Transactional costs & the hop market

Hop growers and merchants are having trouble keeping up with the craft industry because it’s growing so fast, but not for the reason you may think. The American hop industry is big. Americans like things big, so this should come as no surprise. The farms are big. The picking machines are big. Growers like to sell in big quantities when they sell their hops. Merchants like this too. Bigger is not always better. Most hop merchants try to optimize their business focusing on transactional costs … which is the fancy way to say that they prefer to work with big customers because it costs less to work with them. The result is that some merchants screen out brewers that need less than a certain volume of hops. Those brewers are not worth their time.

It’s true that it can take as much time, effort and paperwork to sell 44 pounds of hops as it does to sell 44,000. In fact, it can be more difficult to sell 44 pounds. The company buying 44,000 pounds probably has somebody dedicated to the job of buying raw materials. The brewer who needs 44 pounds of hops is also probably the accountant, the janitor, and the bartender. For that reason, it is easier for merchants to focus on big customers … transactional costs. That’s the way the hop industry has worked traditionally. The infrastructure to handle smaller and medium sized orders doesn’t exist among the largest companies. It’s a different business model. That has fit well with the way big breweries bought hops in the past. It has worked well for the craft industry so far. Third party retailers, traditionally buy hops from bigger merchants and service smaller brewers. There’s nothing wrong with that business model. The problem is while they demand a higher price, not all of them provide a high level of service. All that will change in the coming years with the rise of the long tail.

If you didn’t read our previous blog, you can read it now 47hops.com/revolution so you know what we’re talking about when we talk about the long tail. Growers and merchants will find new ways of dealing with smaller brewers around the world because they want to continue growing their market share. The same old ways of doing things won’t be good enough in a world with 10,000+ craft breweries. We’re likely to see more hop merchants and growers satisfying the demand of smaller brewery customers. We may also see the pooling of orders from the brewer side. If they can organize, brewers can act collectively to get the size necessary to fit the current system. We have already seen both of those things happening. Meanwhile, the merchant companies that once enjoyed a strangle hold on the hop industry are losing their power and influence. Some have yet to realize that there’s a hop revolution happening too.

The old guard will fight to maintain the status quo like empires always do. That’s as true in the hop industry as it is in the beer industry. The hop empires of the past still possess a lot of power and money, but they lack entrepreneurial spirit. How will the market change in a world where smaller breweries become the norm? The focus on quality hops is no less important than it ever was. In the long run, the fight is not just about quality hops. Quality of service and the quality of the experience will be vital to success. Smaller brewers will not accept being treated like second-class citizens once they realize they comprise the majority of the industry. The next several years will be a particularly chaotic time as both the hop and craft beer industries struggle to come to grips with their new future.

2017 State of the Hop Industry

April 2017

Today, the hop industry enjoys a popularity the likes of which it has never before enjoyed. Hop varieties appear on beer labels. Brewers swarm to hop farms at harvest time to catch a glimpse of hop harvest. Nearly the entire crop is contracted. Craft brewers talk of sustainability of the hop industry. On the surface, it would seem that the state of the hop industry has never been better. The truth is quite different. The hop industry sits at a point of equilibrium, something many have idealized for decades. Equilibrium has not brought stability and balance to the industry as the word might suggest. Instead, it brings uncertainty and the continuous fear of shortage. The state of the hop industry is fragile. Just beneath the surface the seeds of a potential crisis are being sewn.

 

The Backstory

Many larger craft brewers contracted significant amounts of hops for sustained growth in the craft beer market, which did not materialize. Fueled by the ambitious goals of 20% of the American beer market by 2020, craft brewers and hop industry members fell victim to confirmation bias. The craft industry has grown beyond anybody’s wild imagination in just 10 short years. The possibility of craft reaching 20% of the domestic beer market by 2020 is dead. Brewers contracted hops for that growth. Growers expanded infrastructure based on that projected growth. The hops contracted to reach that goal are no longer necessary. A fully contracted oversupply exists. Most craft brewers continue to honor their contracts in 2017. Most are working closely with merchants and growers to renegotiate more favorable conditions for future years to lessen the impact of a potential future surplus. The problem exists today, but there is good reason to believe that in the coming years continued growth in the craft industry will alleviate the pressure.

For anybody involved with hops for less than 10 years, this might seem like something new. To those who have been around a while, it’s like watching an old familiar movie again. They know how it ends, but hope the ending will be different this time. Craft brewers say they are interested in the sustainability of the hop industry. That attitude alone may make a difference. When times are good, it’s easy to talk that way. When money gets tight, will they abandon those ideals? Several craft brewers and smaller merchants are already showing their disregarding for contracts. If the ugly side of human nature takes over and hops once again become just a commodity sold to the lowest bidder, the movie will, again, end the way it has so many times before. Something is different in 2017. 

