Who sets hop prices – Part 2

Welcome back! So now you know how hop prices can change and what makes them change. What can you do to keep the cycle from affecting you? Here are some practical tips that will help you save money. They can also keep the cycle from recurring to the extreme that it happened in the past.

It seems some new brewers don’t understand the history of contracting. For years, this was the normal buying strategy was something like this:

When the craft beer revolution happened everybody started contracting at 100% of anticipated growth for 5 years into the future. Bankers and growers required that stability to lend hundreds of millions of dollars to the hop industry. It’s hard to know what you’re going to do 5 years in the future. Of course, when the market slowed the imbalance between supply and demand caused everybody to shudder to a stop. The zero cost of signing a contract mistakenly led brewers to believe that it was easy to hop in and out of contracts. While contracts are too easy to sign, they are difficult to unravel.

How do brewers growers and merchants move forward now in a way that will keep the market from getting out of control, in either direction. Here are some ProTips to consider.

 

ProTip #1: Always be in the market for hops, even if you think things will be better tomorrow. That doesn’t mean buy hops until they are coming out of your nose. Quite the contrary … It means regulating your buying habits so you never have to buy all your hops at once. Plan to buy some every quarter, or even as often as every month. You’ll get a mix of some high prices and some low prices. The mix will beat the market in the long run. If you always base your future purchases on your current needs, you won’t end up with a surplus. If you buy 20% for each of the next 5 years annually and further spread that 20% throughout the course of the year, you’ll pay far less than the guy who has no hops when the shortage happens and has to buy at peak pricing during a shortage.

ProTip #2: Timing the market is impossible so don’t try. After that first ProTip, you’re probably thinking, “yes, but I’ll be paying more than if I buy when the market is cheap”. That’s true, but very few (if any) people are lucky enough to buy all their hops when the market is at its cheapest. If you try to be that person, the odds are not in your favor and you will not likely succeed.

ProTip #3: Don’t be afraid to buy old hops. You’ve been taught that fresh is always better. I don’t mean you should buy those cheesy old hops that Lambic brewers love … unless you’re brewing a Lambic. What I mean is that you can buy 1-2 year old hops so long as they have been kept in cold storage at a constant temperature. If they have, the only difference you’ll likely notice is a slightly reduced alpha value. If the hops have not been stored properly, don’t consider taking this route.

ProTip #4: Don’t ever be dependent on one hop variety. In this age of variety specific shortages, none of your beers should rely upon just one variety. Diversity is strength. If you can’t get one variety, you can easily substitute something for it and nobody will ever feel the difference.

ProTip #5: Know your hop vintage. What?!? Hops don’t have a vintage … do they? Typically, nobody thinks of it that way, but there can be big differences between crop years. Depending on the weather, an old crop can be better than a fresh crop. Most recently, that happened with German Magnum and Herkules from the 2014 crop. They were much better than those from the 2015 crop due to the weather in 2015. You might not want to waste the time to know all about each crop year, but you should know enough to ask the person selling you your hops. They know.

ProTip #6: Remember that hops are a sensitive agricultural product. You NEVER know what the weather can do to the crop tomorrow.

 

If you follow the ProTips in this article,YOU will be the one who sets your hop prices. If brewers leave the market en masse now because they perceive an oversupply that may or may exist, their actions will send the market down an old familiar path.

In the end … We are all just actors.

Who sets hop prices – Part 1

Events unfolding in 2017 will determine the course for hop prices for the next generation. In the past growers, merchants and brewers always traveled a well-worn path. When standing at a similar crossroads, they followed the animal spirit. That path leads to boom and bust cycles. It is a path that brings shortage causing skyrocketing hop prices. This is the one time when that cycle can be interrupted and at no time in history has it appeared more likely to happen. It will determine whether craft brewers are different from the big multinational brewers against which they rebel and who have dominated the scene for generations. Now, it is the craft brewers’ turn at bat. The hop industry is eager to see how craft brewers will play their cards differently.

 

All the world is a stage,

And all the men and women merely players”.

