The USDA released its hop stocks report for the United States today. These numbers are still probably the least appreciated, but in my opinion, one of the most important numbers to get a feel for the supply situation in the hop market. This year, they show a more desperate picture than most people would care to admit. The total volume of hops sitting in cold storage in Yakima today is 168 million pounds, which is 27 million pounds MORE than this time last year.
On March 21, 2017, I wrote in my blog “The crisis that can destroy the hop industry” about the impending crisis. We are now one year closer to reaching the problem about which I wrote, but we are not one step closer to solving that problem. Why? People in the hop industry cannot work together on anything and it is easier to deny the problem exists or blame it on somebody else rather than take ownership of it. People in the hop industry are such bitter rivals and there is so much hatred between some of them that they would rather think they can solve their own problems and believe that somehow they will be immune from the larger problems at hand. The hop industry is like a small boat with a big hole. Nobody riding in the boat can escape from the problems at hand regardless of how they arose or who is responsible. To fix it, hop growers, brewers, merchants and bankers will need to be proactive about finding a solution … or suffer the consequences.
The numbers recently released paint a grim picture. The graph below speaks for itself, but I will point out the rate at which inventory at the dealer/grower level is spiking at an increasing rate. That is, I believe, because the market is beyond the saturation point.
This isn’t your father’s hop market. Technically, all of these hops are “sold”. That’s what everybody will tell the bankers. That’s one way how a merchant can claim that their oversupply problem is just a myth. There are no myths about the graph below and we shouldn’t treat it like a fairy tale with a happy ending either. You can use semantic tricks to get around owning the problem
On September 28, 2017, I described in my blog “How many surplus hops are there?” one way you can go about figuring out the severity of a hop surplus by interpreting the numbers available.
The numbers can be confusing because what does it mean that there’s 169 million pounds of hops sitting around? In this case it’s not good. The number that is important though is the depletion rate. That’s the one calculation from the table below that I’d like to point out that should stand out to everybody. To get it, follow these simple steps.
- Have a look at the difference between September 1, 2016 and March 1, 2017 stocks. The difference is 55 million pounds.
- Next, take a look at the difference between September 1, 2017 and March 1, 2018 stocks. The difference is 72 million pounds.
- Calculate the difference between the two years. This year is 17 million pounds larger than last year.
What does all that mean? That means that hops are moving more slowly through the system and piling up in warehouses because they’re not needed to make beer … they’re just not available for sale under the current circumstances.
Everybody understands the problem lurking just around the corner in the not too distant future. What the world needs is a hop holiday. The reservoir is full. If all the players involved don’t get together to proactively fix the problem, it’s only a matter of time before the dam breaks. What does that mean? That means merchants need to work with brewers to restructure contracts. The trick, however, is that at the same time growers must work together with merchants to also restructure contracts so everybody’s problem gets fixed. The real challenge to the entire situation is the banks. They have to relax their expectations for getting paid on the hundreds of millions of dollars of outstanding loans to growers and merchants. I’ve seen from first hand experience recently how bankers love to analyze numbers … and they are not very happy when projections aren’t met. Prepare for some unhappy bankers ahead unless we have that holiday.
Here’s what I’d like to suggest to all the banks … Hop producers of the world need to take 2018 off. That’s it really. It’s that simple. Everybody needs a hop holiday in 2018. Here’s my crazy plan:
- Every bank should give every producer of hops in the world a pass on all their loan payments until this time next year.
- Without any additional income, banks should loan producers the money needed to maintain fields in an idle state so they can come back into production in 2019.
- Bankers like to call the person that works with you on your loan a “relationship manager”. Well, now it’s time to manage those relationship instead of just collecting payments.
- Merchants and brewers should all agree to roll forward all the contracts from the 2018 crop ahead a year so nobody has any contracts for the 2018 crop.
- To take it a step further … No producer should be financed if they produce any hops, regardless of variety because they will be contributing to the devaluation of inventory (i.e., bank collateral) in the future.
That’s it. It’s that simple. That’s what it will take to bring the market back into balance quickly. 🙂
If you’re a banker and you think that sounds expensive and ridiculous, I agree with you completely. It’s not any more ridiculous however to continue to believe that the face value of a contract on which nobody is performing is still worth the face value of the contract. At some point, when a contract is not honored, that contract becomes just another piece of paper. There are lots of types of paper … wrapping paper, origami art … paper in the shape of little animals, toilet paper and the paper on which some contracts are written. Some are interchangeable. I’ll let you guess which those are. The alternative to my ridiculous hop holiday suggestion, for all you doubting bankers, will be to continue along the road down which we are currently headed. That road leads to a very bad place. That road will cost you easily 10 times the price of my crazy plan because it will require you devalue and/or liquidate inventory, call in lines of credit and foreclose on assets that nobody wants or needs. Ten cents on the dollar is about all you’re looking at receiving from that exercise. Trust me. I’ve been through the math recently. Do you really want to explain that to your bank president at corporate headquarters? Sure my crazy plan looks terrible on paper, but the alternative will look a LOT worse.
I know the likelihood of my idea being adopted by banks is not good. Banks don’t work that way. They’d rather follow procedures and blame somebody else when everything hits the fan. They don’t get creative unless it means they can make more money. As the quote most famously attributed to Ben Franklin goes, “A penny saved is a penny earned”. Desperate times call for desperate measures. I thought I’d throw my crazy plan out there. If nothing else, the ridiculousness of my suggestion demonstrates the gravity of the situation and how far out of alignment the market is and the lengths it will take to fix things. Maybe it will get the discussion started. I suggest it mainly to show the seriousness of the situation, not because I expect it to happen. A more reasonable suggestion (although equally unlikely) is a series of industry-wide meetings including brewers and bankers during which producers and merchants agree to cut production 60% across the board for 2018 assuming they can roll contracts forward into future years.
Something must be done. Everybody contributed to creating this problem over the past 5 years or so and it will take a group effort to fix it … if it is to be fixed at all. If one more year passes without any action and if mother nature doesn’t take care of the oversupply problem herself with a massive crop shortage, when I write this blog again in March 2019, there won’t even be a crazy solution available to fix the situation. We’ll have to review the safety instructions for exiting the aircraft on the way down.