Oversupply: Who is to blame?

The farmers grow the hops so it would be easy to say that they caused the current oversupply problem the large brewers have. While that sounds neat and clean, it’s not accurate. I’m not defending hop growers. They’re not choir boys. They have definitely done their share to contribute to supply problems in the industry, but they are not alone.

Of course, brewers contracted with merchants. Merchants, in turn, contracted with growers to produce those hops mentioned above. So, are brewers and merchants are an easy target to blame for today’s mess? It would be easy to point a finger at them, but that wouldn’t be entirely right either. Brewers calculated that they needed more hops to fuel the growth they were experiencing. They watched as production went out the door faster and faster with each passing month. That growth represented real numbers. Their customers clamored for more and more beer because that’s what their customers, the public, wanted.

Throughout the year, we see data about off premise sales and other very interesting statistics in the media. The IRI Group and Nielsen data, however, do not represent the most accurate data on the craft beer industry. Nevertheless, those are the numbers we look to and the reports we read throughout the year to guide our decisions, perhaps mistakenly so.

Here’s an interesting article from Julia Hertz at the Brewers Association about how to interpret the data the Brewers Association reports. Anybody looking at the numbers should understand what they’re looking at. 

http://www.brewersassociation.org/communicating-craft/dissecting-craft-brewer-data/

Don’t cross a river if it is four feet deep on average.

– Nassim Nicholas Taleb

 

But how do breweries estimate how much of their beer consumers might drink in the future in an expanding market with increased competition? Despite all the sophisticated math that could be done, it really comes down to a hopeful educated guess. Brewers try to base future production on sales trends of the past and forecast where they might be going. Forecasting the public’s tastes would be difficult at best … so they can’t be blamed for doing their best at guessing. That’s where the reality based decision making ended and wishful thinking takes over.

It’s a basic fact of life that many things “everybody knows” turn out to be wrong.

 – Jim Rogers,

 

Everybody in the craft beer and hop industries wanted to see the craft market explode. Hop growers and merchants wanted to see more demand. Manufacturers of bottles, labels and cans wanted more sales. They couldn’t even keep up! Everybody believed the market would get explode, and it did. In the process, craft brewers are today giving big beer a serious run for their money. It is the mother of all underdog stories we ever wanted to believe finally coming true. It just didn’t continue to explode as everybody wanted it to. In that respect, we are all victims of confirmation bias. We are all, therefore, responsible, in part, for the current situation.

Investopedia.com defines Confirmation Bias as “A psychological phenomenon that explains why people tend to seek out information that confirms their existing opinions and overlook or ignore information that refutes their beliefs.”

In short, confirmation bias makes us see what we want to see. It makes us miss the things we don’t want to see. Our social media lifestyles further accentuate the problem. Today, we surround ourselves with like-minded people. By doing so, we reduce our exposure to information we don’t want to hear and we eliminate things that make us unhappy.

 

Bart Watson from the Brewers Association talking about slowed but continued growth for craft. Sounds like a message of cautious optimism.

http://www.brewersassociation.org/press-releases/brewers-association-mid-year-metrics-show-continued-growth-craft/

 

So, is there really an oversupply of hops today? If you ask a big brewer who is over contracted on hops if there is oversupply, the answer is most definitely yes. Ask the merchants sitting on millions of pounds of contracted hops in their warehouses that are not paid for if there is oversupply, and the answer is certain. Talk to the growers having trouble selling their extra hops if there is oversupply and you can imagine what they will say.

People manipulate figures so many different ways depending on their goals. It’s difficult to know what to believe. The hype generated by different media sounds credible and that adds fuel to the fire. This story from the Motley Fool showing how everything is still looking good for craft beer. They present a very convincing argument. They clearly decided they needed to reveal more detail to reach an optimistic tone, and it sounds great.

http://www.fool.com/investing/2016/06/18/dont-believe-the-hype-craft-beer-isnt-dying.aspx

 

At the end of the day, we must believe the facts we know to be true and realize that even with a crystal ball you can’t predict the future. Projecting today’s growth onto tomorrow was clearly not the right approach to take. Wishful thinking doesn’t pay the bills. The slowing payments and mountains of inventory don’t lie. There are too many hops in the ground today considering the rate at which the craft beer industry is growing. Growers ignoring this and planting anyway won’t let facts get in the way of their ambition. They can bring about the end of the party for everybody. Thankfully the growth of craft beer has only slowed. It is not dead. The rules are just changing.