How to guarantee good returns

Most hop growers will tell you everything they are growing is contracted and that is why they need to plant more. That additional acreage, they would tell you, is contracted too! Scanning the industry statistics would lead you to believe that is the case. In reality, nothing could be further from the truth! I would estimate that if 2016 had produced an average yield that about 7 percent of the crop would have NOT been contracted! On top of that, based on conversations I have had with several other merchants, brewers have contracted for at least an additional 5 percent of the crop they don’t need. The numbers reported to the United States Department of Agriculture (USDA) and the International Hop Growers Convention (IHGC) do not support that conclusion. Those numbers are valuable, but you must know how to read them properly to derive any value from them. I was Director of Hop Growers of America and also chaired the Economic Committee of the IHGC for a several years. Those experiences enable me to decipher those reports into more useful data. At the end of the day though, nobody knows the true picture.

Nobody today is talking about slowing the growth of the hop industry today. Given the obvious excess of hops already in the ground, maintaining not expanding, acreage should be on every grower’s mind for the coming year. It should also be on every banker’s mind who finances a hop grower assuming they want to see a return on their investment. It should be the topic of the USAHOPS convention later this month in Bend, Oregon. Take a look at the agenda and you won’t find it there. Growers today are still in growth mode. They understand craft is slowing, but they’re still looking for something to plant. There is too much optimism. The party is just getting started for many of them and they want to keep it going. The perception is that because the craft beer industry is still growing there is opportunity to grow more hops. For some, nobody but the market can tell them when to stop. There is a lag, however, in the reaction of the market to oversupply and shortage. That means that by the time prices begin to crash or spike it is too late to fix the problem with a small adjustment. It’s like a former Fed chairman once said, “The Federal Reserve’s job is to take away the punch bowl just as the party gets going.” The same type of discipline is needed in the hop industry, but there is no equivalent to the Fed to advise in which direction growers should be heading. Growers should not be thinking about growing more in 2017. If they slow down for a year or two, the growth would very likely continue in the future. Unfortunately, there is nobody to tell them.

Together, growers have the capacity to maintain the health of the market and the value of their future contracts by producing less. That is something they have never been able to agree on. Growers also have the capacity to race each other to the bottom and overproduce. That, unfortunately, is something they have done time and time again over the past century. Imagine eating pizza every Saturday until you were sick. You could have some cold pizza Sunday morning, but you couldn’t eat anything the rest of the week. Binging and fasting would not be a healthy way to eat and it’s not a healthy way to plant hop acreage either.

 

Produce for the market.

Don’t market what you produce.

 

Some larger brewers that have over contracted and are sitting on inventory also want to maintain a strong market so they don’t have to write down the value of the inventory on their books. If you don’t believe me … ask one of them. There is a lot riding on planting decisions in 2017!  Until the hop industry is mature enough and can act proactively to cooperate with one another, it will continue to be a dog eat dog industry doomed to repeat the boom and bust cycles that have plagued it throughout its colorful history.