To grow, or not to grow, that is the question.

I received an email from a friend of mine who is involved with a popular grower co-op. He has the capacity to produce an additional 100,000 pounds of hops but does not have a contract for it. He asked me for my opinion on whether to grow for the spot market or idle the acreage.  An excerpt from my reply to his email follows. (The names have been changed to protect the innocent and the not so innocent.)

 

Dear John,

Your question is a difficult one only because the alpha market right now is right on the edge.  I don’t think at any time since 2007 it has mattered more what the weather does than in 2017.  The alpha prices you hear are correct. The prices you mentioned are actually the higher prices, which are being offered from Merchant X. Merchant Y is offering $16-18/lb. of alpha. Some growers have accepted the X prices, but not the Y prices. Aroma opportunities are dwindling in the U.S. because large craft brewers have over contracted in the short term.  I mention that only because growers are still in growth mode and are looking for anything to plant. Prices will not likely change one way or the other until the picture of the 2017 crop becomes clearer. Over time, however, growers’ expectations will likely decrease to make Merchant Y’s prices more attractive.  I suspect more and more growers will begin accepting these lower alpha prices so as to have something to plant. German growers who think that alpha will be their savior in the future should be very worried about this. They think the U.S. and Germany have swapped places and Germany is now the dominant alpha producer. Alpha business goes to whomever is willing to produce it for the lowest price. American growers are not out of the alpha market for good, only temporarily. I would expect to see a resurgence in future years as expectations fall even further, which will, ironically, be accelerated by their own over planting.
 
To your question about whether to grow alpha on spot or to grub the acreage … I wouldn’t recommend anybody grow on spot this year because there is a risk that that there will be over production already from the 2017 crop, particularly if you see American growers planting 3,000 – 4,000 additional acres, which at the moment seems likely.  I don’t think prices will decrease between now and harvest.  I think they will stay strong, but that doesn’t mean that there will be a rush to purchase any additional volumes. That could send the wrong signal to growers. Merchants will be cautious due to the risk associated with investing at high prices. If there is any hint of a poor crop, I believe prices will increase temporarily as merchants scramble for available supply. If, on the other hand, there is a hint of an average or better than average crop prices will fall immediately to the lowest of the two prices I referenced above as that is the level of the most recent wave of German alpha contracts. There will be some resistance to going lower than that. The price can fall even further depending on how vigorously growers oversupply the market.  Unfortunately, I would say the odds are in favor of an average crop, because it is … the average, but the uncertainty of agriculture and high risk is what makes this business so exciting, isn’t it? Frankly, the market doesn’t need any extra hops at the moment. American growers should be talking about removing 3,000 – 4,000 acres rather than planting more. There are plenty of hops out there, alpha and aroma, that can be purchased. If somebody really wants to place a bet in the alpha casino for 2017, I would buy alpha rather than growing it. 
 
It seems we are headed for some difficult times ahead.  I’d love to stay in touch more often and share information.  From time to time, it is interesting for me to hear what is happening in your part of the world too. 
 
Regards,
 
Doug