 

Sit Rep

In the aroma hop market in 2017, supply and demand are tracking well save for the recent decline in the growth of craft beer. Although the corresponding adjustment needed in the hop world today is less than ideal, it is not so dire as in the past. The difference is the growth. The worldwide preference toward craft beer continues to grow bringing a disproportionate demand for American aroma hops. That growth provides the unprecedented opportunity for the hop market to navigate the current situation avoiding extreme surplus and shortage and the price fluctuations of the past. We are, however, in uncharted territory. Anything is possible, but there are no guarantees.

The hop and craft market today is more segmented than ever before. Although many brewers are long on hops, there is not a surplus of hops in general. Many brewers still need to buy hops. Then there is the alpha market, which is on the verge of deficit. For craft brewers who were proactive and already renegotiated contracts, future supply problems are largely resolved. For those who chose to kick the can down the road or were not flexible, the options remaining are greatly reduced. Excess inventories from the 2015 and 2016 crops linger, but brewers are slowly working it into their production. Others are quietly selling their surplus, careful not to dump prices so as not to harm the hop market or the value of the inventory they purchased. We’re all hop merchants now.

 

If there enough hops, why are farmers planting more?

The simple answer is because there are breweries that still need hops. The market is much more complicated than it appears on the surface. Some merchants will not allow breweries that over bought to renegotiate contracts. Rather than shuffling existing inventory between the “haves” and the “have nots”, they keep contracts in place. They sign new contracts with new customers. In theory, there is nothing wrong with this, except that it delays the problem of dealing with excess inventory until another day. On paper, this creates the perception that sales are growing. This looks great to investors and banks. Sustaining massive lines of credit to finance hop inventory for longer periods, now commonplace among hop merchants, is the likely reason.

Brewers are also throwing up roadblocks in the renegotiation process. It takes two to tango after all. Brewers must be willing to let go of current inventory. Many are not. They must be willing to extend contracts further into the future in exchange for relief of current obligations and think they can dictate the terms of their contracts now that they don’t need the hops. Many don’t want to seek a compromise that works for both sides. They fear they will not find the varieties they need again so easily in the future and want to completely abandon the hops they contracted believing they can just buy them on the spot market for less.  Every year, due to the hop industry producing at capacity, there are variety specific shortages and no way to predict from year to year which variety may be short as that depends largely on the weather. The certainty and stability of the supply of a variety is jeopardized while the market is so near the point of equilibrium, as it is today. When brewers move away from contracting, which is already happening, it leaves growers with no guide as to the varieties the market needs. 

 

The Catch-22

Prices for hops remain stable at a historically high level due to the cost of expanding infrastructure. Coincidentally, many breweries feel that pain too, having recently finished financing expansions of their own. The market for which they expanded, however, has not materialized meaning many will be laden with debt and producing below capacity. Revenue from beer sales has slowed in 2017 further restricting cash flow causing many brewers to withhold payment for hops until absolutely necessary.

Brewers’ lack of payment for contracted hops increases the costs and risks associated to carry each crop from the time it is produced until the time it is delivered. Despite the slowdown, growers still expect to be paid on time. Many brewers do not take this into consideration, or simply don’t care. If this additional expense continues, hop prices to brewers should increase. That is not likely to happen due to the competitiveness of the hop market. Prices, however, are also not likely to decrease anytime soon due to the additional expenses inherent in the industry today. 

 

When perception is not reality

To a Koi in a shallow pond the world is very simple. She doesn’t perceive the world on the other side of the water. She may not even realize she is swimming in a manmade pond. Similarly, many brewers believe they understand the hop market. They are convinced hop prices will plummet soon because they hear oversupply exists. After all, that is how the market behaved in the past. That perception is overly simplistic. They see the market in two dimensions, supply and demand. The hop market has at least a few more dimensions. Cost of producing a crop and the debt associated with it provides depth to the picture. How the market behaves over time adds breadth. The increased complexity introduced by the larger number of players growing, selling and buying hops increases the randomness of the path forward making the path forward less predictable. Sustained growth and a state of equilibrium has never existed in the hop industry before and it is proving to be a very precarious place. 2017 will be a pivotal year for the hop industry. Beyond 2017, the future of the hop industry is murky and unpredictable.

 

 

 

 

 

The ROI of CBC

If we’re being honest isn’t the purpose of a hop merchant having a booth at the trade show to sell hops? If you think it’s just to say hi to everybody and shake hands with customers, I’ve got some Hopi Luwak™ to sell you. This year, we took a second look at whether there could be enough hop sales resulting from the CBC to pay for a cool booth. With so many large brewers well stocked on hops, the chances of them buying much more are virtually non-existent. The odds of paying for CBC by making sales to small brewers who can afford to attend are slim. Three days just isn’t enough time to do so many deals. A lot of small brewers can’t even afford the thousands of dollars it would cost to attend. We don’t want to do CBC just because everybody else is doing it. It has to pay for itself one way or another.

