What a 5% Short Crop Means for YOU

When I first graduated from college, a friend of mine and I took a 1965 Ford Mustang I had on a trip across the US. We plotted all our stops on a map and had big plans. The first day out, driving through the Mojave dessert, temperatures reached 109 degrees and that poor old mustang overheated. After a while, it cooled down and we could drive a bit further before it overheated again as we tried desperately to get to the next city, Kingman, Arizona. We met a lot of kind people who stopped to help us along the way. A couple days later, I had fixed it, or so I thought, and we were on the road again. Unfortunately, the gremlins were already in the car. We were plagued with problems the rest of the trip. Six weeks and 10,000 miles later, once the car was safely back home in the garage, I figured out the source of the problem was a clogged heater core that was contaminating the rest of the motor causing our overheating problems. Not sure why I didn’t think of that on the trip. I guess I was distracted with all that was going on. I replaced that heater core and the car ran just fine for years. What does that have to do with hops?  The road we plan to travel is pretty clear. We even know the points on the map, 20X20, US style craft beer in Europe, for example. Most of the hop industry is using old, tired equipment. They’re running it at or beyond capacity, pushing it through difficult conditions. Many of the machines weren’t meant to pick so many acres and be driven so hard. Just like with that old Mustang, they can’t take the heat and there will be breakdowns along the way. It’s inevitable. There will be fixes that will get us a little bit further down the road, but don’t actually fix the problem. We may even be able to get pretty far. Until the core problem is fixed though, the industry will not run the way it should.
Not that we can take it for granted, but we all know the craft industry is growing by 18% this year just like it did last year … yadda yadda yadda. This spring, American growers planted an additional 3,168 acres, or 8.9%. True, not all craft beer is made with American hops. Most likely, nobody even knows what the number is, but it seems pretty high based on the calls we get from brewers and the percentage of them asking for foreign hops. Whatever the number is … pretty safe bet that the 2014 acreage increases don’t cover the growth in demand. That doesn’t sound good already. Hang on a minute … it gets worse. Agriculture being what it is, some yields are already down significantly while others are only slightly off. Let’s assume overall a very mildly-reduced crop that is only down 5% from anticipated yields, although some varieties, as we mentioned in our Harvest Half Time Report are down quite a bit more than that. Five percent doesn’t sound so bad, does it? Normally, it wouldn’t be. With the craft demand, some varieties are sold near (or even over) anticipated yields, which means there may not have been enough to satisfy demand to begin with.  Let’s have a look at the numbers and what a crop that is 5% short means in 2014.
You don’t want to cross a river that is on average 4 feet deep. Averages don’t usually tell us much about anything specific, but they give a good overall picture and over time they show trends. The average yield across Washington, Oregon and Idaho in 2013 was 1969 pounds per acre. You can find that on page 5 of the 2013 Hop Growers of America (HGA) Statistical Packet.  In 2014, in the same three states, there were 38,392 acres strung for harvest. You can find that number in the 2014 USDA NASS Acreage Strung for Harvest Survey.
Put those two numbers together and you come up with an anticipated yield for the 2014 US crop of 75.59 million pounds. Now, let’s assume we are 5% less than that number, it means roughly 3.78 million fewer pounds of hops were produced than anticipated. That equates to a US crop of 71.81 million pounds, a gain of 2.47 million pounds over 2013. That’s still a lot more hops, right?  True, but that’s an increase of only 3.5% in the supply of US hops in 2014!  Compare that with an 18+% increase in the demand for craft beer. One more thing … those hops being harvested now have to last until October or November of 2015! We haven’t even started talking about the demand for US style craft beers outside of the US yet. Houston, we have a problem!
What do you think that could do to the price of hops?  Well, thank you for asking. Let me tell you … It’s likely to drive the prices for spot aroma hops significantly higher for those who can get them. There will continue to be variety specific shortages while other varieties are in surplus. Depending on which merchant you’re working with, the size of your brewery, and maybe even the day of the week and the mood of the sales manager, you may not be lucky enough to even get what you contracted. It seems some merchants are playing favorites, taking care of bigger customers at the expense of the smaller guys. I’m just bad mouthing the other guys you say? Not true. We get calls from brewers abandoned by other merchants every week. We’re kind of like Brewer Rescue that way. At 47Hops, we won’t abandon brewers. We want to help. Everybody will get the hops they contracted despite the short crop. The short supply will mean the 2015 and very likely 2016 crops will be fully contracted before we ring in the New Year so waiting isn’t a good option. Don’t worry though, 2014’s crop won’t create a panic and increase prices a-la 2008. That’s the right hook that’s coming after we take a few more left jabs first.
Prices that look high today will seem like a steal two years from now. We have seen this already with several of our customers who contracted with 47Hops early in 2013, when prices were half of what they are today. They’re already saving tens of thousands of dollars!  In this market, and for the foreseeable future, it is very risky to plan to buy any hops on the spot market.
If you haven’t already gotten the message, what you need to do to protect yourself … Contract Contract Contract … and then contract some more. By that I don’t mean hoard hops or buy more than you need. Nobody likes a hoarder. I mean you should contract for everything you need and keep contracting for more every time you see your needs increasing. Contract early and often, like I mentioned in my earlier blog “How to Avoid High Hop Prices”, and you’ll avoid the worst prices out there.  
Maybe you’ve noticed the silence in the hop industry other than this blog. Nobody likes to say anything market related. There’s money to be made in uncertainty and there’s a lot of uncertainty right now. The wolves always have their sheep’s clothing ready. They’ll say they’re being cautious and don’t want to alarm anybody. That sounds very PC. They probably wonder why the heck I’m sharing all of this with you. When it comes to hops, people both in the craft beer industry and definitely in the hop industry seem to enjoy the cloak and dagger discussions in dark corners of obscure restaurants all the while scanning the room for key people who may overhear the details of your conversation. All that secrecy and people playing one against the other will hasten another crisis. It’s one of the things caused the cycles of the past. I’ve always believed it’s best to be informed and to get bad news out of the way quickly. Then, you can pivot, adjust your plans and move on. Nobody likes last minute surprises. If you’re a brewer, you can’t afford that in your supply chain. Openness and access to knowledge and information levels the playing field.
Some armchair quarterbacks may comment on Facebook or Twitter, “Stop brewing those damn IPAs”. I’m curious if they understand we’re living in a relatively capitalist society here. IPAs sell beer. That style of beer is one of the reasons craft is taking off the way it has. If people want IPAs and are willing to pay for them, that’s what they’ll get. You can’t kill the goose that laid the golden egg. Killing demand is not the answer. The answer is creating more supply to meet the demand. That’s going to take creativity. The market is an efficient thing and it will find an answer.
Of course, it’s too early to know a final number for the crop since the harvest isn’t finished. It’s not too early to know that things are looking bad. We’ll know by the first week in October though. The 5% number is just an estimate based on the current performance and optimistically assuming that the harvest will improve as it progresses. Most aromas are down, but alpha hops have yet to be harvested in the US. All of that only worsens the problem. Agriculture acts and reacts no faster than nature’s cycles. Changes take time. Even if the crop had come in as expected, there would have been a deficit in the supply of hops relative to demand since acreage increases weren’t close to matching the increase in demand for craft beer. If the supply of hops is to keep pace with the demand for craft beer, the players in the hop and the craft beer industries will have to communicate a little better with one another and lay all their cards on the table. The alternative will be ugly.