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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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

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.
 
sawing-branch
 
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.

 

 

 

 

 

 

Hops & Terroir

Visiting with other hop merchants, brewers and growers over the years, quite a few people have asked me about Cascades grown in other parts of the world. Cascades seem to grow everywhere.  I think it’s the gateway American aroma hop variety for new growers and brewers. If somebody thinks they want to grow hops they try their luck first with Cascade. Some growers around the world have asked if 47Hops is interested in buying their locally-grown Cascades. So far we have declined to buy any. The reason is that, in our opinion, they would not be real Cascades and shouldn’t be sold as such.  They can be different for many reasons, cultural practices being one of them, but we believe terroir plays a more serious role than anybody cares to mention
 
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Terroir?!?  Sacré Bleu!  What’s that?  It sounds French!  Can it be trusted?  Isn’t Terroir a fancy wine marketing term used to build value for wines from certain areas?  Well, it is that, but it is much more too. 
 
Somebody in Europe who produces Cascades is probably cursing me right now as they sit down to enjoy their schnitzel looking out at their field of Hallertau-grown Cascades.  How can I say that what they are growing is NOT Cascades!! The roots came directly from Washington and were exported through all the official programs. They were planted with love in one of the best areas in Europe to grow hops.  All that is wonderful, but unfortunately there are factors at work we cannot control that give a variety its unique characteristics. Grow Cascades outside of Washington, the place that has given Cascade it’s Cascadiness and they could have very different flavors. Those changes might make the variety better than the original in some people’s opinions … but they are not the original. Terroir plays as much a role in the characteristics of a hop variety as the rootstock itself. 
 
Why does all this matter now?  Well, today, the initial offer for German growers to produce AMARILLO® (‘VGXP01’ variety) expires in Germany. Naturally, they are tempted by the reported potential yields and the money they are told can be earned. The price offered is higher than anything else being offered currently.  Will they grow the variety?  Early reports are that the uber-conservative little voice every German hop grower has in his head is warning them that something seems too good to be true. They are concerned about the risk of growing an immigrant variety. Germans seem to be very tolerant of immigrants lately, but that may not be the case when it comes to hop varieties.  Sometimes, it’s good to listen to that little voice.  The fact is that any American variety could yield wonderful hops with an amazing Hallertau twist that we’ve not yet seen in the hop world when transplanted in Germany. That Hallertau twist can be a curse as well as a blessing. It depends on whether a brewer is looking for the traditional flavor associated with a name. Can a transplanted variety be the same as its namesake from the home country … more than likely not.
 
There’s a scientific explanation why varieties change their characteristics when they move to a different neighborhood. According to John Henning, hop breeder extraordinaire from the USDA in Corvallis, Oregon, such things as day length, soil type and climate can affect the genetic characteristics of any hop variety.  Basically … in non genius speak … it can activate or deactivate genes that would not otherwise be in that state when the hop variety is produced in it’s original growing region thereby changing the resulting variety characteristics.  SCIENCE! 
 
 
Dictionary.com defines Terroir as follows:
 
  1. The environmental conditions, especially soil and climate, in which grapes are grown and that give a wine its unique flavor and aroma. 
  1. Also called goût de terroir

 

[goo duh ter-wahr, gooduh ter-war]

 

.  the unique flavor and aroma of a wine that is attributed to the growing environment of the grapes. 

  1. The conditions in which a food is grown or produced and that give the food its unique characteristics:
 
Definitions number 1 and 2 obviously focus on wine, which demonstrates how powerful the wine market industry groups have affected the definition … Good on you wine guys!!  Definition number three is, however, much more general and we see can apply to hops too, as it most certainly does.
 
We don’t have to look far for evidence of this.  There are precedents in the hop industry that demonstrate the effect of Terroir on hops.  The one that comes to mind first is from the U.K.  Tony Redsell’s efforts in protecting the name “East Kent Golding” as a unique variety that must come from a certain area to demonstrate the characteristics for which that variety is sought, are well-known throughout the hop industry.  You can read more about his efforts in this great article.
 
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If you read that article, you’ll see his description that the “cold, salt-laden winds of the Thames Estuary” play a role in creating the characteristics of the East Kent Golding variety and what gives it its East-Kentiness (Yes … I just made up that adjective).  I was having lunch with Tony at an IHGC event a couple years ago shortly after the application’s approval. If my memory serves me correctly, he was scheduled for an interview with the BBC that evening. He was reveling in his victory, and rightly so.  It is quite an accomplishment to get something like that registered, not because it’s not worthy of the designation … just that it had not been tried before with hops. 
 
