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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