Originally published prior to the 2014 CBC in April of this year, the 2014 State of the US Hop Industry Report becomes more relevant with each passing day.
The state of the U.S. hop industry is strong today, but turbulent times lurk just around the corner. The industry is experiencing a period of sustained increasing demand and struggling to keep pace. The capacity to produce a continually increasing supply will not exist without significant investment, which, in short, means increasing hop prices. Traditionally, the hop market is either in surplus or deficit. It is not stable when it is in balance and it has never experienced such balance as the aroma market sees today.
Prices are on the rise, in part because of limited production capacity and rapidly increasing demand. In part, memories of an industry history filled with boom and bust cycles are still fresh. Empowered by good returns on aroma hops American growers will say NO to low prices now because they can. It’s important to understand the way growers think. If you do, you can understand what will happen in the hop market next. Growers look at their farms and measure their return per acre of hops by variety. Naturally, they want to maximize that number. In a market like we have today, that causes something we can call Growerthink. If you like economics, opportunity costs are the official name for one of the causes of what we are calling Growerthink.
Law of Growerthink – In a short or balanced hop market, the return per acre generated by the most expensive variety dictates the return per acre of all varieties. Varieties returning less per acre will not be produced.
In good times and bad, the price of hops is not strongly related to the cost of production. The return per acre in a surplus market is determined by the price per pound the grower receives. In a slightly short or balanced hop market, the price per pound is determined by the desired return per acre of the grower. At the time of this writing, a grower can earn $10,000 – $12,000 per acre growing one of the industry’s more popular varieties. If a buyer wants another variety picked during the very limited “prime time” for picking aroma varieties, September 1 – 21, the grower will expect the same high return per acre. This makes sense since he could plant the higher revenue generating variety instead. The buyer must, therefore, match the same high return per acre, or out the lower returning variety goes. Varieties that yield more pounds per acre are cheaper. As price increases for the most expensive variety, so will prices for all other varieties picked during the same picking window. Resistance to high prices will push demand to the fringe picking times and into alternative varieties, creating demand there too. Hops are hops though and soon it is not the prime time picking window that drives the price, but picking hops at all. The high return of the prime time varieties extends beyond that highly competitive picking window to ALL varieties, regardless of when they are picked. Today, the industry is not quite to that point, but it soon will be … again. We believe prices to brewers will likely be over $10 per pound for every aroma variety by year’s end.
There will be no shortage of aroma varieties that higher prices cannot fix. Articles you may have read claiming the sky is falling and there will not be aroma hops in the future are not true. Temporary shortages by variety already exist, but they will only last until the price increases to the point where new production capacity can be introduced to increase production. In some early cases, that will mean new hop yards, more kilns or a new picking machine. Later, it will mean entirely new farms. All are very expensive options. Without additional capacity, however, additional hops cannot be produced and real shortages will result. The solution is a question of money, not of ability to produce. Today’s grower can produce more hops if they can pay for the necessary infrastructure. Once prices rise for varieties produced on new acreage though, Growerthink insures they will rise for all varieties.
If you own or work for a brewery, the best thing you can do now to protect yourself is sign a five-year contract while prices are still reasonable. Consider asking for seven-year contracts at volumes you know you will need if you want to secure them. Contracting forward for an amount of hops you are certain you will need is an insurance policy against the challenging times to come, not as a liability. Some may still remember the high prices of 2007-08. That was caused by the cyclical nature of the surpluses and deficits of the alpha hop market. The effect the alpha market has on hop prices dwarfs anything happening today in the aroma market. Today many large brewers, the top 40 of which control 85% of the world’s beer production, are not in the market for alpha hops. Meanwhile, acreage of alpha hops continues to disappear. Those breweries will likely return to the market in the next 18 months or so shopping for their alpha needs. The production capacity necessary to respond quickly to those additional demands will not exist. An event horizon is approaching. Prices for alpha hops can quickly rise beyond the highest current aroma market prices. These brewers, unlike their craft brewer brethren, make billions in profits each quarter. Growerthink again will rear its head. This time, it will be alpha hops setting the high water mark. Aroma acreage that has not been contracted must match the alpha acreage returns or it will be removed to plant alpha hops. Only contracted hops are protected from this threat.
Brewers large and small have been accustomed to buying hops when they need them, like you buy flour at the store when you make a cake. The store always has flour so you don’t buy your flour for next month’s cake today. Those days may return to the hop industry someday. For the rest of the decade, however, it seems they are gone. It is already necessary to anticipate needs for the next five years and contract forward for those needs now. The landscape of the next five years will be drastically different than it is today. Five-year contracts will become the norm rather than the exception. Large brewers will consider purchasing interests in new farms to secure their hop needs. Brewers will use hop backs, variety substitution and other creative brewing methods to make limited quantities of scarce varieties stretch further before paying prices that could be double what they are today. If brewers don’t contract forward, they won’t get whatever they need. They’ll need whatever they can get. Challenging times are ahead, but we believe the solution is simple. Contract your hops today!