Greedy Growers and Dirty Dealers!

It seems lately there are a lot of articles referencing rising hop prices and how dramatic the changes have been.  Usually, the articles reference the statistics regarding season average price collected for the hop industry by the USDA. As the former head of Hop Growers of America, the organization that, as you might guess, represents hop growers in the United States, I can tell you that these price numbers are useless in and of themselves. They are a mixture of spot and contract prices for aroma and alpha hops and as such provide no real useful information except that they demonstrate a trend and show in which direction that trend might be going.  They don’t represent actual current hop prices, spot or contract, aroma or alpha, unless by coincidence. Everybody in the industry knows this, but it’s something that’s not often talked about.

Actual hop prices these days are calculated in growers minds by using a desired return per acre, which today is somewhere between $9,000 – $10,000 per acre and then dividing by the yield the grower expects to receive per acre. Eighteen months ago, that number was $6,500 per acre.  Many proprietary varieties today are returning $12,000 – $14,000 per acre and that is dragging prices for all hops higher as they compete for valuable picking time.  The higher prices for the elusive proprietary hops, are due to a restricted supply caused in part by one-desk selling and more demand than that one desk can handle.  Not all proprietary hops are sold this way, but the few that are are sending prices higher for all varieties.

“Growers are being greedy” or “Dealers are making a killing” … Those may be some of the things you hear out there when brewers are talking about buying hops.  However, that’s not really the case.  It’s expensive and very risky to produce hops. Kennedy had it right when he said,

The farmer is the only man in our economy who buys everything at retail, sells everything at wholesale, and pays the freight both ways.  – JFK

The truth is that traditionally hop market prices are below the cost of production.  That’s BS you say? They wouldn’t still be in business you say?  The economic term for the whole thing is “inelastic demand” … which basically means when there’s one hop too many the price is terrible and you can’t give them away.  When there’s one hop to few they’re worth their weight in gold and prices soar.  Cyclical imbalances in the alpha market create price spikes that drive the prices for hops very high very quickly.  In 2007 and 2008, the last time this spike took place, prices increased 40x in 8 months only to crash back down to zero shortly thereafter.  Those price spikes enable reinvestment in the expensive infrastructure needed to produce hops.  That existing infrastructure is nearing capacity in 2014. In 2015, it will reach capacity. That has never happened before without an alpha market price spike. Therefore, additional investment is necessary if the industry is to grow to produce the hops that craft brewers need to give Americans the flavors they want to taste in their beers.  How much investment?  47 Hops estimates the US industry as a whole needs to invest between $500 million and $1 billion in the next 5 years if craft beer growth stays somewhere between 10-20% per year.  Banks want their money back in roughly 5 years +/- a year or two.  Current prices are simply not high enough to pay for the continued growth of the industry.  To reach that level of return plus a reasonable 15-20% return on investment for the grower, prices will need to roughly double from where they are today.

It’s not that growers are being greedy or merchants are being nasty.  Hop prices have been too low for too long creating difficulty for many farms to keep their head above water.  That’s why in the 1930s there were nearly 2000 growers in the US and today there are just over 100.  Big brewers and even some big craft brewers have become good at using their status to drive prices down to the lowest possible point, using their purchasing power as leverage.  How can a small farm stand up against a billion dollar brewery when his neighbor will cave (that’s the subject of another article).

If the quality hops that we all know and love are to stick around, prices must increase.  A doubling, or even a tripling of hop prices, however, may only translate to a 5-10% increase in the price of a good craft beer at the pub though … if you feel it at all.  Certainly, supporting local brewers and having great beer is worth paying a sustainable price.