Globalization and the other guy

The level of globalization in the hop industry is unprecedented. I refer not only to the volumes of hops traveling to breweries around the globe. Increased popularity of hops created more dependency on one another than ever before. The ties binding brewers to merchants and growers are unfathomable. Some relationships are more fragile than others. The difference today is the delicacy of the finances of some key brewers, growers and merchants. There is more debt in both industries than ever before. Participants have fewer options on the table than they had in the past.

So many breweries over contracted for hops in recent years. As a result, some merchants are in the same position. We just recently received an email from a large brewer asking if there was “any possibility for forgiveness” on their contracts. The majority of situations need an equitable solution or the entire system can break. The hop industry has been rather black or white in the past. Some people arrogantly say, “bring it on” if that’s what the market brings. Nobody really wants that. If you’re a brewer and you need to get out of hop contracts this year, expect to extend your contract well into future years. You might have to buy out your contract. Maybe extending your contract for greater volumes into the future will make it right by the other guy. You must pay in the future for the inconvenience you are causing the supply chain today.

As unfortunate as this sounds, there is no room for absolute forgiveness in the hop business. If a merchant or a grower lets a brewer walk away from a contract without paying anything, it is because it’s easy for them to do so. Maybe that means they have better opportunities for those hops somewhere else. That’s sad, but that’s the way it’s done today.

Similarly, if a merchant wants to buy out a contract from a grower, the grower should calculate a fair price to enable that to happen. The grower too must think about the health of the merchant both now and in the future if they value that relationship and if they are not prepared for the consequences. If they try to hold on to an unnecessary contract, they encourage the dumping of those hops onto the market. Hops sell when the price is low enough. Ultimately, sending the market low prematurely through artificially low prices harms the grower much more in the long run than it harms the merchant. Under that scenario, in the short run, the merchant loses money. Merchants, however, add value and can profit in both strong and weak markets.

Thoughtfulness and consideration about the other guy’s situation is largely absent from the picture. We should all focus, in part, on that today. That doesn’t mean anybody must forgive anybody for anything. By that, I simply mean looking for fair and equitable solutions wherever they can be found. There are plenty of ways to find solutions. You must first be willing to look. Forcing a customer to fulfill a contract they don’t need may make your books look good. It slows the movement of hops, distorts the relationship between supply and demand and may have other more dire long-term consequences.

My banker posed an interesting question to me recently regarding one of our brewery customers. He asked, “How quickly could you resell that volume of hops if that brewery goes bankrupt?” It wasn’t pretty. I analyzed the situation and thought seriously about the consequences, but not just about that particular brewer. With our current level of globalization, every decision affects us all. Regardless of whether it’s a merchant, a grower or a brewer, we all have an interest in the success of our business partners, customers and suppliers. We should not have such a myopic view of the industry, or the world, that we ignore the health of the people around us. In today’s world of globalization, we are all related.