   – William Shakespeare, As You Like It, 1599

 

If, brewers perceive an oversupply and move to exploit the market to their advantage, it guarantees the next cycle will resemble previous cycles. By buying only on the spot market instead of contracting forward for their hops, and by relentlessly driving prices lower, craft brewers will virtually ensure the future direction of the market. When we see that happening, we will know they are following a well-established path of events, and there is good reason to fear it. At that point, growers would be powerless to stop the cycle.

Without contracts, growers don’t know what demand exists. They cannot know what to produce. They will remove acreage more slowly than necessary hoping to sell their hops on a spot market that may or may not exist. When they produce too many hops they will sell them at a discount to push them into the market. After a few years of doing that, family farms will go out of business. Equity will slowly drain from the hop industry. True, brewers will save some money on hops, but at what cost? Companies will go bankrupt. Growers will remove more acreage. Annual production deficits emerge and grow eventually leading to shortage. It’s a transfer of wealth from farms to breweries. 

That’s not the end of the world by any means. Life goes on if the cycle continues, as will the volatility in the hop market. By the time the next hop shortage occurs, the hop industry will be so drained physically, financially and mentally, growers have no choice but to recover as quickly as possible. Prices will skyrocket. Brewers will feel they’re getting screwed. The whole process is unpleasant for everybody. We all like to save money wherever we can. I get that. If you could know with absolute certainty you would pay as much as 40 times more in the future for something you need every year, would you still try to save 30-40% today? If you can save $1-2 per pound for the next few years, will you be equally as happy when you have to pay $20 more per pound. That’s where this road leads.

How can I be so sure that this can be the path for the future? Each cycle is slightly different, but basically this is how every cycle played out for most of the 20th century when the multinational brewers dominated the industry. The beer market is different now, that’s true. Will the fact that craft breweries dominate today’s market make any difference?

We already see a few craft brewers foregoing contracting in favor of buying hops on the spot market. We already hear their perception of oversupply as a justification for the low prices they expect. What else should anybody expect? Can anybody do anything differently to avoid repeating the mistakes of the past? We’ll provide some more insights and options in our next blog.

 

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The crisis that can destroy the hop industry

The March 1 Hop Stocks report collected by the United States Department of Agriculture National Agricultural Statistical Service (USDA NASS) is typically not fully appreciated by anybody and therefore only given a cursory glance. In 2017, however, this is very likely the most significant report you will read until harvest numbers are released. Hidden in the numbers is evidence of a trend, which, if it continues, will turn into a crisis of massive proportions with the potential to forever change and even destroy the hop industry as we know it today. Let’s take a deeper look.

Figure 1: The data from the most recent March 1Hop Stocks report

Figure 2: A graph of the 2007-2017 March 1 Hop Stocks data:

Less than a decade ago, brewers held more stocks than growers and merchants combined. That all changed in 2009 with the growth in popularity of the craft beer industry. Craft brewers clearly love their hops and they don’t mind contracting for them either. At first, that trend seemed to be great news for hop growers everywhere. Unfortunately, the way craft brewers are expressing their love lately has shifted the burden of financing the crop for an additional year before being paid. Some financing is traditionally built into hop prices, but not that much. Two things are troubling about the current trend:

  1. The gap of stocks and who is holding them is widening in the direction of growers and merchants, and
  2. The cost of and risk associated with that gap is growing.  

A quick look back in history reveals the scope of the problem. In March, 2007, growers and merchants held 40% of total stocks. Based on the season average price for the 2007 crop year of $2.99 per pound as reported by the USDA NASS, inventory held by growers and merchants in March 2007 represented approximately $83 million at a time when the entire industry production was valued at just under $180 million. 

Figure 3: A representation of the 2007-2017 March 1 Hop Stock data expressed in percentage of ownership of those stocks.