Terroir has spread it’s influence all over the world. All you have to do is read any American Viticulture Area (AVA) application and you’ll see why any particular area’s climate and soil have an effect on the grapes grown there, much like what Tony did for hops in his application.  Whether you believe the idea of terroir in hops or not, you’re buying it all the time. As of January 21, 2016, there were 232 AVAs registered in the United States.  If you still think Terroir is a bunch of BS, you can try a very unscientific and enjoyable experiment in the form of a wine tasting.  Try wine made with the same grape varietal grown in California versus Washington State.  If you do that, you’ll find the wine from California has what they refer to as a buttery feeling.  It seems to have a higher viscosity and smoother on your tongue.  That’s because of the sunlight and more moderate temperatures in California.  Washington State’s wines are more crisp and acidic due to the rich volcanic soils, which can be a very desirable characteristic for many.  My point is that Terroir is not BS.  It is real in grapes and it should be recognized in hops too. 
 
terroir
 

 

I’m not advocating for any kind of special designation or hop areas.  The last thing any of us need is an additional layer of bureaucracy. Nobody is willing to pay for that anyway. What I’m suggesting is summed up by the words: Caveat Emptor (buyer beware for those of you not fluent in Latin). As the hop market continues to develop more quickly than hop growers can respond, things that would not normally be condoned are happening everywhere with the best of intentions in an attempt to fill demand.  That can mean anything from harvesting a variety that normally picks in 4-5 days over a 2-3 week window to transplanting varieties to new regions where they are unproven.  It’s an exciting time to be in the hop industry, but that excitement is beginning to take its toll on the industry.  When supply eventually catches up with demand, a lot of the more questionable practices will fall by the wayside.  Until then, Caveat Emptor!

I’m not Saying it’s a Hop Shortage … But it’s a Hop Shortage!

Have you heard about the 2015 European hop shortage?  I’d be surprised if you had unless you follow our blog regularly and read our blog back in July when we warned this was coming.  Unless you’re in the hop industry … even if you’re a brewer … nobody around you is talking about the fact that European hop varieties will likely be at least 30% down this year. To put that into real numbers, that’s over 25 million pounds of hops that won’t be there. How does that affect the rest of the world’s hop market? That’s the million-dollar question … literally.
 
shortage
 
Harvest isn’t quite over yet, so it’s a little early to say exactly how bad the carnage will get. It’s not just Europe.  The U.S. has had it’s share of difficulties too. In the most extreme cases, some early aroma varieties are down 50%.  That’s not to say the entire crop will be that bad, but there are mixed results depending upon the location and variety. There are varieties that will have normal yields this year. Overall, the U.S. will appear on the surface to have an average crop, but that apparently calming statistic conceals the underlying truth, which is there are shortages of some varieties and surpluses of others.
 
“Don’t cross a river that’s four feet deep on average.”
Nassim Taleb, The Black Swan
 
swan
 
 
Merchants are scrambling to buy available hops before a potential panic begins … better safe than sorry as they say. Of course, nobody is sure whether there will actually be a panic, but the winds seem to be blowing in that direction. Unfortunately, there are many breweries that still have not realized they should contract forward for hops to protect themselves from exactly this situation. We try to convince them of this, but it sounds like a self-serving message and is often discounted by people who think they know the market better. The panic, if there will be one, will begin when they all come into the market thinking everything is normal only to find out the hop world has gone all topsy turvy since they last checked in. If you know one of those people, do them a favor and forward them a link to this blog so they won’t be surprised by what happens in the future. 

Prior to harvest, most aroma varieties planted worldwide were sold at 95% or more of their 5-year average yields leaving very little room for error.  Most American alpha hops have been removed in favor of aroma hops leaving that market in a deficit even before the season began  … and therein lies the problem. German merchants have encouraged German growers to produce alpha hops because they’ll do it for a lower price than American growers. Alpha acid is a commodity, which usually sells to the lowest bidder. With few other options available, German growers have flocked toward alpha hopsin recent years. Ironically, European growers who traditionally specialize in fine aroma hops are producing alpha hops at a time when aroma hops have never been more popular, further tightening the aroma market. Are you starting to see the problem? If you squeeze one end of a balloon, the other side expands. If demand for European or alpha varieties can’t be satisfied, it will increase demand for American and other varieties, which were all sold before the season began.

Spoiler Alert: 2016 will NOT be better than 2015.
 
Many brewers haven’t heard about all of this yet because there’s no avenue for information other than the hop merchants and it seems most merchants believe it’s not in anybody’s interest to announce hop shortages until they’ve got their house in order. This is what we Americans would call “Inside Baseball”. I can understand why merchants are being so tight lipped, since any remaining spot hops will certainly become more expensive as a result. It’s all part of the game. Merchants would prefer to continue scrambling to get hops everywhere they can cheaply before a potential tsunami hits. This is also when people start to get nasty. At least one U.S. merchant has reportedly threatened to sue several growers if they don’t deliver in full on their contracts. I guess they don’t know the old saying, “You catch more flies with honey than you do with vinegar!”
 
If you’re reading this and think it sounds like there won’t be any hops in 2015, that’s not entirely true. We don’t want to lead you in the wrong direction. There will be hops, of course. Substitutions will be the name of the game. This shortage will create demand where demand did not previously exist. With the current shortage the markets for aroma and alpha hops are now dramatically over sold.  

