Now that we are done looking back at 2015, we can focus on the year ahead and how it will affect the hop and beer world. Here are some of the things on our mind at 47Hops as we get 2016 started.
- We believe 2016 will mark a turning point in the market. Before you exhale a sigh of relief at the thought of hop prices finally on the decline after the past three years of rapid increases, wait a minute. We didn’t mean prices would be heading downward just yet. This is just getting started. Sales of craft beer in 2015 were up by 20% according to the Brewers Association. That will make those buying hops feel even more comfortable about buying for the future. It seems this trend has a long way to go before things slow down and prices decline.
- Despite all the good news in the hop and beer world about increasing demand, risk is on the rise. Never has the market been in a more precarious position due to supply and demand. The hop industry is seriously undercapitalized and suffering from a lack of infrastructure. The inability to respond quickly to demand with existing infrastructure causes prices to rise. The rising prices slow the willingness of merchants to sign any speculative long-term contracts at higher prices. Speculative and anticipatory merchant purchases traditionally create a buffer against poor crop performance and shortages. The buffer financed by the merchants is shrinking. That responsibility will likely shift to growers and brewers.
- It is our view that a real shortage of hops is inevitable for the first time. The question at the moment in our minds is whether we see evidence of it in 2016 or 2017. We believe that will most likely happen in 2017, but there is a good chance it happens in 2016. Agriculture is inherently unpredictable. A poor crop could trigger just such an event, but a worldwide bumper crop could just as easily delay it. “Hang on … Didn’t we just have a hop shortage in 2008?” you’re probably thinking to yourself. Well, yes, and no … Not really. There were hops in the market back then. They just weren’t where they needed to be when they needed to be there, which drove prices upward. Then people got greedy and prices went crazy. Perception creates a powerful reality, even when it’s false.
- In 2016 and beyond, the American hop industry will need to find creative ways to finance new growth. As they say, “Cash is King”. Cash flow is governing how much banks are willing to lend to American growers to finance new operations. Make no mistake about it, American farms are leveraging their futures to finance the current expansion, another risk added to the pile. Only a few completely new farms are now under construction in 2016 and 2017 to handle the growth going forward. The industry needs more. In addition to that, warehouse space for all those bales during harvest is at a premium these days. The hop industry is running up against capacity issues for the first time in living memory.
- In 2016, we already see that there won’t be enough aroma hops to satisfy the growing craft appetite. That’s kind of a no-brainer, but we had to include it anyway. The best the American industry can muster at the moment seems to be another 3,000 and 4,000 acres. We estimate there is demand for an additional 5,000 – 6,000 acres. With craft growth at 20% for 2015 and still continuing to grow, expect a very tight hop market with little or no spot hops available.
- We believe German growers will realize in 2016 what American growers realized in 2013 … They need more money if they’re going to grow with and stay relevant in the hop market going forward.
- As Will Rodgers once said, “Buy land. They ain’t makin’ any more of the stuff”. It seems in 2016, any land within comfortable driving distance of an existing hop farm in the U.S. or Germany will become much more expensive as future expansion plans ramp up.
- Opportunists with little understanding of the hop or beer market will continue to jump into what looks like a never-ending rising market in 2016. They’re here for a quick buck. This will happen on the craft beer side as well as the hop side of things. While competition is good for any market, there will inevitably be some who cannot deliver on what they promise. They will be the first to jump ship when the sea gets rough.
- Last, but most certainly not least … Alpha acid will become a serious concern in 2016. “Who cares” You might think if you’re a craft brewer not using alpha hops in the first place. You should care if you are anywhere near a brewery. The alpha cycle is rearing it’s ugly head again. The surplus from the previous surge in production, back in 08, is nearly to the point where it has triggered a reaction in the market during past cycles. We estimate there is currently an annual production deficit of approximately 1500 metric tons of alpha. For those of you trying to quickly do the math in your heads, that’s over 22 million pounds (10 million kilograms) of hops at 15% alpha! That’s BIG when you consider an average American hop farm can only produce 1 million pounds of hops. The average European hop farm produces much less than 10% of that number. Imagine it like a tsunami. If we weren’t seeing a flood of demand for aroma hops from the craft industry, this would be the point where all the water recedes into the ocean and the passers by, unaware of the stages of a tsunami, are amazed and distracted by the fish left behind on the beach. Whatever aroma hops aren’t contracted now will be swept away by the fury of a wave of alpha demand fueled by Mega Brewers with very deep pockets.