47Hops is in Europe this week and next for some meetings and for the Brau Beviale trade show in Nurnberg. This year promises to be an interesting Brau due to the terrible European crop. I’ve noticed some growers and merchants are anxious for the event. They seem to think prices will spike due to the poor European crop and obvious deficit of production this year. Prices are increasing as a result. Already, Pre-Brau, I’ve found prices for European spot hops offered for prices as high as $20.00 per pound (40 Euros/Kg.) in anticipation of a shortage. I haven’t heard of any sales at those prices yet and we certainly didn’t buy anything at those prices. That gives you an idea the “optimism” regarding prices out there at the moment.
The thing about big market events in any industry is that they are big because they’re unpredictable. That’s why they happen in the first place. I am a bit skeptical that we’re about to see a huge price spike a-la 2007 in 2015. The fact that so many people are anticipating a price spike in 2015 has an effect in and of itself. True, nobody saw the drought of 2015 coming, but people have anticipated another alpha shortage for sometime now.
Like an army of squirrels, hop growers and dealers worldwide have hidden away hops for a rainy day. It’s raining. The question is how much must it rain before those volumes are released into the market. With no sign of chronic oversupply of hops on the horizon, some of those squirrels might be willing and able to hold on for what they think will be a larger return next year. The deficit in this year’s market will certainly have a cleansing effect on the supply of old inventory, which is a nice way to say that prices will increase and tolerances will decrease enough to lure out a lot of old inventory out of hiding as everybody tries to find the least expensive solutions to the 2015 hop deficit. At the end of the day, that is good and bad. It’s good because they’re hiding and can’t otherwise be accounted for. On the downside, the disappearance of the old inventory removes the buffer and places the market precariously on the edge of the precipice of supply and demand to face whatever may come in 2016 and the years beyond.
Here’s how it seems to be going down already: Faced with very high prices for spot 2015 crop, inventory that is 2-3 years old, not interesting to brewers in a normal market, will become very interesting in 2015 due to the fact that it sells at a discount to current crop. There are many people for whom price is a deciding factor and they can be flexible on crop year to get the price they need. They’ll find what they need in this year’s market. Nobody knows how many hops from previous crops are quietly sitting out there waiting for an opportunity. I believe there’s a significant volume. Similarly, nobody knows how much demand is waiting out there unsatisfied at the moment. That too, I believe, is significant. The thing we do know is that the worldwide crop was sold at nearly 100% and that we are thousands of tons short of hops due to the European drought. There is no way we see prices decreasing in the near future.
Many people wonder if 2015 will be another 2007. I get asked that a lot lately. For those who don’t remember or weren’t involved back then, here’s what happened: In 2006, prices for alpha, which was the market driver at the time, increased by 50-60% to about 26 Euros/KgA in the days and weeks leading up to Brau. It continued to increase following the Brau until the market thought it was satisfied and could survive until the next crop. Only six months later, prices increased by a factor of 5x. Six months after that, by Brau 2007, prices increased another three-fold. By February 2008, prices were 30x what they were only 16 months earlier. Of course, that was followed by a massive oversupply and severe crash in the market price during the following years. I mention this only to show how irrational the market can be when there is the perception of shortage.
The market is clearly different today than it was in 2007. Today, craft beer and aroma varieties are driving the market. Prices for aroma varieties have doubled, and in some cases tripled, over the past 3 years alone. Alpha is almost an afterthought. That is only because the multinational brewers who rely on alpha have excess inventories they are depleting. Their alpha demand still exists, but it is being satisfied through surplus inventories, which disguises the current annual production deficit. So long as surplus alpha acid inventories exist, they have a depressive effect on alpha market prices. Even alpha prices have moved up in recent years, although not at the pace of aroma hops. In 2011, you could buy a kilogram of alpha acid for 18 Euros/KgA. They are more than double that today. Like earthquakes prior to a volcanic eruption, these price increases are a sign of ominous things to come. When the alpha market erupts it causes a lot of damage.
It is impossible to say exactly where prices will go during the Brau, but we believe this Brau will be a milestone moment. The pressure in the market is building, increasing the pressure on everybody. So long as prices do not increase significantly neither will production. Increasing production in today’s hop world means investing in infrastructure, which means millions in investment. Nowhere in the world is there excess production capacity lying idle as there was between 2006 – 2008. For Americans to plant additional alpha acreage, they are clear that they require prices to compete with current prices for aroma hops. That means prices of 80-100 Euros/KgA, roughly double where they are today. American growers understand that it is a seller’s market and they can ask for the prices they need to finance their expansion plans. German growers, for the most part, have not yet woken up to the fact that American aroma hop prices are driving the entire hop market. They are still operating as if it is a buyer’s market and they are price takers, not price makers. It’s not that they are somehow less enlightened than the American grower. They just have fewer options due to the structure of the German industry. Merchants in Germany, aware of this fact and extremely conservative by nature, limit their offerings and are encouraging German growers to produce alpha hops at prices half of what American growers will produce them. Meanwhile, every other hop growing country in the world is interested in producing aroma hops at the moment. The German industry has amazing aroma hop varieties too, and there is significant demand for them at sustainable prices, but these price signals seldom reach the grower so instead they are planting Herkules. Some of the contract offers run as far out as 2025 at flat pricing, locking that alpha, and more importantly the acreage, up for a LONG time at low prices!
German hop growers have become the world leaders in the production of cheap alpha acid, not an enviable position in a market that values aroma hops. Annual alpha acid production is already significantly less than annual alpha acid demand. American growers, however, continue to remove alpha acreage faster than Germans can plant it. German growers, unfortunately, are not calculating the true value of their farms in their pricing and what it will cost to increase their production capacity when the time comes. Without further investment in the industry on both sides of the Atlantic, the industry will soon run into a production ceiling.
We believe the German industry will reach capacity on their existing infrastructure within the next year. Most would prefer not to discuss this fact and instead say the situation is “dynamic”. IF that means that more acres will be planted as prices increase, well, of course. Prices need to increase significantly though before that happens. That is why there is a race on for the currently undervalued production. When German growers start to calculate what it costs to build new farms, they will realize too late that the contracts they are making today do not pay the bills and do not allow for reinvestment. They too will be asking for the same prices as the Americans … Prices for German hops will double.
In our opinion, the direction of the market is very clear. Prices have increased over 100% in the past 3 years, and they are not finished. Prices this time next year will be significantly higher than they are today. Although difficult to track, we believe surplus alpha inventories are disappearing at a rate that will severely affect prices in the months following the 2016 harvest.
The hop market is affected more by perception of availability, than it is by actual availability itself. A false sense of security and a lack of information keeps prices artificially low. You can only stretch a rubber band so far before it snaps back and hurts you. The same is true with the hop market. We are stretching that rubber band now and it is only a matter of time before it snaps. It was perception of shortage that drove prices in 2007/08 to increase 30x in 16 months. In 2016 and beyond, an actual lack of availability will exist for the first time in anybody’s memory. Nobody knows what the consequences will be. For that reason, it is easy to predict the direction of the market. It is even possible to predict significant price increases for some varieties. It’s impossible though to predict with any certainty how active the market will be and where it will stop.