There are three things that will happen that will further exaggerate the effects of this shortage:

 
1)          Hoarding: Growers, merchants and even brewers start to hold back inventory from the market in order to get a higher price for their spot hops later. Some morally challenged individuals will short their contracts so as to have hops to play with on the open market. That’s not nice, but the hop industry is not full of choir boys. Slovenian, Polish and Czech growers have the worst reputations for this in the industry. The reality is that it happens everywhere. Prices increase in response to hoarding.
 
2)           The Ripple Effect: Shortages in one variety cause demand for different varieties that would otherwise be in balance sending their prices upward. Cascade demand increasing in response to a Centennial shortage is a good example of this. Centennial prices increase until the market can’t bear anymore and then substitutions become more attractive. We’ve heard of growers already selling Centennials for $17/pound to one merchant and $15/pound to another. We’ll see how far that goes until it spills over and affects the Cascade price, which seems inevitable. When it comes to an alpha shortage, no variety is immune since all hops contain alpha acid. Expect to see that again in the near future too. 
 
3)          Favoritism:  Everybody likes to help a friend. We know for a fact that some merchants prioritize their customers into A, B and C groups. That’s pretty self-explanatory … You want to be on the “A” list if you want to receive all your hops. Other guys distribute the pain equally across the board. There’s no right or wrong way really. If you’re on the short end of the stick, though, you probably think otherwise.
 

 

 

 

 

 

If you think this all sounds like a bunch of textbook supply chain mumbo jumbo, all you have to do is look at the “shortage” of 2007-2008.  There were plenty of hops still out there. There was no shortage of hops in 2007. You just had to know where to find them. That wasn’t easy. We’re heading for a very similar situation with the 2015 and 2016 crops. I know I probably sound like some scheister hop merchant when I suggest that contracting can help you get around these problems, but it is really that easy. That, combined with plenty of communication with your hop supplier so you’re on the “A” list is the best way to know that your hops will be there when you need them.

Washington State Hop Growers Are Losing Their Edge

Washington State hop growers have long enjoyed an unfair advantage over hop growers around the world. More often than not, however, it has been more of a curse than a blessing. That advantage has been the ability to plant and produce a crop in the same year. It may sound like a great advantage. In fact, it has been a double-edged sword that has allowed them to quickly take advantage of, and destroy, hop markets. Those days, at least for the foreseeable future, seem to be gone. No, it’s not climate change or even the changing of the varietal mix. It’s simply because Washington State growers have to plan for the next crop or the crop after that rather than the crop that is immediately before them.

If you’re saying to yourself, “Oh God, not another crazy article about how everybody’s at capacity and how much it’s going to cost to fix that problem”, read on because It’s not about that. You are in for a treat. What does this all have to do with production you may ask. Of course, growers can still plant and harvest a crop in the same year. That hasn’t changed. True, it is still possible to plant and harvest a crop in one year in Washington State. The weather hasn’t changed THAT much. Without surplus infrastructure to harvest and process any new crop, the machine that was once able to quickly respond to events is forced to think more long term. Maybe that’s a good thing! Producing hops is about so much more than just growing them. Sure, that’s the sexy part and hop growers are rock stars again. That’s great. There’s a lot that happens after those pretty hop vines leave the field. With the Washington State industry at or near capacity, the ability to expand acreage (i.e., plant and harvest a crop in one year) disappears.

If you’re a brewer, you need hops all year round. You usually need more hops during the warmer months but you may have seasonal beers that need a lot of hops even during winter. Typically brewers have been used to balancing their needs on a monthly basis. All that is changing with the surge in demand for hops produced by craft beer. Agriculture is a seasonal business with natural cycles into which the orders must flow. In the past, hop merchants have been the buffer between shortage and surplus. Through speculation they were able to overcome the discrepancy between brewer and farmer cycles. As long-term prices to hop growers increase and the margins between merchant and brewer remain largely the same, the profit that can be made by the merchant does not warrant the same level of speculation. That is one reason why the hop industry is closer to equilibrium than ever before.

Let’s say it’s spring, you’re a brewer and you need some hops. When can you place an order for those hops and expect to get them? In the good old days, a merchant might have some extra hops lying around that weren’t sold. He probably bought some “overs” from a grower at a pretty low price just in case a brewer needed some extra hops. No problem … whenever you call, you’d get the hops you needed. If you’ve tried to do that lately, you know that’s not a good strategy. Unless your beer is named “RANDOM”, that will not work out so well anymore.

Here’s how it works today. You’re a brewer again and it’s still spring. If the merchant needs to find those hops and they know a grower with empty trellis (also not happening a lot these days) you can wait as late as the February before harvest in Washington State, but November of the previous year would be better. Already, you may have missed the boat. Merchants do still speculate to some degree, but it’s not pure speculation like in the old days. It’s a reserve they use to buffer against shortages. That may only be an extra 5-10%. As the year progresses and if it looks like it will be a good crop a merchant can free up some of that reserve to sell. That’s how hops become available after harvest when everybody is saying that the crop has been sold out forever. You may still find a merchant who can sell you hops or who is willing to borrow from their reserve to sell hops to you prior to harvest, but that’s risky for everybody.