Fast forward to the most recent hop stocks report from March, 2017. Today, growers and merchants hold 200% more inventory than brewers, which equates to over a year’s worth of inventory. The season average price for 2016 was $5.72 per pound of hops. The increased price compounds the problem facing the industry by drastically increasing the risk associated with holding inventory. The total inventory held by growers and merchants today represents $600 million dollars. That’s represents a 722% increase in the value of stocks growers and merchants finance over the past 10 years alone. You can find the season average price data and do the math for yourself at the Hop Growers of America homepage

Hopefully you can see by now that the USDA March 1 Hop Stocks Reports is much more than a benign report that shows who is storing the inventory regardless of ownership. Typically, inventory does not sit long in the grower or merchant warehouse if the brewer needs it and has paid for it. Some does, but that’s the exception rather than the rule. Therefore, we can infer from the data not only who is storing the hops, but who needs it, who owns it … and more importantly who has not paid for it

Prices for hops surged over the past decade. Today, the USDA estimates the crop is worth roughly $500 million. According to the Brewers Association, the value of the craft beer industry in 2015 by contrast is $22.3 Billion. The natural question that arises in my mind is … Why is the industry worth $500 million financing the industry that generates over 40 times more revenue?  Something has to change or this will come to a bad end.

Hop prices increased to pay for investments in infrastructure incurred as the hop industry quickly ramped up in response to increased demand by craft brewers. Today’s prices do no cover the added responsibility of providing soft financing for brewers. It seems brewers are using growers and merchants as bankers of last resort. The current risk/reward ratio is not high enough for the hop industry to also act as banker. That is one reason we will see little interest in the short term by growers or brewers to soften prices. If the trend of financing continues, prices in the future will increase. Only once the ratio of stocks returns to a more balanced level, or if bankruptcies are imminent, will prices begin to soften.

Some brewers see the surge in hop stocks and hope prices will crash soon. They don’t understand the consequences of what they are wishing for. Hop prices crashing today will cause chaos in the hop industry. It would lead to countless hop farms going out of business. Say goodbye to creative new varieties. Sustainable business practices will take a back seat. Many of the features craft brewers say they appreciate about the industry today will disappear. Those go away when the money to pay for them goes away. Growers too should realize the seriousness of the situation. They cannot act without impunity. Ultimately neither they nor their neighbors will get paid if they continue to plant additional hops in the current environment. Ironically, it could be the craft brewers’ love for hops and their willingness to contract them that causes a catastrophic failure in the hop industry. 

 

Why homebrewers pay more for hops

A comment regarding homebrew shops from a friend on Facebook inspired this blog. I thought rather than answering his question in Facebook it would be worthwhile to share the answer with everybody since it applies not just to homebrew shops, but to everybody who buys hops. Enjoy!
 
…. specifically for home brewers. 3.00/ounce for some varieties in the homebrew shops. What is the shops’ wholesale price from the supplier. How many times do the hops get sold before they reach the end user? I’m working on connections to local growers in upstate ny to source hops, and be free of an inflated market price for hops. Supply and demand.
 

Good question. You are paying for several conveniences that apparently you don’t fully value or appreciate. If you are buying a 3 ounce package of hops, it seems you don’t want to buy any more than you absolutely need at the moment. You are paying extra for packaging and labor to put hops in 3 ounce packages. That’s just one thing that increases the price of the hops as they make their way from the farm to you. You probably have a freezer at home where you could store a pound or two of hops at a time. Are you not willing to use that as your own personal cold storage in order to save a little money?  If you buy in larger volumes, you’ll get a cheaper price. That’s the Costco business model.

Secondly, you’re going to a home-brew shop. The owner of that shop invested their time and money to collect a little bit of everything just for you so you can buy everything in one place … in person at a storefront. That involves rent and somebody’s salary to run the shop. When you go there, you probably like to ask questions from time to time to take advantage of the owner’s experience. That’s a convenience you’re paying for in that price  that it seems you don’t appreciate. That’s also another way price is increased on its way from the farmer to you. 

Yes, that homebrew shop probably bought those hops from at least one hop dealer so there’s an additional layer, or possibly two, of the supply chain adding to the price. Have you ever been to the grocery store? It’s the same situation there. Did you know the grocery store adds 100% margin to most of the goods it sells? I wouldn’t be surprised if your homebrew shop has to do the same. Do you feel the need to contact a carrot grower to buy your carrots or a cattle rancher to buy your steak? That sounds a little ridiculous, doesn’t it? That extra margin doesn’t mean the store is making a mint. There are just a lot of expenses involved in that business model.

