that it’s becoming difficult for growers to manage them all. The mind-numbing flow of new varieties continues. Once you start the variety-producing machine it’s difficult to stop. All that innovation doesn’t really change the way things are done. It creates more selection for brewers on the “shelf” of varieties from which to choose when brewers go shopping. Today, brewers can choose hops with citrusy flavors described in fifteen different creative ways. That’s confusing! Back in the stone age of craft brewing, 10-15 years ago, there were only a couple varieties with citrusy flavor. Somehow those guys made a lot of great beer. It’s starting to be like the cereal section at the grocery store.

All the extra choice in the hop industry isn’t raising the bar. It’s just crowding the field. Sometimes less is more. There is some bad beer out there today that sells because it has the name of the variety and “IPA” after it on the bottle. Have you ever been pissed off when you pick up a beer anticipating how it might taste … and it’s terrible. Breweries use hop varieties today as a marketing gimmick to sell beer. When did they stop using them to create interesting flavors? It’s great that people care so much about hops. If some brewers are using hop hype as a means to an end, our wonderful hop trend might turn into a fad rather than a culture.True innovation in the hop industry would be pouring dollars into research that expands the hop beyond the brewing industry.

Imagine a hop industry whose fate cannot be manipulated and controlled by the actions of a few large breweries. More money should go towards Xanthohumol research as a potential cure for cancer. Articles about that Xanthohumol have littered journals for over 10 years. It is always something “on the horizon”. Here are some more ideas you can have. Hop plants have as much or more cellulosic fiber than hemp! It has high tensile strength and long sisal fibers. I’ve tested the vines right after harvest and again 6 months later. Everybody knows how useful hemp is. Hop paper, hop clothing, hop twine, hop labels on beer bottles are all potential products. Hops are legal to grow everywhere without the government oversight of cannabis or hemp. Cellulosic ethanol production is a thing these days. Imagine … hop fuel.


I looked into all of those things. I believe there are viable business opportunities in each of those ideas. It will take somebody with passion to develop a business around those ideas. The ideas are there … somebody please take them and run with them. To be fair, not everybody is a slouch.  There are a couple companies out there looking into very cool things. Beta acids are a possible solution for preservatives and saving the world’s bee population. Kudos to the companies working on those projects! The hop industry needs more of that sort of innovation, not more hop varieties.

Anatomy of the current surplus-shortage-surplus cycle

The anatomy of the current surplus-shortage-surplus cycle is not entirely unique. There are many similarities between this and cycles of the past. 

 

  1. A massive oversupply occurs in response to over contracting. Spot hop prices plummet. Once it is clear a stable exists, brewers try to renegotiate expensive contracts into less expensive longer-term contracts.
  2. Contracted demand decreases rapidly. New contract prices (if available) plummet accordingly.
  3. Growers remove acreage (growers never remove acreage as quickly as they plant).
  4. After several years of acreage removal, an annual production deficit quietly develops. Surplus hides the deficit from the market. This is one of two times when equilibrium between supply and demand exists in the market. The perception of surplus, however, dominates.
  5. Recurring annual production deficits erode the accumulated surplus. Brewers believe a surplus of hops still exists. Prices are depressed further, which leads to further acreage reduction.
  6. Increasingly larger annual deficits diminish the surplus to the point where merchants must juggle inventory held by their customers to keep them all supplied. Brewers remain unaware of any potential shortage.
  7. Merchants buy the cheapest inventory far into the future at low prices and reluctantly increase prices slowly. They entice growers to plant slowly so as not to cause a panic in the market. This is a gamble. Agriculture is unpredictable. Success means delaying the shortage until they reach a point of equilibrium. The chances of that happening are very small. Short crops and bumper crops are equally likely in any given year. This is a risky strategy.
  8. Some irregularity occurs somewhere in the market.    8a.) If the crop is short, some brewers become aware of the presence of a supply problem sooner than others. It will not be possible for the market to quickly correct the deficit, which is now far below equilibrium.   8b.) If, on the other hand, the crop continues to be average or long for several years, merchants can delay the day of reckoning. They slowly increase prices to develop inventory. Some brewers become aware and may reduce their reliance on spot inventory positions. (there is no precedent for a balanced hop market).
  9. Let’s assume 8a occurs at some point. Brewers en masse become aware of a shortage … a rush on the hop market ensues. They fear not having the hops they need to brew beer since they buy a significant portion of their hops on the spot market.
  10. Prices increase. Anybody who has unsold hops hoards them, exaggerating the effect of the shortage. Some people break contracts to sell on the spot market. Higher prices prevail.
  11. Brewers, fearful of more hoarding and a multi-year shortage, contract more than 100% of their needs to be sure they have ample supply for future years.
  12. Growers plant more hops than they sold to satisfy 100% of their contracts at the new high prices. They dump extra production at whatever prices they can find. This is the other time when equilibrium occurs, although growers plant so many hops at this point that nobody notices. … A surplus of inventory quickly develops.
  13. Rinse and repeat.

