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