Because the hop industry can’t keep up with demand, brewers, merchants and growers must now think out beyond the horizon. Most common today is that the grower will need to buy ground, build trellis and perhaps even invest in additional picking infrastructure. Those are the factors driving prices ever higher. Even a doubting Thomas cannot deny that fact. Those prices mean that the merchant is less likely to buy too much extra just to have a nice fat reserve because that reserve if not sold quickly eats away any potential profit. It is easier to tighten up the reserve and just claim Force Majeure if there is a crop failure. We know of at least one hop merchant that has that as their business plan. I believe we will see a lot more reserve tightening during the next couple years. That strategy passes risk on to the brewer. Without adequate planning in advance and plenty of communication, the hops that are needed will not be produced.

The incredible growth of demand for aroma hops has actually removed the amazing advantage that Washington State has over all other hop producing regions in the world. It has taken away the ability to produce hops in response to last minute orders. The hop industry hasn’t been so restrained since the 1930’s, before Washington State became a significant center for hop production. For the past century, merchants and big brewers have used Washington State’s ability to quickly respond as a buffer against shortage. Within one year any problem could be corrected. Furthermore, with the fat brewer inventories of the past, the impact of a shortage could be softened until that next crop could be produced. No more! Inventories are shrinking and the response time for production has drastically increased. That buffer is gone. We are all risk takers now.

Natural-Crystal-Ball-MGB004-

Between merchants and growers, the conversation is already about two crops in the future and beyond. Everything being produced sooner is spoken for. The problem with all of this is that the crystal ball is fuzzy far out into the future. If the industry was growing at a stable 2% every year, we wouldn’t be having this conversation. With craft brewery growth in the double digits every year, however, it’s a different game. You know that kind of growth can’t last forever. When do you apply the brakes on the supply side? That’s literally the million dollar question on the minds of growers and merchants these days in greasy spoons all over the Yakima Valley.

Brewers and merchants cannot often predict what they will need with any certainty, but they have to contract hops to secure what they believe will happen. The roulette wheel is spinning. Where it will land, nobody knows. It can land continued “craft beer growth” and everybody is happy. If it lands on “slowed growth” we all lurch forward as the bus suddenly downshifts. The trick is that we all now must plan ahead much further into the future today for the hops we think we will need tomorrow or we are guaranteed that they will not be there. Those who are willing to take the risk that the trend for growth in the craft industry will win if that growth continues as they will be the only ones with hops to sell. The playing field between Germany and the United States has been leveled. The thing that will make the difference going forward will be who has the appetite for risk. The United States is a country of entrepreneurs and independent thinkers that seem like a natural winner for this type of contest, but I wouldn’t count the German hop production machine out just yet. Game on!

2015 Pre-Harvest Crop Report – Hops

Part of the 47Hops crew just attended the International Hop Growers Convention (IHGC) in Germany.  It’s almost the beginning of August, which officially marks the calm before the storm.  Harvest will begin in just over two weeks for the earliest hop varieties and just like before a big football game you can feel the tension in the air.  A mere eight weeks from now, though the results will be in and the chaos that is harvest will once again be behind us. Until then, the anticipation regarding crop 2015 and what it will bring builds with each passing day.

EUROPE

Driving around the Hallertau it was obvious that the German crop, which constitutes approximately 40% of world hop production, is a very mixed bag. There were some healthy looking fields. There were also some fields that looked terrible. There was also everything in between. Most fields we saw were at the late bloom or early cone development stage. This is one of the most fragile times during the German growing season. Weather can often make or break a crop between the third week of July and the middle of August. The weather in 2015 is not cooperating. In short, above average temperatures and a lack of rain have taken what was a beautiful crop with enormous potential just 6 short weeks ago and turned it into a crop that has the potential at the time of this writing to be one of the worst in recent memory.

During the Economic Committee session at the IHGC at which estimated yields from hop producing countries around the world are typically discussed, one European country after another took the stage. They announced with solemn faces that the numbers they reported to the organization just a few short weeks earlier were now inaccurate. The prognosis had worsened since then. The norm amongst those reporting was that the crop would be down 10-15% from average yields. Germany, which had an above average crop in 2014, expects yields to be down 16% from 2014 levels (The 2014 German crop was excellent, however, and yielded approximately 10% above average).

IMG_4974

The problems developing with the German crop, and to a certain extent, with the entire European crop in 2015 are many. Some varieties that typically produce their hops at the top of the vine were very thin on top and Christmas tree shaped … meaning that there won’t be much of a yield there. Arms on the vines of many varieties are short. If hops don’t “arm out” there’s less room for hop growth lower down the vine. The drought that has plagued Europe the past 6 weeks continues, but that is not all. The past 5 days have brought winds to Germany, which wreak havoc on hops at this time of year bending and even breaking arms and further drying out the already thirsty hop vines. Many yards were visibly stressed.

