Surplus and shortage – why the endless cycle?

Greed and fear create hop surpluses. It’s not the greed and fear you would imagine though. You might think that a surplus of hops would always come from the grower side since they are the ones producing the hops. You might thing that greedy growers are to blame. That would be too easy. True, some growers find it hard to resist planting a few extra acres of hops on speculation when prices are high in an attempt to cash in on a good thing. That, however, is not the main reason hop surpluses develop. Grower greed is strong, but it is not grower greed that drives a hop surplus.

A grower’s or merchant’s optimism about market conditions does not spring from within. Most growers and merchants react to circumstances in the market. They aren’t market makers. Markets of shortages and surpluses are born from the demand side, from the brewers. Multinational brewers have long played the system to their advantage. In the past, they have bought on the spot market during times of surplus when spot prices were low. They played merchants and growers against one another to drive prices down below the cost of production. During a shortage brewers short on hops typically contract. Once the market stabilizes, they inevitably use their size as leverage to cancel or renegotiate their contracts. In doing so they create cycles in the market that occurs every decade or so.

It is, therefore, the greed of the big brewer, always looking for the cheapest possible way to source hops that makes the hop market extremely competitive. Greed may be a harsh word. Thriftiness, frugality, budget-consciousness might all be kinder softer words. At the end of the day though, they want to get more and pay less. A while back, I had a friend who was a purchasing agent from one of the 20 largest breweries in the world. He told me his bonus was calculated based on how much money he saved versus the prior year. Granted, not all brewers are so callous. This guy worked for one of the 20 largest breweries in the world when he told me that so his actions had a huge impact.

 

Sadly, some of the larger brewers (yes, larger craft brewers too) who talk about sustainability and insist on high hop quality use their size as a bargaining tactic. They’ll try to knock down a price by $0.05 per pound if they can. With only so many players in the market, growers and merchants are afraid to lose a customer. Big brewers know this and can smell that fear. Fear of missing out on a potential hop deal drives merchants and growers to do whatever it takes to get a deal. That may never change So long as greed and fear play a key role in the hop market, we’re likely to continue to see times of surplus and shortage in the hop industry.