If you want to buy at cheaper prices online, you can check out the store on the 47Hops web site.  We sell one pound resealable packages that you can stick in your freezer. If you can figure out a way to make that work, you’ll cut your hop bill way down … but you won’t get that same experience as at your homebrew shop. If enough people do that, the homebrew shops go away forever. That might not be a good thing, but that might be the way of the future. We’re definitely not going to hold your hand or have all your brewing supplies, but the price of your hops will be lower.

You shouldn’t make the mistake of judging everything by price alone without factoring in the value of all the other things you’re getting along the way. Nevertheless, brewers large and small do this all the time. I haven’t even mentioned cold storage, processing, financing and shipping, all things that add to the value of the hops you’re buying. There are a lot of people who have families to feed who touch that little convenient package of hops before it gets to your local homebrew shop.

Sure, growers sell hops for less than you can buy them in a homebrew store. Do you want to, or are you even able to, buy 13 or 130 or 200 pounds of raw hops at a time and pay for them in September? Do you have a freezer big enough at home to handle that?  Do you even use raw hops? If so, what are you doing buying 3 ounces at a time in the first place? Most growers don’t sell pellets. They don’t have storage facilities and they won’t package into 3 ounce packages. Very few growers are set up or are inclined to deal with somebody wanting a retail style product like what you are getting at the homebrew shop. All in all, you’re already getting a pretty good deal at that homebrew shop, but no … It’s NOT the cheapest price.

If you all you are looking for is cheap prices and nothing else matters, there are probably some really nasty old hops floating around out there. I imagine you can probably buy them for less than a $1.00 per pound if you’re lucky. Good luck making good beer with them though.  You should be careful driving your decisions based on price alone … you might actually get what you pay for. 

How to know the weakest hop companies from the strong ones

Now is the time of year when hop growers and merchants are digging roots and planting new hop fields. The past few years brought with them the longest running bull market in the hop industry. That market created strengths and weaknesses in a lot of companies. Unfortunately, that type of money facilitates a lot of careless mistakes and can hide fatal flaws. Brewers, merchants and growers were all shocked when the increase in craft beer sales slowed so drastically in 2016. Most people anticipated the market would continue on its run through 2020 or longer. Many planned accordingly. Obviously, that was not the case. It was confirmation bias at its finest. If you’re a brewer or a hop merchant, of course you want to know which companies will be around for the long term, and which won’t … but how can you know?

 

If everyone thinks one way, it’s likely to be wrong.

     – Jim Rogers

 

The abrupt slowdown of craft sales slowed the flow of money into the hop industry. That caused a wave of contract renegotiations with merchants, but very few at the grower level. Through it all, the worst pain most growers felt was not being able to sell their spot hops. Despite the fact that the talk in the industry is about the craft slowdown, some hop companies are still expanding. They claim their plans are already in motion and cannot be stopped. Expanding in the face of a drastic slowdown … That doesn’t make any sense … or does it? Actually, it makes perfect sense. It’s a tell! You might think the strong companies are expanding because it takes capital to expand or because there is strong demand. The truth is counterintuitive. The companies expanding “because they have to” are very likely the weakest companies. They lack the financial strength to do anything but chase growth and sales on their books. They lack options. Growth looks great on paper and investors expect to see that. 

I am sure you are thinking to yourself … “The craft market is still growing, albeit at a slower rate. There’s got to be some legitimate demand out there for new hops?” That’s true. Based on the rate of payment and deliveries to breweries in 2016, however, the overall market appears to be extremely well supplied from the 2016 crop. The USDA collects statistics on hop stocks. They are collecting them now, in fact. The report will likely depict an increase in brewer and merchant stocks over last year. Statistically, that is how the slowdown manifests itself. Still, there are no reports of growers removing acreage. We expect a net increase in production in 2017 over crop year 2016. That is a net increase that is very likely not necessary. So why is it happening?

