2015 State of the Hop Industry

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The 2015 crop year will be the last year of a normal hop market before things get out of control. Just like a duck, the current hop market may seem calm on the surface. Underneath the surface, there’s a lot of activity. The trend of changing varieties and new plantings continues at a feverish pace in hop yards around the world. 47Hops expects an additional 6,000 acres of hops in the U.S. (3,500+/- acres in Washington alone). All of that new acreage is toward aroma varieties and away from alpha hops, which will be the cause for some additional stress in the future, but we’re not focused on that today. Is the additional 2015 acreage a troubling sign? Yes it is … but not for the reasons you might expect! What’s troubling is that Washington growers are ONLY planting an extra 3,500 acres. Before we dive deeper into that, let’s take a look at Germany.

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47Hops expects approximately 650 hectares (~1600 acres) of new hops in Germany. Significant acreage conversion continues to aroma varieties led not only by the 3 new popular Open Source varieties, Mandarina Bavaria, Hüll Melon and Hallertau Blanc, but also by old trusted names like Perle, Tradition and Hersbrucker. The trend away from the Magnum variety to the more efficient alpha producer, Herkules, continues fueled by an exchange rate making Germany a cheaper source for alpha, which at the end of the day is just a commodity. Remember, outside of Washington and Idaho none of the new acres planted this year will be available for the 2015 crop. Our sources estimate that there is only another 500-1000 hectares (1,235 – 2,470 acres) of picking capacity remaining in Germany after 2015. Further investment in infrastructure is highly unlikely in Germany due to: 1) Extremely high land costs, 2) Alternative crop opportunities due to the goal Munich has set to be powered by 100% renewable energy by 2025, and, 3) Skepticism about the market and the low return on investment available for new hops due to the lack of economies of scale. Furthermore, due to the burgeoning hop industry in states outside the Pacific Northwest of the U.S., exports of used German Wolf picking machine exports may soon surpass BMW. Ok, tiny exaggeration there. Not really. Seriously though, we have one friend alone who has sold over 40 machines to the US! While that may open doors for small American hop farmers, it closes the doors to low-cost small-scale expansion for the German hop industry. We estimate Germany will reach Peak Hop capacity next year.

In the past, Washington State’s ability to plant a crop in the spring and harvest in the fall has been a curse and a blessing. In 2008, Washington growers planted 8,000 acres in a very enthusiastic response to the high market prices at the time. Idle acreage and picking capacity were everywhere at the time! Everybody wanted a piece of the action! By 2009, you couldn’t give hops away. These cycles have happened in the hop industry as long as there has been a hop industry. Fast-forward to 2015 … Demand for more hops is high. Prices are strong. Are growers showing restraint because of the lessons learned in 08/09? No, that’s not it. Everybody wants a piece of the action … again. Yet, all Washington growers could do in 2015 was to expand by 3,500 acres helped along by +/- 1,200 acres in Idaho. With an average crop, that 47 hundred acres could produce 6.5M pounds of hops in 2015. That’s a lot of hops, but we estimate demand for hops to increase by 8-9M pounds this year based on roughly 22M barrels at approximately 2 pounds of hops per barrel and 18% growth and the trend toward dry hopping. Growers worldwide are pushing every bit of picking capacity and kiln space to do this. American hop farms are at capacity. Without a bumper crop and even with last year’s baby crops maturing, the hop industry will just keep pace with demand. Remember what the hop market has been like for the past 12 months with variety shortages? Expect more of that. The varieties that are short may change, but the shortages will be very real.

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Slowing growers’ expansion is money … surprise! Growers can’t finance the expansions quickly enough with the current market prices. In exchange for lower prices from growers, some merchants have stepped in to finance growers where banks would not. We have heard of ten growers receiving “alternate” financing. While that is keeping the market relatively calm and prices reasonable for 2015, it’s a troubling sign for future growth. While merchant financing solves one problem, it introduces even more risk into an already risky industry. These are temporary solutions to an ongoing problem. The American hop industry has never been more at risk than it is today.

Some new farms are going in, yes, but you can count them on one hand. Brewery partnerships are discussed more openly, but only a few have developed. If the craft industry continues to grow at 18-20% for another year, another 6,000 – 8,000 acres will be necessary in 2016. No grower knows today how that will happen. Ask one. Land is there if the price is right. That price is approaching $12,000 per acre. Picking capacity is the bottleneck. Dauenhauer Manufacturing, which produces picking machines in the US, is at capacity for a couple years. Prices in today’s market, many of which are $12,000 – $14,000 per acre return to the grower, finance some additional picking capacity, but don’t pay for new farms. Remember … one new farm costs about $20M+ and only produces about $1M pounds of hops per year. Some growers say that prices will need to reach $20,000 – $25,000 per acre before they support new farms.

So, what does all this mean? It means the hop industry reach will PEAK HOP production in 12 months. Does that mean there won’t be any more hops in 2016? Of course not! It just means the low-hanging fruit will be gone. Very soon, as they say, shit’s gonna get real. Merchants will step up to the plate to finance growers where they can. To keep the market calm, brewers must also step up to the plate to help finance the hop industry in ways other than just by purchasing hops. Without more of a vertically integrated partnership between grower, merchant and brewer, prices will skyrocket if demand continues to grow In that world, big brewers will likely be favored over small brewers more than they are today. Well-financed breweries will edge out competitors.

If you’re a budding young wannabe hop grower in Podunk, Arkansas, don’t start to think it’s time to plant the back 40 into hops based on what you read here. Brewers big and small will likely switch to using alpha acid and isomerized products to combat the shortages coming from Peak Hop. Creative strategies don’t have to be for only the breweries with deep pockets. Small brewers who develop relationships with their hop suppliers and use their craftiness first will be the ones to make it through the coming peak relatively unscathed. When shit gets real in the hop industry, business becomes very cutthroat. When prices are going through the roof is when close relationships will matter most. Long-term contracts and a relationship with a supplier you can trust to take care of you are as valuable as the hops themselves.

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