The pre harvest report you WON’T read anywhere else!

 

We just returned from a trip to Europe where we met with quite a few brewers and distributors. The main question, as you might imagine, was what’s happening with the crop in the U.S. What I told them, you definitely won’t hear anywhere else.

 

ACREAGE

Let’s start by saying that the U.S. acreage reported in the USDA June acres strung report is not correct. Everybody whose job it is to know these sorts of things in the industry knows this. Nobody is saying it out loud though. I’ll let you speculate on the ulterior motive. By the end of this blog, you’ll probably have it figured out. Growers planted even more acres than reported in the June report. How many more? At least 1,000+ acres more is the best estimate at the moment. You probably won’t see that number touted though for a couple reasons.

 

  1. It’s in the interest of everybody in the hop industry to report lower official data if lower acreage numbers are available somewhere. By doing so, the brewers’ perception of potential oversupply can be managed and hopefully delayed. This is likely a hold over from the days when there were fewer and larger merchants and information did not flow so freely as it does today. The next acreage numbers we will see from the USDA won’t be until the 2017 acres harvested report until mid December, which won’t be reported by Hop Growers of America until the annual convention in January of 2018. By then, the market, which typically develops after harvest until November will have time to develop. The correction in the data at that time will have less effect than it would if the information were widely known today.

 

  1. It’s “official” data. Plausible deniability! Being official doesn’t make the data correct, but it does pass the responsibility off the shoulders of anybody who reports the official data. Anybody who published anything about the data prior to December or January when the next official data is released can say they were just using the official data. Remember, It’s only official data because it’s the only data published on behalf of the industry. Hop growers are not required to report their data. There is no penalty for reporting inaccurate data. Also, the USDA does not collect statistics from all hop-producing regions in the United States. That means some areas are completely left out of the report. To collect perfect data would be expensive and the hop industry organizations usually have a tight budget. To be fair, the USDA report is the best available data out there. The USDA statisticians are very professional and do a great job compiling and reporting data in aggregate form to the industry. Kudos to them for getting any results.

 

YIELDS

It’s really just too early to know what yields will be. Sometimes, depending on the year, growers honestly don’t know what their yields will be until they are in the bale. Here is what we do know today:

  • The U.S. has had unseasonably hot weather in late June and early July. This is good because it reduces powdery mildew pressure. There is a bad side too. When we saw similar weather in 2015, early aroma variety yields like Centennial, Willamette and Tettnanger were reduced by as much as 40%. That was due to reduced core weights at the time of harvest. The crop looked beautiful and there were plenty of cones, but they didn’t weigh much. There’s no way to know in mid July whether that will happen again, but it is a possibility.
  • Germany has had unusually hot and dry weather this year and, more importantly, has a deficit of rain. July and August are extremely important months for the development of the crop in Germany because about 80% of the crop is not irrigated. Even those fields that have irrigation do not always deliver average yields under extreme heat conditions. Their industry is simply not set up for such weather because typically they do not get that sort of weather. I usually follow a German weather site on a weekly basis to keep up with what’s going on there. It’s all in German, but you’ll only have to learn a few words of German to figure it out … numbers are numbers. If you follow the link provided here, you’ll notice under the “Wasserbilanz” column a lot of negative numbers during the past few months. Let’s just say that’s not good. If you can figure your way around that chart and manage to find the average yearly rain totals, have a look at 2003, when average rain for the year was -155.8 millimeters below normal. That year, the German hop crop was down nearly 50% as a result. That gives you an idea the lack of rain can have on the German crop. So far this year, the average today deficit is greater than -48 millimeters. In 2003, the deficit of rain was over 100 millimeters worse than today at this time of the year. So, it doesn’t look as extreme as 2003 at the moment. It’s not all about quantity of rain though. That rain has to fall at the right time for there to be a good crop in Germany. July and August are the most crucial months. Is it time to panic? That would be a bit premature, but it is safe to say that if the situation does not improve drastically in the next two weeks yields will suffer. There is very little rain in the forecast through the rest of July. Each day without rain makes the situation looks a little more grim.
  • Australia and New Zealand yields were short. We know this already since their harvests were months ago, but deficits from those contracts will put additional pressure on hops from the Northern Hemisphere for substitutes adding additional demand.

 

THE OTHER HOP MARKET

Everybody is focused on aroma hops these days. They’re sexy. Craft beer is a huge attention-getting trend. There are two basic types of hops though, aroma and alpha. We must put things into perspective. Craft breweries use a boatload of hops, more per barrel than any big multinational brewer. All the beer produced in the craft world, however, is only a drop in the bucket compared to the multinational brewers. The big guys use fewer hops per barrel. What they lack in hoppiness though they make up in volume. Their needs are huge! Most of the big brewers are exploring craft one way or another. Those brewers rely on alpha hops … alpha acid in particular.

The alpha market has periods of shortage during which acreage rapidly increases to meet demand followed by long periods of surplus during which acreage slowly comes out creating annual deficits until the overall surplus dwindles away. It’s way more complicated than that, but that’s it in a nutshell. In theory, there are points of equilibrium. They are never reached. The alpha market swings wildly from one extreme to the other and passes right by equilibrium on its way. Last time there was a shortage in the alpha market was 2007. The 2006 crop was short and brewers stretched inventory thin assuming the 2007 would save them. When it didn’t, all hell broke loose. I would argue there wasn’t really even a shortage in 2007, just the perception of one. The inventory wasn’t where it was needed at the right time and buyers were rejected. People with inventory began to hoard and prices skyrocketed. In 2017, the potential for a real shortage exists, not just the perception of one.