 

 

Opposite Roles

Happy National Opposite Day!! Yes, it’s today! I bet you didn’t even know there was such a day, did you? It seems the hop and brewing industry are ahead of the times. For at least the past 6 months, members of the hop and craft brewing industries are playing opposite roles. Here’s an example … Today, it makes more sense for merchants to buy hops from big craft brewers than it does to buy them from growers. Many of the largest craft brewers in the country have more hops than they need and are desperately trying to sell hops. On the other hand, some hop growers, despite the slowing growth of craft beer, are planting more hops this spring. Could there be a better example of a time when somebody did the opposite of what they should be doing?

Is the situation hopeless? Should we prepare for Hopageddon? No … all is not lost. There are still breweries that need hops. They didn’t participate in the hop orgy the big craft breweries enjoyed when they thought the party would go on forever. Just as with beer, there’s a hangover when you have too many hops. Anybody who buys or sells hops for a living knows exactly what I’m talking about. The big craft breweries feel the effects of that hangover today. Unfortunately, there is no pill to take to make the problem go away.

When one big brewery has “some extra hops” it can take 50 smaller breweries needing that same variety to fix the problem. That’s 50 times the effort, 50 times the time and 50 times the expense to sell those hops … a second time. Growers and merchants who prefer to sell to the big craft breweries are not prepared for that level of increased transactional cost (that’s what they call it). The big craft breweries’ problems, like their successes, are big and they messed up … bigly.

If you aren’t a brewer sitting on a mountain of inventory, you still should not want prices to crash. Do you know what happens when prices crash? Quality crashes. Sustainability crashes. The number of varieties crashes. Selection crashes. Hops can be very cheap, but that comes at a very expensive price. You don’t want that … Not even on National Opposite Day.

Convention: One big Party?

When I was director of Hop Growers of America, most brewers, or anybody for that matter, didn’t care much about convention. When attendance was greater than 150 people, it was a shock. Convention was a time when growers and industry members would get together to discuss industry issues, drink free beer and play dice together. The meetings, I’ll admit, were a bit on the gloomy side. You have to remember that unless there was a warehouse fire or an alpha shortage, prices were often below the cost of production. Discussions involved much head shaking and trying figure out how to curb over production. In short, it was a lot of inside baseball. Growers drank a lot every evening (that hasn’t changed) and coffee was the lifeblood of the morning meetings. You could usually count on serious and thought provoking discussions.

Fast-forward 10 years … Hop convention is a big party! Some hop growers truly feel like rock stars and have naturally succumbed to hubris. There were more brewers at convention this year than you could shake a stick at, with about 650 people in attendance. How could you not think you were king of the world with all that attention? One brewer with whom I had breakfast enjoyed his first convention. He commented how great it would be if there were even more brewers in attendance.

Brewers communicating with hop growers and merchants is ultimately a good thing. Is convention the right venue for that? All the focus on selling and developing relationships has pushed some discussions to the side. There are a lot of issues growers and merchants need to discuss without brewers present. Planners today organize meetings regarding new variety development, increased hop quality. Everything has a theme of sustainability. The talks about cost of production, market forces, managing supply and the alpha surplus/shortage are conspicuously absent. Of course, that type of talk isn’t any fun when times are good.