Strong merchants and growers are pausing now to see what comes next. The industry is nearing a tipping point and they realize it. There’s no incentive to get caught heading in the wrong direction unless you don’t have anything to lose. The weakest companies, on the other hand, aren’t concerned with the long-term effects of their decisions. If they don’t get through the short-term, there is no long-term for them. They lack options. For sure, they can get lucky and survive the next year or two.

Sometimes, the difference between surplus and shortage can be just one bad crop away. That’s the case in 2017. The weakest players can capitalize on that misfortune and potentially make a fortune … or not if there’s a bumper crop. It’s pretty rough when your best chance of making money in your chosen field comes only after a crop failure.

Azacca® Hops – Spotlight

The American Dwarf Hop Association released the Azacca® hop variety several years ago as one of their first forays into the proprietary aroma hop market. Don’t let the word proprietary scare you in this case. Access is not an issue with Azacca®. Supplies are managed responsibly to meet all the demand out there, not intentionally creating shortage to jack up the price. Speaking of price … You also won’t have sticker shock when you see the price. They are much more reasonably priced than some of the other proprietary varieties that have given “proprietary” a bad name. Azacca® popularity grows with each passing year as brewers become more familiar with the exotic flavors it brings to the table, particularly mango and pineapple.

Azacca® is an aroma hop but delivers high alpha 14-16%. It posses a mild bitterness so you won’t find its alpha spoiling the flavors you’re looking for. We see breweries using Azacca® hops in all sorts of ways, from IPAs to sours and every time it seems to delivery amazing flavor. It seems, however, the most positive comments stem from brewers who have used it later in the brewing process, particularly as a dry hopping addition. Azacca® has a lot to offer all through the brewing process though as evidenced by this post from Founders Brewing announcing their Azacca® IPA.

If you’d like to read another perspective … Here are some useful tasting notes from the user yso191 on the homebrewer association forum. Thanks yso191, whoever you are. 

Conclusion:

In a sea of new hop varieties, Azacca® rises above the rest. It is a versatile variety that find a niche in many different beer styles. It offers everything from mango to pineapple to piney resinous flavors depending on how you use it. Azacca’s® fun exotic flavors really shine though when used late in the brewing process, particularly as a dry hopping addition. If you’re looking to blend it with another hop variety or even some fruit additions, this is the hop that will work with you to accomplish your goals. If you haven’t tried Azacca® yet, you should. It’s so flexible, you’ll be sure to use it in at least one of the beer styles you’re brewing.

And now, in honor of International Woman’s Day, March 8, 2017, we will be offering a Yuuuge discount on a limited supply of Azacca®. Starting at 12:01am on March 8th, for 47 hours, we will be offering 47% off our normal spot purchase price. Use the promo code 47WMDAY at checkout. Sound Good? What are you still doing here … Head on over to our web site store to get some while it’s still available.

 

 

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Hopi Luwak™ – The Ridiculous New Hop Innovation

47Hops is pleased to announce the newest and most proprietary product to hit the hop industry … ever … Hopi Luwak™. This revolutionary new product is an all-natural and fully renewable hop pellet sure to create a movement in the brewing industry. We produce Hopi Luwak™ sustainably because we care about the environment.

Hopi Luwak™ comes from the Latin (Paradoxurus hermaphrodites) a process originating high in the mountains of Indonesia. For years we probed and evaluated this ancient, rare and highly selective processing technique known only to a select few. We applied the Luwak™ process to hops to create a pre-fermented product. Hopi Luwak™ is guaranteed to bring an unprecedented new Earthy flavor to any beer.

To preserve the sensitive resins and oils, we produce Hopi Luwak™ at a mean temperature of an Asian Livet. This is cooler than average T-90 hop pellet production temperatures, and significantly cooler than other known pelleting operations.