There were, of course, hop yards that were surviving Mother Nature’s torturous treatment. Those with irrigation are finding that investment is paying for itself this year. Only about 16% of the total German acreage is currently under irrigation. Soil type plays a significant role as those with sandier soils, which don’t retain water so well, are suffering. Weather around the Hallertau specifically, and Europe in general, varies greatly from village to village. Every hop variety, of course, responds differently to weather conditions. The result is a LOT of variety out there, but overall a poor outlook for hop production on the continent. Unfortunately for growers in the Czech Republic with irrigation, they are not finding irrigation systems to be their salvation. They are restricted as those systems draw from nearby rivers, the levels of which are being protected. The exception to this wave of bad news across Europe was England, where growers expect an average crop and whose growers have enjoyed ample rainfall this year.

As we mentioned, delegates at the IHGC Economic Committee meeting reported anticipating lower-than-average yields. Worse still was when they reinforced that the coming weeks will be crucial to the development of the hops. They warned that unless there is significant rainfall during the next week or two, yields would suffer further losses. Some estimated yields could be down 25% or more from average yields. The longer the drought continues, the deeper the deficit will become. With no rain in sight, the prospects for a normal hop market in 2015 are dim. The hop world is never boring.

During a conversation with a German grower following the Economic Committee meeting, he explained how, in his opinion, the estimates presented were overly optimistic. He stated he did not understand how people could present the estimates they presented with the current conditions and the existing weather forecast. Without significant rainfall soon, he continued, the bloom and cones that are only just developing would not continue to develop to a normal maturity. What would result without any additional rainfall, he continued, would be cones that do not grow to their proper size, are of poorer than normal quality and that contain little to no alpha. He suggested we could be on track for a year much like 2003. In short, it was a disaster of hopocalyptic proportions. Only time will tell of course, but we do not have long to wait before the verdict is in. Naturally, varieties that harvest later develop later and enjoy the luxury of more time to benefit from much needed rains. There is still hope for them to yield closer to average than the earlier-harvested varieties. That hope fades with each passing dry day.

For those who don’t remember, 2003 was a year during which the German crop was down approximately 50% and alphas were very low.

At the time of this writing, according to Weather Underground (www.wunderground.com) there is only a 40-50% chance for several millimeters of rain in the forecast for the Hallertau area for the next 10 days. We all know how accurate weathermen are though so we will keep an eye on that situation as the days pass. The elephant in the room is that many European countries are over 90% sold based on average yields. Already with the anticipated reduced yields of 10-15%, it seems there will be supply problems that will require some creative solutions.

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UNITED STATES

Things in the U.S., by comparison, don’t seem so bad, although 2015 has been a difficult year to say the least. Blistering heat has rocked the Yakima valley and has severely affected several varieties. That same heat however improved the outlook for other varieties like Cascade. Again, it’s a mixed bag due to different varieties and how they react to varying weather conditions. Reporters are talking and writing about the drought and the current water shortage in the U.S. At the moment, it’s a non-issue for most growers and there is plenty of water for hop production. If the 2015/16 winter is weak, the 2016 crop year could bring with it serious water shortages that can drastically affect production … but winter seems an eternity away with harvest only on the horizon.

By and large, Oregon, Idaho and the rest of the country have escaped the punishment Mother Nature has unleashed on Yakima. They seem to be on track for an average yield. Yakima, however, with nearly 80% of the American hop acreage, is a different story. Several aroma varieties, open source and proprietary, are anticipated to produce light yields, which, when totaled easily add up to several million pounds of hops. That equates to roughly 4-5% down from average yields.

Newly planted acreage in 2015 was already not on track to produce enough hops to meet brewers’ anticipated demands as growers struggle to find ways to harvest the additional needs of brewers. The short crop might actually help relieve some of the pressure of harvest for some growers. That pressure will shift to brewers who will have a difficult time sourcing hops if they are not fully contracted already.

OUTLOOK

When compared to the anticipated growth of the craft beer industry, it seems the American hop industry will fall short of satisfying that demand, another sign of the industry being at or above capacity. With the conservative estimates we have at the time of this writing, we can already see that the worldwide crop in 2015 will produce approximately 15 million pounds fewer hops than the 2014 crop. Should the outlook for European yields worsen in the coming days and weeks, that number could easily double, and depending upon the length of the drought in Europe, even possibly triple … although we believe that is much less likely.