We asked ourselves, “How could we do this whole CBC thing better than we’ve been doing it?” The answer we came up with was fun and a little crazy. We decided it might be possible to chuck the whole idea. Why mess around with baby steps, right? Go big or go home. To figure out if we were on the right track, we asked some brewer friends if they thought the booth was a necessary part of the merchant / brewer relationship. We searched for a compelling reason to spend several times the average American’s annual salary in just three short days. For the 2017 show, we couldn’t find one.

Responses from our brewer friends varied. Some were surprised. Others were encouraging. In general, they supported our plan. Most take it for granted that every merchant will have a booth at the show. Nobody seemed to think that having a booth at the CBC was all that important. The consensus was that it was just nice to see your hop supplier. Brewers with whom we have the most candid relationships shared with us that they had always wondered, how much they were over paying hop dealers so they can afford those booths. We decided that there was so much more we could do with that CBC booth money.

“How much are we over paying hop dealers

so they can afford those booths?”

So … We’re experimenting in 2017. Whether we exhibit at the 2018 CBC will depend on how it all goes. We’ll be at the show. We’ll attend the presentations. We plan to roam the show like gypsy hop merchants. If you see one of us walking around in a 47Hops shirt and want to talk hops, say howdy. The deepest discounts and opportunities are reserved for people who buy online or who stop us in person at the show. We’ll still offer sale prices during CBC week for people stuck in the 20th century who prefer to email or call. So … If that’s how you roll, don’t worry. Since we’re not blowing a small fortune on a booth this year, we can offer a metric butt load of discounts. Take advantage of that! 😉

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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. 

 

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.

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.

 

 

Why 47 Posts in 47 Days?

During the past 47 days, I wrote these 47 blogs because I believe the hop industry is at an important crossroad. Decisions made now will determine the direction of the hop industry for the balance of this decade and much of the next. The actions of growers and merchants now have never held more consequence and should not be made lightly. They should proceed only after careful analysis of the market and with access to information.

There is obviously a lack of transparency and openness within the hop industry. The hop market is opaque and inefficient. The secrecy and fear of speaking one’s mind is obvious by the lack of comments on these blogs. Thousands have read them each day. I have received hundreds of emails with nice messages of support. There is clearly a shortage of market information. Everybody from the brewer and the grower to the banker is hungry for that information. I may not be able to change the way secrecy permeates the industry so long as the stakes are incredibly high. I don’t expect to. Money doesn’t trust anybody.

My goal with these 47 blogs over the past 47 days has been simply to increase awareness about the times in which we find ourselves by speaking out. We are living through unique and unprecedented times. Today we see sustained increases (albeit at a slowing rate) in the popularity and demand for hops. Customers seem to be sincerely interested in paying a sustainable price, rather than just giving it lip service. The situation requires a fresh perspective and bold new thinking or the industry risks a return to the ways of the past.

No longer is the market an all or nothing game. Growers and merchants don’t need to binge on every opportunity that arises out of fear that the future may bring a vicious down cycle. Binging has been the reason for the down cycles of the past. If another down cycle occurs in the years to come it will be due to a lack of self-restraint. Growers and merchants can afford to say no to bad deals. It is possible to reach a higher plain without jeopardizing everything everybody has worked so hard to achieve.

The hop industry has always reacted to market conditions. Everybody throws their dice simultaneously each spring and nobody knows where they land until harvest. Some of that risk is inherent in agriculture. Part of it though is due to the lack of organization and trust among people who have everything in common. As a result, a feast and famine cycle causes some to find fortune while others dreams are broken. There are great farmers that are out of business today. Success or failure is not a sign of intelligence or goodness. As the dollars grow, the primitive animal spirit keeps growers and merchants fiercely independent. Each player seems convinced they know better than their neighbor. With their determination and stubbornness, the uncertainty grows ever larger.

 

“It is not the strongest or the most intelligent who will survive

but those who can best manage change.     –  Charles Darwin

 

The more things change the more they stay the same. The promise of fortune keeps everybody coming back for more. If growers think they must go full speed ahead in pursuit of the brass ring, the future may resemble the past. That need not be the case.

We’ve reached the end of this challenge, but this is only the beginning. The most interesting times lie ahead. I’d like to thank everybody who read any of the blogs so far. I am honored and humbled that so many of you have tuned in. If a few of you have found them useful, then I consider the effort a success. Going forward (after a short break) I’ll be writing 2-3 blogs every week. The goal for the future will be to continue to increase the dialogue, and to reduce the opacity that embodies the hop market. Subscribe if you want to continue to get an inside view of the hop industry’s most interesting days as they unfold.