Hopi Luwak™ will enable us as a hop merchant to market hops that would otherwise be difficult to sell. Furthermore, we plan to make it available through companies we like and work with. We will control the entire process. We will decide who has access, and we will decide what prices they will pay. Competition in the industry is really tough right now so we had to do something. We decided a new product would make us look very creative and so much smarter than our competitors. Because we are so smart, we expect our new product to wipe out the competition, but don’t expect us to dump it on the market. It has cost us a load to develop this new exciting new product. They will be hella expensive, probably even double your normal hop bill.  Ka-ching! $$$

Processing via the Luwak™ method is filled with twists and turns. We successfully passed them for YOU, our readers. We are confident it will take a while for the claims that Hopi Luwak™ is just snake oil to appear in the market. If Hopi Luwak™ sounds familiar perhaps you are very well traveled or have an eclectic coffee habit. Yes, we’ve borrowed the name from the infamous, and ridiculously expensive Kopi Luwak coffee beans collected from the poop of the Luwak of Indonesia.

YES … this article is a spoof on some of the ridiculous innovation happening in the hop industry today. Please don’t write us ordering any Hopi Luwak™ … although, if enough of you do … who knows … we might have to go to Indonesia!

Hop merchants today overstate the importance of their innovations that basically result in incremental changes in the form in which the product is sold and slight changes to its performance. They hype them up and play everybody else’s products down. It’s all just lipstick on a pig, and we’re good with that. At the end of the day, the flavor of the other guy’s snake oil doesn’t matter if their customer service sucks. At 47Hops, we’re focusing on great quality, no B.S., amazing customer service … not snake oil.

Is a great shakeout coming?

Last week, CNBC published an article about Boston Beer and the coming great shakeout of the craft industry. It may feel like a great shakeout to the corporate craft breweries at the top of the heap, like Boston Beer. They and the largest craft breweries enjoyed hockey stick growth the past 6-7 years. Today, they more closely resemble the corporate brewers against which they rebelled than our stereotypical image of a craft brewer. That growth slowed last year and continues to slow. Large corporate craft breweries are hardly local anymore. Many aspire to sell to stores around the U.S. Some are busy chasing global distribution.

The insatiable desire for growth is creating battles between corporate craft brewers and multinational brewers for control of shelf space and distribution. Neither group wants to stay in their lane. The craft beer industry probably won’t suffer much from that struggle. It will just be a question of who profits from it. Will the corporation worth hundreds of millions of dollars produce your craft beer, or will it be the corporation worth $186 billion? That struggle attracts a lot of attention. The irony of the situation appears to be lost. There’s another shakeout coming, one that will bring with it even more dire consequences.

If hop acreage growth continues on the current trajectory, there is a shakeout coming in the hop industry. How can that possibly be more important than the shakeout in craft beer? I’m glad you asked! Consider this … Last week, I ran into a Yakima hop grower I don’t normally see. He’s a brilliant guy and has done well over the years. We started talking about the trend of small hop farms starting across the country. He was concerned. We both agreed that they serve a purpose in their local markets but that they don’t understand how bad things can get in the market. Then, he emphasized, “Once they saturate their local markets and start selling outside of their area, they’re playing in my sandbox. If they want to do that, they better be ready to sell Cascades for $2.00 per pound.” 

Nobody wants to sell any hops for $2.00 per pound. Nobody makes money at those prices. Hop growers in the Pacific Northwest are prepared to go to the mattresses to protect their family businesses. If you own a small hop farm anywhere around the country, you should keep that in mind. Many PNW hop growers believe they can survive because they can always produce for less. That is their goto strategy. That doesn’t mean they are looking forward to it.

During the years from 2000-2005, PNW hop growers routinely sold hops far below their cost of production to drive out their competition, which at that time was other PNW hop growers. They are ready to use their size and economies of scale against the smaller farmers if necessary. It sounds like a crazy strategy, but it works. It challenges the resolve of the weaker player and to the victor goes the spoils … such as they are. For small hop farms that think this is a bluff … It’s not just hops. Even Amazon.com used the same strategy against diapers.com a few years ago.

To all the brewers excited by the thought of hops for $2.00 per pound … that should be the last thing you hope for. When prices sink below the cost of production everybody cuts corners, quality is a forgotten concept, farms go out of business, and the number of varieties available decreases. In short, you will get what you pay for.