OPTIONS

Relationships, substitutions and flexibility will be the name of the game in 2015 if the outlook for the European crop continues to worsen. The deeper the deficit, the more dramatic the solutions required to survive. Hopefully your source for hops will have set aside some sort of reserve to make sure they can deliver on all their contracts even in the event of a below average crop. Let’s take a worst-case scenario though, a worldwide crop that is short by 30 million pounds of hops … or more. There are alternatives since there are alpha hops being produced out there that may be available. I’m talking specifically about CTZ, Herkules and Magnum. Those are excellent bittering varieties. German Herkules and Magnum are a bit foreign to the American market (pardon the pun), but there’s no good reason for that as they’re excellent varieties. Perhaps 2015 will finally mark their grand entrance into the American market? They can be substituted the hops brewers use for bittering at the beginning of the brew to make hard-to-find aroma hops stretch further. If you’re a brewer and you go that route, you can finish off with the hops whose flavor you’re looking for to make those difficult-to-find varieties stretch further.

Why German Herkules and Magnum? Why not CTZ? True, there still is some CTZ out there, but it is harder to find as American growers remove it to use the acreage for aroma hops in high demand. Conversely, Germans are planting Herkules every year despite the enormous demand for German aroma varieties. Go figure! For that reason, supply will be easier to insure. Contracts are more easily available and prices are more affordable.

Hint: It would be a good idea to make German Herkules and Magnum a part of your regular plan going forward as a solution to the inevitable upcoming varietal deficits in future years due to the lack of excess production capacity.

In addition to German Herkules and Magnum, we also hear there are still very limited quantities of crop 2014 in different dealers’ inventories. That would be an excellent substitute for the short 2015 crop … if you can find them.

SUMMARY:

  • Stay tuned and keep an eye on what’s happening with the crop. At 47Hops, we’ll keep you up to date with information you won’t get from other sources. We call it like we see it, no BS. We think it’s about time for that in the hop industry.
  • Make sure you will have enough hops. Contact your dealer every couple weeks for the next 2 months to find out if you can expect a full delivery on your contracts. The situation may change so don’t rely on old news.
  • Be flexible. Consider alternative varieties like German Magnum and Herkules to make scarce aroma hops go further.
  • If you can find the variety of hops you need, or a good substitute, buy them right away. Don’t wait because they will likely be gone. There won’t be a spot market in 2015 because there aren’t many hops available.
  • Finally … Chillax. Use this as an opportunity to make adjustments to recipes and prepare for the years to come, which will be full of variety shortages, strange weather and spot deficits as the industry tries desperately to reach beyond its current capacity.

Why Cascades Will Be Short in 2015

Last week the USDA released the U.S. acreage strung for harvest statistics.  What do they show?  They show a huge migration toward proprietary varieties, some of which, as I have discussed in previous blogs, are locked down and controlled by only a few people.  That’s a trend that should concern every brewer if they don’t like the idea of three guys deciding how much hops they can source.  One thing that is suspiciously absent, however, in 2015 is a significant increase in Cascade acreage.  There were less than 200 new Cascade acres in the Pacific Northwest.  While that may sound like a lot if you’re starting a farm, there were over 6,600 acres in the U.S., so that represents a very small percentage, less than 3% to be exact!

Based on average yields, that means there will be +/- 275,000 pounds more Cascades in 2015 than there were in 2014. That sounds like a lot of hops. For any normal brewer, that would be enough … surely there can’t be a problem. Let’s dive into that number a bit deeper, because it’s nowhere near enough.

In 2014, Cascade production was 12.6 million pounds. Everybody knows the craft market is growing at roughly 18%. That would mean roughly an additional 2.2 Million pounds of Cascade should be necessary this year. That sounds a little optimistic though and that’s a really big number. In the interests of trying to get that number down a bit, and since some people might want to try other varieties, let’s say we need only an additional 10% Cascade volume. That means an additional 1.26 million pounds necessary. If all goes well, we’re short by about 1 million pounds. That sounds pretty bad. It actually gets much worse than that.

Last year, one large brewer was sitting on several hundred thousand pounds of 2013 Cascades. They didn’t need them for whatever reason and decided to sell them back into the market to several dealers at $2.50 per pound. They did this during harvest … coincidentally just as prices were starting to escalate due to a production deficit. I know the details because along the way we were also offered the chance to buy these hops. We declined.

When the 2013 Cascades came on the market, prices were rising quickly. Prices had increased about $3.00 per pound at the grower level in a period of about as many weeks. At the time, it seemed Cascade had the momentum to continue to $10.00 per pound to the grower as Centennials were doing at the same time in response to the deficit in that variety.

 47Hops Cascade Article

That’s right, there was a deficit of Cascades in 2014. Prices did not reflect that because of the hops that reentered the market. Let’s say, just to keep things simple that the deficit was roughly the same as the amount of 2013 hops that reentered the market, 300,000 pounds. Let’s try to estimate the actual 2015 Cascade demand … We have to start with what the actual 2014 Cascade crop demand. We should assume we started from a deficit position based on the way prices were skyrocketing. Let’s assume that to be the case. If we assume that the deficit was approximately 300,000 pounds, since that was enough to send prices back down, the actual 2014 demand was somewhere around 12.9 million pounds of Cascade. That would make our actual 2015 demand (if calculated at only a 10% increase) at 14.2 million pounds. If we calculate the growth of Cascade demand at 18%, the demand increases to 15.2 million pounds in 2015. The reasons to assume growth of greater than 10% are many. That is one of the flagship varieties of many beers. It’s also one of the gateway hop varieties for people trying American hops around the world.

