“Don’t tell anybody, but I just got $10.00 a pound”

I tried to buy some hops the other day.  To my surprise, the grower said no to a price that should have been OK based on the price per acre everybody says they want.  At first I thought he was being a little unreasonable and even greedy.  After the phone call, I realized the price per pound he wanted, which was higher than the going rate, was based, not on the market or demand, but on his inefficiency as a grower.  That sounds harsh, I know.  It’s really nothing against him personally.  He’s a good guy.  The thing is that there’s a lot of marginal land being used for hops now and there are some “alternate” growing areas trying to produce varieties not originally intended for those areas, which results in some pretty poor yields.  I realized the market has the potential to spiral upward quickly … and for no good reason.  Let me explain.

First of all, you have to understand how tight growers in the Pacific Northwest are. I’m not just referring to the fact that after 100 years of being in the same industry most of them are related in some way to one another … True Fact! What I mean is that hop growers get together and talk a lot … I mean they REALLY talk A LOT … literally every day! They talk over coffee about problems they’re having. They talk over lunch about what opportunities are coming along or ideas they’re having. They even occasionally get together at the end of the day for a beer to talk about how the day went. When they pass each other as they’re driving around checking out their fields, they’ll stop for a bit … and talk. They talk about who sold what to whom and at what price. They talk about the latest gossip. They all know if a big craft brewer sells back some old inventory into the market and at what price. They talk about the market and where they think it’s going. With all this talking, you’d think they were BFFs! The thing is that deep down very few of them trust one another completely. That’s probably a function of the history they all have together. To sum it up … There’s a lot of psychological warfare happening every day in the hop industry. Crazy huh?

Here’s an example: Jack might say to Bob, “Ya know Bob, I get 10 bales per acre on my Alamos” (Alamos being a fake hop variety I made up for this example, although it would be a pretty cool frickin’ name for a variety). There’s really no way Jack is getting 10 bales per acre on Alamos. The industry average is 7 bales, but acreage yields are not really documented in the U.S. like they are in Europe since no subsidies are tied to them so, at the end of the day, nobody can really disprove what anybody claims. So, Bob may believe Jack. Even if Bob doesn’t believe Jack, Jack just planted a seed. Farmers are good at planting seeds. So, basically Jack “massages” the numbers for Bob, who certainly gets a lower yield than Jack’s massaged number, so Jack gains a little stature in what is a very testosterone-laden game. Even if Bob doesn’t believe Jack, that number will bother him … like a splinter in his mind. The reason I bring all this up is to emphasize that there are two things for sure in the hop industry 1) there are no secrets in the hop industry, and 2) information, right or wrong, travels fast.

All of this is important because, like I’ve mentioned before, growers these days are thinking in dollars they receive per acre in addition to prices per pound of hops. You can read more about that in my one of my previous blogs.

Growers also compare their own yields to their neighbor’s. Perhaps it’s normal to want to keep up with the Jones’ as they say and measure your relative success by your neighbor’s performance. It’s the equivalent of seeing who has a bigger penis. That may sound crass, I know. Don’t get me wrong … they don’t all fall prey to the temptation. Some are genuinely good people who care and want to improve their businesses. It seems they genuinely want to be the best they can be. That’s inspiring. For better or worse though, there’s a lot of penis measuring still going on. Even some of the female growers do it … go figure.

Anyway … that false yield number flies around with every sip of coffee and every bite of lunch. The thing is … at the end of the day … growers aren’t equal. Jack might actually get 7 bales per acreage on his Alamos, but Bob can only get 5 bales per acre because his ground isn’t as good or maybe he strung his hops late because he couldn’t get a crew out in time.

At the same time, another bit of information that also flies around is the price per pound of hops when they’re sold. Jack might tell Bob, “I got $8.00 per pound for those Alamos.” That’s where things get screwy. Why, you ask? Because Bob still has in his head from somewhere a number that “everybody” is getting per acre. The thing is that Bob may need $10.00 per pound to reach that same number per acre because his yields are below average. Bob wants the going rate for hops too though, so he says he won’t sell them unless he gets his price.

Let’s say Bob gets his $10.00 per pound from somebody who is desperate at the moment and needs some Alamos. You can be sure that $10.00/pound number is going to get out there because it’s higher than anybody else’s price yet. That kind of information spreads like wildfire. That $10.00 per pound price will quickly become the new price for Alamos. After a few coffees and a few lunches, everybody in the industry knows about Bob’s $10.00 Alamos. Soon Jack is having coffee with his neighbor and may drop into the conversation, “Don’t tell anybody, but I just got $10.00 a pound for my Alamos from Scheißter and Son”.

Don’t forget about that seed Jack planed earlier. Everybody thinks Jack is getting 10 bales to the acre on those Alamos which means in their minds he’s making even more than he actually is per acre. That new dollar return per acre gets around and everybody does their calculations and soon the dollar price per pound grows again. That’s how prices are get jacked up (yes, the pun is intended).

The speed at which that all happens depends on how tight the market is. During the crisis of 2007-08 all of that could happen in a day or two. Today, prices seem to be increasing every few months and growers are scrambling to put in acreage as quickly as possible. That leads to things being done less efficiently than possible. That’s not the fault of the grower per se. They’re doing the best they can, considering the ever-increasing demands of the market. Nevertheless, as the 2015 crop approaches, growers and brewers are starting to realize that the 2016 crop will be short. The tension and energy in the market is increasing. It’s palpable. You sense that growers know they’re in the driver’s seat. They have an attitude they didn’t have a couple years ago. They’re not afraid to say no to opportunities that would have been considered good not too long ago because they believe demand will continue to increase and hops will only be worth more tomorrow. As one grower friend told me recently, “Things are getting stupid out there”. He was talking about all the expansion and how unlikely some of it will really provide a decent return on investment in the future for various reasons.

There are legitimate reasons why hop prices need to go up in the next few years. Some growers know what their costs are and they’re preparing for the investment. I’ve gone over those in another one of my previous blogs.

yellow-brick-road

I’ve been an advocate for that so the growers can buy and finance the equipment they need to get to the next level of production. The next phase of expansion will be expensive.  The problem is that some growers don’t know what that will entail or how they’ll get the return on the investment. They’re just enjoying a ride on the gravy train. It’s hard to watch as prices skyrocket at an ever-increasing rate, but that’s likely to continue for the foreseeable future. Of course, all good things must come to an end, but if there’s an end it doesn’t seem to be in sight yet. If prices continue to increase to cover the cost of hasty less efficient expansion, those looking from the outside will begin to think the hop yards are paved with gold.