How many surplus hops are there?
One week ago, the USDA released the September 1 Hop Stocks report. You can have a look at it for yourself on the USDA’s website.
It’s nice to see statistics, but if you don’t know how to interpret them, they are useless. So, what does it mean when the USDA says there is 98 million pounds of hop stocks in storage as of September 1? Does it mean that there’s 98 million pounds of extra hops that nobody needs just sitting around? No … Not even close. The situation regarding surplus hops is bad and getting worse, but it’s not THAT bad … not yet anyway. If growers keep planting acreage and don’t start removing acreage, it will get that bad very quickly.
When it comes to hop inventories, a hockey stick trend line going up and to the right is not a good thing. But how bad is it really? The USDA will be the first to admit that their numbers are not 100% accurate. They do the best they can with the data they have available though … and they do a great job given the challenge of the assignment and the secrecy inherent in the industry. So, let’s not focus on the exact number too closely. In fact, lets just say there’s 100 million pounds of hops as the September 1 stocks number to make the math easier. If we assume that between September 1 and the time when most of the 2017 crop becomes available several months will pass, we can lower that figure some because brewers will need to continue to use 2016 and older product in the meanwhile. Let’s say that adds up to around 25% of the total stocks. So, those are not really surplus because they are necessary until the new crop becomes available. That lowers our number (let’s call that number our surplus estimate) to 75ish million pounds sitting around. That’s still a huge number, but we’re not done. The ideal number of extra stock on hand is never zero for any brewer even when the market is in surplus and hops can easily be bought on a spot basis. You can see from the graph that even during 2007 and 2008, the time of the last hop shortage, there were 45-50 million pounds of stock on hand as of September 1. Those were considered alpha shortage years and prices for alpha acid shot up to over 1000 Euros per kilogram of alpha acid despite the fact that the stock numbers showed millions of pounds of hops sitting around. They weren’t the right varieties for what the market demanded. Despite the huge hop stocks, we’re in the midst of another alpha hop shortage right now! You wouldn’t guess that by looking at the stocks report though. The numbers are simply not designed to show that level of detail. We can talk about the alpha situation in a later blog. Focus.
So … back to the numbers. Let’s say we assume that at a minimum the world’s brewers don’t want there to be less than 45-50 million pounds of hops in stock ever on September 1. That’s a massive oversimplification, but given the numbers we have to work with it seems that that level of American stock on hand is significant for some reason. So, let’s take away another 50 million pounds from our surplus estimate. That lowers it to 25 million pounds. That is most likely how many extra hops there are out there. It’s the best guess we can make with the data available at least. If we take that 25 million extra pounds and divide it by a very generous average yield of 2,000 pounds per acre, it means that there were an extra 12,500 acres of hops in the United States that didn’t need to be produced during the past year. If you use a lower, more accurate number, that extra acreage number goes up quite a bit. Don’t forget, American growers increased acreage in 2017 by about 4500 acres. Word on the street is that there is at least another 1800 acres going in for 2018 in Idaho alone. Up and to the right. Up and to the right.
The problem with the way that the market is working today is that everybody believes those surplus hops are all contracted. Adding to the problem is that every grower always grows a little more than their contracts so they can be sure to fulfill contracts in full, especially when prices are good. It’s not because they’re greedy, although there’s plenty of greed to go around. With agriculture, you’re never guaranteed what the yield will be from one year to the next so it’s safer to plant a little extra to make sure you don’t short your contracts. When everybody does that, you can easily discover that there is 25-30% surplus built into the system. That means that short markets don’t last long. That is has been developing over the past few years and it is what is happening now. The craft market has slowed. The hop market has changed from a seller’s market to a buyer’s market.
Equally as interesting as the numbers in the chart above are the rates of increases and declines if you follow the changes chronologically. Have a look for yourself:
March 2015 until September 2015: 38 million pounds used
By March 2016: +35 million pounds (Crop was 78 million pounds)
March 2016 until September 2016: 43 million pounds used
By March 2017: +55 million pounds (Crop was 87 million pounds)
March 2017 until September 2017: 42 million pounds used
By March 2018: +?? Million pounds (Crop is approximately 100 million pounds)
If that trend holds, it’s not hard to imagine that by March 2018 we will see hop stocks at 155-160 million pounds, in other words +57-62 million pounds from the September 1, 2017 stock number. The rate of usage relative to the rate of production is slowing. It’s time for a correction on the supply side.