Based on average yields, the 2015 Cascade crop should be approximately 13 million pounds. That is if 2015 produces an average yield. This year has been difficult already with powdery mildew pressure and early bloom challenging the Cascade and many other varieties, including one or two of those proprietary varieties nobody can ever get their hands on.

So, why are there not enough Cascades? It’s not rocket science. Growers react to price signals. When that brewer flooded the market with old Cascades last year, it instantly filled the market. It sent prices back down to where they had been prior to the time when the deficit became obvious. The brewery was most likely just trying to take care of a problem they were having with excess inventory and saw an opportunity to do that, nothing sinister or conspiratorial there. It is doubtful the brewery considered or understood the full consequences of their actions. In the absence of fact, conspiracies and rumors will fly though. Some say that brewer was influenced by the owners of the elusive proprietary varieties to sell those hops into the market, the mafia-like families to which we have referred in a previous blog. The theory is that those guys would benefit financially from the resulting royalties on the additional production. That would make sense because it would drive growers more toward their varieties instead of Open Source varieties, but it’s pure speculation. Some growers also speculate that that brewer, who usually does not like to pay market prices for their hops and who growers believe they can use their size as a threat to insure low prices, may have been trying to keep prices for Cascade reasonable. Whether either those theories are true or not is impossible to say of course. That’s what makes conspiracies so much fun. What we know is that the effect of their actions was that Cascade prices plummeted in 2014, at the very time growers were making planting decisions for 2015. That effectively steered growers away from Cascades and toward proprietary varieties that were commanding a higher return per acre at the time. The market really is that simple and open to manipulation from outside forces, intentional or otherwise.

We have seen all this before. It was only 2007 and 2008 when acreage switched from just about every conceivable variety to the CTZ variety due to the higher prices being paid for it at that time. The result was that other varieties, if brewers wanted to keep them in the ground, had to deliver to the grower as much or more than the price that could be had for the alpha hops. As a result there were brewers had to pay $20-25/pound for Willamettes and Cascades. The same thing is happening now.

The limit of production capacity about which I have been writing for the past year or two has arrived. It manifests itself in variety-specific shortages that will change from year to year as the limited amount of acreage chases demand. The varieties that return the highest yields to the grower will prevail. We anticipate double-digit prices for most varieties this fall. Only CTZ and a few other alpha varieties will stay below the $10 mark. A smart strategy for a brewer during this time is to secure supply and be less concerned about price. Of course, that sounds like something a dealer might say … dirty dealers. The truth is though that locking in at today’s prices will seem like a brilliant strategy 12-18 months from now and it could save you thousands, or tens of thousands of dollars, just as it has already for those who locked in a couple years ago and who can sit back and watch this all unfold.

Is Water Threatening the Hop Supply?

If you’re a brewer, you’re used to thinking about water.  You use a lot of it.  Some of our brewer friends in California have to think about it a little more than the rest of us these days.  That’s a concern that’s starting to trickle into the hop industry too.  Last week there was a local news story about the Roza Irrigation district (one of the irrigation districts in the Yakima valley) and how they will be shutting off the water for 11 days this month to ration water. Check out the story for yourself here.  The Roza district is infamous for being at the end of the line, meaning that they are the first to get shut off in times of trouble … the canary in the coal mine if you will. There are other districts that are senior to the Roza and are always guaranteed water.

There’s a lot of concern out there about water now. It seems reporters are thirsty for a story about how water will doom the industry. We know that about 25-33% of the Washington State hop acreage is grown within the boundaries of the Roza irrigation district. That’s a significant number! A lot of growers there have access to wells, and there are other irrigation districts around some farms. It’s definitely not a black and white issue. The water irrigation system has reserve capacity built into it so a short supply does not equal a shortage. There are a few other options for some people. It’s too early to predict exactly how the short water supply will affect the 2015 crop. It’s not too early though to predict, that if we have another warm winter with very little snow in the Cascade mountain range like the one we just had, 2016 will bring with it serious water problems that will negatively affect the hop crop. That’s how serious the situation is at the moment. That’s a concern among hop growers today.

drought pic

The Balancing Act

A table normally has 4 legs, but it can also stand on just three if you take one away. Sure, it’s less stable that way, but it’ll stand. Although it’s standing, that table will fall over if you put some weight on the wrong side once that fourth leg is gone. Once you’ve taken away that fourth leg, you lose the stability built into the table. The result is that you are at greater risk and more vulnerable to the next problem that comes along. That is where the hop industry is now with its water problem, a little closer to tipping over. A heat wave, or another warm winter with very little snow, and we’re in a serious drought situation that could drastically affect the supply of hops.