Most craft brewers in the business today weren’t in business back in 2007. If you’re new to the business, ask somebody who was around how crazy things were. Once the perception of a shortage begins, hoarding leads to more hoarding and it takes high prices to pry those hops loose. Merchants and growers quietly feel this is payback time for every time a brewer asked for lower prices in the past. A 20-year average hop price probably works out to a nice sustainable return, but it sure doesn’t work that way on a year-by-year basis. The hop industry quickly becomes a seller’s market. Between November 2006 and February 2008 the price of hops increased between 20-40x. At the height of the panic, you could only get hops by contracting at extremely high prices for 5 years. I remember on one day, November 15, 2007, I was at the Brau trade show in Germany. Prices of alpha started off at 150 Euros per kilo in the morning and were over 500 Euros per kilo by the end of the day. The Euro was very strong at the time. One Euro cost about $1.60. A kilo of high alpha acid can take approximately 15 pounds of hops. That translates to $53 per pound of hops for our American readers. It went up from there until February. So … If you think hop prices are high now, you haven’t seen anything compared to where they can go if the perception of a hop shortage begins.

Today, Germany is the world’s leading producer of alpha acid. That sounds nice … who cares where it comes from, right? Germans produce some of the best hops in the world after all. The problem with that is that the German hop industry is entirely dependent on the weather. If you’ve been anywhere on the planet during the past 10 years you have noticed that the weather is not so consistent anymore. Call it climate change if you want to, or not. It doesn’t really matter. Some might think Germans producing the lion’s share of alpha acid is good. Truth is, that’s a very risky play. The market would be much more stable and very likely more over supplied if Americans were producing alpha acid. In Washington and Idaho weather conditions are also changing, but weather there is much more favorable for consistent alpha acid production than Germany. Sincere apologies to all my German friends.

The world inventory balance of alpha, something that requires a lot of insider information to estimate properly is right on the border. I have followed those numbers closely for nearly 15 years and have discovered patterns over the past 50 years that indicate when the market will be short.

I can tell you the official statistics tell a very limited part of the story. There are other people at the big merchant companies who also have this knowledge. They know exactly where the inventory sits and will quietly admit in very private conversations that there is reason to be concerned, but that there is no need to panic just yet. That’s true.

 

PROGNOSIS

So what does all this mean for you if you’re a brewer reading this blog? That means that if the crop is short this year, the world alpha supply tips into deficit and, depending on the size of the deficit, into real shortage. If there is a bumper crop, or even an average crop this year, there’s no need to be concerned. With an average crop, the market will remain very tight and the tension and potential threat of shortage will continue until harvest 2018, when very likely there will be more acres of alpha hops in the ground.

Does the current situation mean we should expect prices will increase by 20-40x? That’s doubtful unless we see alpha yields that are 40-50% below average. An alpha shortage would send prices higher temporarily. High alpha prices would drag the price of anything with alpha levels of 10% or more right immediately higher. If the perception of the shortage is deep enough, even Saaz hops will be vulnerable. How high can prices go? With so many variables involved it would be irresponsible to even venture a guess. It’s still possible that the crop will be fine and there will be no problem at all. If, however, alpha yields are even 10-20% short, that is enough to trigger prices to move higher. Don’t forget, big brewers who need alpha acid have very deep pockets. They are deeply connected to the hop industry and will use their size to leverage purchasing power. They will also spend some of their vast resources so as not to interrupt their continuity of production. They don’t care whom they step on along the way to keep quarterly revenue targets.

 

RECOMMENDATIONS

  • The Boy Scout’s motto in the U.S. is “Be Prepared”. The Pioneers of the Soviet Union had a similar motto “Always Prepared”. There’s a lot of scoffing on people who want to be prepared today, but preparedness today, under the current circumstances in the hop industry, is the right strategy.

  • If you’re a brewer, make sure you have an ample supply of hops to brew all the beer you need until the 2018 harvest is available. What does that mean? Pay for your hops. Have them in your control either at the merchant’s warehouse or your own facility. If you haven’t paid for your 2016 hops, and aren’t ready to pay for them, are they really yours if prices skyrocket tomorrow? Chances are if you’ve left a merchant holding the bag that long, which many craft brewers have done these days, a hop merchant might not be so inclined to do you any favors when they can get real money for those hops somewhere else.
  • At the time of this writing, July 2017, if you use alpha acid or high alpha acid varieties you should have at a bit more than your projected supply needs on hand to cover a potential shortage until the 2018 crop becomes available. You can buy less or roll forward the volumes into a future year if there’s no shortage. If you have a little more than you need right now, you’ll be ready if shortages get distributed equally.
  • Remember … This is a temporary situation. Don’t go out and contract extra hops for the next 5 years just to cover a potential shortage this year. Don’t go out and contract anything in fact. Spot buying right now to cover any holes in your needs is the best way to go even if it is at drastically higher prices for one year. Hops will be cheaper in the future once the alpha supply problem is fixed. If there’s an opportunity to plant alpha hops American hop growers will jump on it with way too much enthusiasm and very soon the market will be in surplus again. The big breweries know this.
  • Make sure your contracts of specialty varieties are secure. Aroma hops themselves are not at risk of being in short supply, but, again, it is good to be prepared.
  • Remember … At the end of the day, all hop varieties are ultimately substitutes for all other hop varieties.

Did you figure out why you’ve not yet heard of any of this anywhere else? The answer is simple … MONEY. It’s all about money and there is a LOT of money potentially at stake.