2016 State of the Hop Industry

Despite acreage increases worldwide don’t expect a surplus of hops this year, but that doesn’t mean there will be shortage either. On the surface, that sounds like great news. A closer look reveals massive imbalances and fragility. Barring a crop failure, there should be enough hops to go around, but variety specific shortages, similar to those we saw in 2015, will require that brewers be creative and consider substitutions. There are several reasons this year’s variety specific shortages will be more severe than normal.
 
  1. Stability of Randomness,
  2. The hop cartel, and
  3. Something we’ll call the X factor
We won’t discuss alternative financing, how it affects planting decisions and the varieties available to breweries, but there is a power play happening behind the scenes that is changing the varieties available. We’ll leave that for another time.
 
Stability of Randomness.
With farming, on the other hand, something unpredictable happens every year. In some years, it seems the crop can be threatened in ways not before thought possible. Randomness is the only constant. This year’s long-term weather forecast is for storms in the hop-growing regions of Central Europe this summer. Storms have already lowered yields in Australia and New Zealand in 2016. South America is experiencing a drought. At the time of this writing, hop growers in the Hallertau are concerned that the drought of 2015 is continuing into 2016, as there has been less than average rainfall. Next week, they could complain of flooding. That is the nature of agriculture, managed chaos.
 
Growers are accustomed to dealing with uncertainty. Brewers are accustomed to ordering the ingredients they need and brewing with them when they arrive. A great brewer friend of ours who has won many awards and earned plenty of well-deserved recognition within the industry recently told us, “when you can’t get the hops you want, a good brewer will brew with the hops he can get. If he’s really good, nobody will notice the difference.”
 
High demand for specific varieties at profitable prices has caused growers to stretch harvest beyond its natural limits and beyond their best judgment. Growers will admit that privately, but not often in the company of brewers touring their facilities. The world hop industry is at capacity until prices increase. Being at capacity is the equivalent of walking a tightrope with no safety net. Unfortunately, the randomness of nature doesn’t fit into the timelines and rigid schedules being forced upon it. Storms, drought and mildew, are just some threats to hops every year. Normally, there is a buffer capacity to allow for the randomness of nature. That buffer has disappeared a little bit with each passing year of growth of the craft beer market. Vulnerability to random events is higher now than ever before and the ability to react to avoid its consequences is at its lowest point. Growers say, “you don’t know what you’ve got until it’s in the bale”. That is a saying that will be very true in 2016. Variety shortages don’t mean producing less beer. They just require a different path to reach the goal.
 
The Hop Cartel.
Many believe today’s variety shortages are due to the effects of supply and demand or Mother Nature. They both affect the market. A deeper look reveals a much more captivating reason. A cartel operating behind the scenes, controls several proprietary varieties from end to end. If the thought of a cartel existing in the hop world sounds like fantasy to you, don’t overlook the fact that at today’s market prices the value of the market is well over $1 billion. Several families are vying to control that market.
 
The cartel believes they can “manage” the hop market. A market as open and complex as the hop market cannot be so easily managed. As brewers have long speculated in online forums, variety shortages may in fact be contrived to drive prices higher. They could also represent the cartel’s inability to properly read the market … but these are clever people. The result is clear. Squeezing the hop market in one area has ripple effects that are felt worldwide. They manifest themselves in the shortages that persist in nearly every hop variety today.
 
Let’s take a closer look at how the cartel operates. A few individuals own the cartel’s varieties. Varieties are available only to handpicked individuals. They retain ownership of the plants even when they are produced on other growers’ farms. They tell farmers when to harvest. They dictate how much will be produced and to which companies it will be sold. They set the prices paid to growers and the sales price to brewers. The cartel’s members convene privately to determine these things. By imposing draconian controls over every step of the process, they restrict access to their product under the façade of insuring higher quality. Their quality, however, is not higher or lower than other varieties on the market as most growers pride themselves on producing a very high quality product. Their strategy, part of which reportedly includes “keeping supply at about 90% of demand” has created frustration for brewers and great wealth for themselves. Tens of millions of dollars are paid by growers each year on royalties alone.
 
“Money doesn’t change men, it merely unmasks them.”
Henry Ford
 
You won’t see the cartel with a booth at the CBC or at Brau. They prefer to operate behind the scenes and will likely continue to do so for the foreseeable future. If you’re thinking this sounds like fantasy and could not possibly be true, ask yourself who exactly is responsible for policing the industry. The answer is the hop industry is small relative to other industries so there really is nobody looking. Without an insider’s perspective, how would anybody know which stones to turn over and which questions to ask? Not to fear though … Karma has a way of prevailing and the market is fixing the situation. Frustration with variety shortages year after year is quickly driving business toward more widely available open source substitute varieties.  We expect that trend to continue this year.
 