3-legged table

Farmers always have a lot of risk. Considering that, I’m surprised how much they like to gamble in their free time. You would think they get enough at work. I guess next to farming a little game of dice or poker doesn’t seem very risky at all. After all, all they can lose is the money on the table. Something farmers also like to do … they also like to complain how they can lose the crop. I often hear criticism from brewers that growers and merchants are trying to drive the price up by creating things to worry about. Some people may be doing that for sure, but by and large the things that come along, like today’s water situation, can develop into real problems and the crop can really be affected. Those are the things growers have to be concerned about. If brewers understood all the risks to the crop that happen every year on the farm, they would be thankful there are hops at all.

I don’t want to boost grower egos too much because some of them already drink their own Kool-Aid, but it comes down to the fact that most of them are experts with generations of experience behind them. With farming, that’s important. That enables them to overcome the challenges they face every year to produce an average crop more often than not. Farming isn’t as sexy as being an astronaut, but most of them do the equivalent to what the pilots of Apollo 13 did when they brought their ship home … but they do it every year. Some of them read this. It’s good for them to know that they are appreciated. I don’t want them to start thinking they can walk on water though so I’ll stop saying nice things about them now. Sometimes though, despite the day and age in which we live, there are still surprises. Let’s not forget, it was just last year that Centennials and every early-harvesting variety in the U.S. were short 30-50%. Nobody saw that coming. The crop looked good, but the cones just didn’t weight out. How do you plan for that?

Sometimes it’s Better to be Lucky than Good

Let’s say the crop is down 5-10% across all varieties this year. It doesn’t have to be from a water-related problem. There are threats to the crop all around. It could just as easily be because of a heat wave that shut down the growth of aroma varieties and bring on spider mites. A short crop could also be due to cold temperatures that don’t allow the crop to mature quickly enough. The crop can suffer from more rain and humidity than normal. That increases the chance of powdery mildew and other diseases. In the Hallertau region of Germany, there are several areas that seem to be particularly susceptible to hail storms. I could go on, but I think you get the point.

Fun Fact: Did you know many aroma hops don’t like when the temperatures get over 100 degrees Fahrenheit. They stop growing in response and need even more water.

Growing a great crop depends on a lot of knowledge and experience … but also a bit of random luck. As the saying goes, the harder you work, the luckier you will get applies here too. The lucky ones choose to be proactive rather than reactive regarding circumstances that may affect them. In the pricing of hops, it seems we take for granted the experience and wisdom and discount the value of luck.

On the Edge

Due to the popularity of hops from the craft beer revolution, the hop industry has been pushed to its limits.  That means, unfortunately, there is very little room for error. For all intents and purposes, you can say the 2015 and 2016 crops are fully sold. Crops 2017 through 2020 are heading in that direction quickly. Quite a few European hops are contracted beyond 2020. The trend is moving toward longer-term contracts. Any of the threats to the crop mentioned above could result in a decrease in yields of 5-10%. Five or ten percent is not much. It’s definitely not unrealistic to consider the crop could be off by that much. To put it in perspective though, that’s roughly 4-8 million pounds of U.S. hops that could just not materialize. That is significant. That probably doesn’t even represent the growth in hop demand for the craft beer market this year alone.

Many people have some reserve set aside in case the crop comes in short. With so much demand in the market though, it’s tempting to grab the business when it comes along. As a result, some are selling dangerously close to 100% of what they expect to receive from an average crop. That’s risky! Consider that the crop in the growing regions in the rest of the world are much more dependent on weather than growers in the Yakima valley and you start to grasp the full scope of the risk involved. Germany has long had a rule that they do not contract more than 80% of their crop due to the fluctuations in yield from year to year. According to the most recent IHGC data, They have already exceeded that for 2015, and those numbers were collected in April. A world crop that is 5-10% down could be 10-20 million pounds short.  That’ll leave a mark.

Fortune favors the prepared mind.

-Louis Pasteur

 

Right now you’re thinking, “Sure, this hop merchant is telling me how the crop can be short. I know it goes the other way too. You can have a bumper crop in any given year too. Then maybe I could save some money.” That’s absolutely true! Bumper crops don’t happen very often though for a reason. There are a lot of things working against huge monocultures of crops succeeding to begin with.  Hoping for a bumper crop is like betting on green at the roulette table.  It hits once in a while, but it’s not as safe as some of the other bets you can make. It all depends on your appetite for risk as a brewer. My guess is you probably have car insurance even if you know you’re a great driver because you never know when something out of your control will affect your path. Do you do that because the State requires it, or would you buy it on your own too?

blackswan

The farther we look out on the time horizon of the hop industry, the greater the odds that there will be some black swan event that can touch each of us directly. Can the water supply affect the 2015 crop in Washington State? Yes, It can. The answer to that question is usually NO. Unfortunately, it’s too early to know with any certainty whether it will or not. We should be always prepared for anything because this is agriculture and agriculture depends on random things we can’t control, like the weather. We will just have to wait and see what Mother Nature has in store.