Maybe people don’t care to watch the pennies when the dollars are flowing in. Maybe they just want to live for the moment knowing they cannot avoid their nemesis anyway when it comes. Lack of discipline in the hop industry can lead to big problems. Let’s not forget … The industry never figured out a way to manage supply and demand. They have been fortunate they haven’t had to for the past 7 years.

Surplus and shortage – why the endless cycle?

Greed and fear create hop surpluses. It’s not the greed and fear you would imagine though. You might think that a surplus of hops would always come from the grower side since they are the ones producing the hops. You might thing that greedy growers are to blame. That would be too easy. True, some growers find it hard to resist planting a few extra acres of hops on speculation when prices are high in an attempt to cash in on a good thing. That, however, is not the main reason hop surpluses develop. Grower greed is strong, but it is not grower greed that drives a hop surplus.

A grower’s or merchant’s optimism about market conditions does not spring from within. Most growers and merchants react to circumstances in the market. They aren’t market makers. Markets of shortages and surpluses are born from the demand side, from the brewers. Multinational brewers have long played the system to their advantage. In the past, they have bought on the spot market during times of surplus when spot prices were low. They played merchants and growers against one another to drive prices down below the cost of production. During a shortage brewers short on hops typically contract. Once the market stabilizes, they inevitably use their size as leverage to cancel or renegotiate their contracts. In doing so they create cycles in the market that occurs every decade or so.

It is, therefore, the greed of the big brewer, always looking for the cheapest possible way to source hops that makes the hop market extremely competitive. Greed may be a harsh word. Thriftiness, frugality, budget-consciousness might all be kinder softer words. At the end of the day though, they want to get more and pay less. A while back, I had a friend who was a purchasing agent from one of the 20 largest breweries in the world. He told me his bonus was calculated based on how much money he saved versus the prior year. Granted, not all brewers are so callous. This guy worked for one of the 20 largest breweries in the world when he told me that so his actions had a huge impact.

 

Sadly, some of the larger brewers (yes, larger craft brewers too) who talk about sustainability and insist on high hop quality use their size as a bargaining tactic. They’ll try to knock down a price by $0.05 per pound if they can. With only so many players in the market, growers and merchants are afraid to lose a customer. Big brewers know this and can smell that fear. Fear of missing out on a potential hop deal drives merchants and growers to do whatever it takes to get a deal. That may never change So long as greed and fear play a key role in the hop market, we’re likely to continue to see times of surplus and shortage in the hop industry.

200,000 reads in 3 months – Thank YOU!

Since we moved this blog to WordPress from Blogger three months ago, we’ve had over 200,000 reads! When I go to an event like the Hop Growers of America convention, Brau or CBC, people say things like, “I love your blog”, or they tell me to “keep up the good work”. I am happy to hear that people enjoy it … Thank YOU for reading! I enjoy writing it.

If you looked at the comments section alone, you might imagine that nobody reads the blog. The hop industry is very opaque and secretive. In such an industry that is very cloak and dagger by nature, it can be dangerous for anybody to publicly comment using their real name. With anonymous comments, though, the dark troll side of people comes out. When I was Executive Director at Hop Growers of America over 10 years ago, we had that problem with the Coffee Shop, an online forum back in the day.  Apparently, there are some serious trolls in the industry that are emboldened when they’re anonymous. That’s not good for anybody. I’d like to keep this blog free from trolls so the next 200,000 reads are as enjoyable as the first. Everybody in the industry is very careful to never commit to any position in writing. I get that.

 

That doesn’t mean you can’t comment though. I hope you’ll continue to reach out to me the ways you have been, by email and Facebook messages, to let me know your thoughts … positive or negative. Constructive criticism and debate is always welcome here. There have been a few people who have been a little too nasty or self-aggrandizing in the comments section of the Facebook or the Twitter. Honestly, I’m quick to ban or block those people. I see social media like a big elevator. Ideally, it’s taking us to a higher level together. If somebody passes gas while we’re all riding in the elevator though, they should have to get out and should not be allowed back in the elevator again. One strike and you’re out. Nobody wants to stand in an elevator breathing somebody else’s gas! Maybe there are special places on the Internet for those people.