5 Trends We See Coming in 2016:
There are other trends we see emerging as well, but these five, we believe, will have the most significant effects on the average brewer.
 
  1. Variety specific shortages
  2. Mainstream acceptance of newer varieties
  3. Resurgence of legacy varieties
  4. Strengthening of hop prices
  5. Developing alpha crisis
 
The X Factor.
Demand for craft beer is part of a much larger trend we are witnessing in the 21st century that is transforming the way people spend their money. Perceived value, the quality of products and the means by which they are produced is affecting buying habits more than just price alone. For decades Americans in particular embraced globalism in a quest for lower prices. If low prices meant low quality, that was acceptable. That now seems to be changing to the dismay of the multinational companies that have made billions producing for that market. The mantra “Corporate Beer Sucks” espoused by Stone Brewing is a great metaphor that sums up how that trend manifests itself in the beer industry. It can’t be taken literally, as Stone, of course, is a corporation, and they make great beer.
 
The millennial generation in and of itself is not the cause of the disruption we see in the market today despite the flood of articles on the Interwebs to the contrary. New relationships and a dissemination of power are causing the disruption. Today a guy sitting in his pajamas in Bliss, Idaho with 15 followers on Twitter can call out a global company like Heineken or Apple if he thinks they are using unethical practices in their business. His message can be heard around the world overnight and can bring that company to their knees. Successful brands recognize this. They work hard to interact with their customers and carefully curate their image on social media, but you can’t just put lipstick on a pig and take it home to meet your parents.
 
People seem to have become aware about the voting power of their money. More and more, they want to spend their money on brands that behave ethically and deliver a quality product. More people like the idea of keeping their money local or support a brand that does. It’s a trend that is just beginning but it’s happening with the food we eat, the beer we drink and the products we buy and people are sharing their experiences. The Internet and smart phones have given consumers a voice, and a broadcasting network all in their pockets. That is causing the change we see today. The millennial generation is leading the charge because they have a more intimate relationship with technology.
 
As they say, “it’s an ill bird that fouls its own nest”. The openness brought about by more interconnectedness and the relative ease of travel has expanded the size of our nests from the neighborhood in which we live. The world is our neighborhood now. With that is developing a moral consciousness and the understanding that the way one person spends their money can make a difference.
 
The millennial generation is emerging as a generation that has decided to forego working countless hours to save money to buy things that traditionally have represented stability. Those seemingly stable things were shown by the crisis of 07-08 to be tools through which banks manipulated markets to generate profits for themselves. The system was rigged against the individual … hence the phrase “Corporate Beer Sucks”. The result is a generation of people who are more interested in spending money on affordable luxuries, like craft beer and Starbucks, where they know they are getting what they pay for. That thing that created the change in priorities away from low price and toward high quality is what we’re calling the X Factor.
 
We believe the X Factor stems from frustration with corrupt government and financial systems. It is fed by frustration from large corporations making billions each quarter while the people who produce their products work in inhumane conditions struggling to survive in third world countries around the globe. Will Donald Trump or Hillary Clinton fix that in four, or even eight, years? Not likely. That leads millennials to spend time and money on things that have inherent value and deliver a benefit immediately. Inadvertently, in doing so they’ve discovered the voting power of their dollars. So long as people continue to perceive value in high quality, locally produced goods, we will see the trend toward craft beer continue. We believe that is a shift in the thinking of an entire generation, which is why we believe craft beer, and the many other products like it in the market today, are here to stay. Drinking craft beer is not just about the beer in the bottle, it’s a way to be the change you wish to see in the world.
 
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Unfortunately, it is not the American way to be content with a bird in your hand when you think you could have two. Ironically, large craft brewers have grown so large they resemble the corporations against which people are rebelling in the first place. We believe growth of the larger breweries will continue albeit at a slower pace. Based on what we see in the market, the next big trend will be at the smaller end of the scale. The neighborhood pub and local Nano brewery will grow in popularity as people continue to crave local community and see the effect of the dollars they spend. Kickstarter and Indiegogo demonstrate that people like being involved in the creation of projects even if they do not have an ownership. That is an exciting trend! In this new world, it will not be easy for large companies interested in minimizing transactional costs to exploit consumers. There will be an evolution in the way that hops are produced and sold, one that is emerging now. The times are changing and we are excited for the changes ahead.