Why 2016 hops should go to the landfill

The hop market exists in a perpetual state of imbalance. It never finds the sweet spot of equilibrium where supply equals demand causing a never-ending series of boom and bust cycles. Every cycle is different, of course. I have a book written in 1828 in London about the history of the hop industry that goes back to the 1500’s that talks about the same boom and bust cycles. The current bull market, although it has persisted now for several years, is only an anomaly. It is not immune from the mistakes of the past. The prices increases of the past 5 years were necessary to cover the hundreds of millions of dollars growers and merchants borrowed to build and modernize production facilities. Nevertheless, some brewers think the industry is gouging. While there have been profits, the majority of the revenue was used to develop the infrastructure that enables the current level of production.

High hop prices, a quick rate of growth in the industry and the trend toward craft beer attracted the attention of institutional investors and farmers from other industries, some of whom decided to invest in hops … further fueling expansion. The hop industry is living through a period of irrational exuberance, a term Alan Greenspan made famous in the 90’s when describing the dot-com bubble. That did not end well and neither will this if it continues. The beer market is not a bottomless pit and cannot absorb all the hops growers want to produce year after year. 2017 must be time for restraint.

The hop industry today is in a precarious position. Many brewers contracted growth upon growth years into the future spread out across multiple merchants resulting in them having contracts for more hops than they needed due to future growth that never materialized. Well over half of the craft brewers in the industry today were not around 10 years ago. They don’t realize how delicate the hop market is. They haven’t known the consequences of not contracting correctly. They entered into hop contracts that were easy to sign. Most merchants are unwilling to officially share information about customers’ contracts and deliveries with one another. Therefore, from the merchant perspective, no one merchant can identify the scope of the problem and it is not fixed, but it is still salvageable.

It is apparent that brewers’ appetite for hops was, in many cases, unrealistic. Thankfully, there is still growth in the craft beer market so cuts in acreage are not yet necessary. Over time, the problem can work itself out without any serious consequences since brewers can slowly use the hops for which they have contracted even if they don’t require those varieties any longer. Thankfully, the 2016 crop was millions of pounds short of pre-harvest expectations in Germany and the U.S., or the situation today would be much worse. For an adjustment to happen, the expansion in hop acreage must stop with 2016 for a couple years and be allowed to normalize. 

This year most likely fueled by optimism, and probably a little greed, some growers produced hops that were not sold prior to harvest. They’re sitting on those hops now waiting for the market to improve. They should dump those hops in the landfill rather than dumping them in the market. Given the circumstances, growers should grow only for what they have contracted … not a little extra to make sure they fill their contracts, not a little extra just in case there’s bad weather. The hop industry should pause and let the craft beer industry catch up. That would be the proper thing to do to maintain the health of the market moving forward.

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The complicated part of this puzzle is that some varieties are long while others are in short supply. Substituting for varieties in short supply with available varieties is one solution. Aspiring hop growers around the country are still eagerly jumping into the game. They seem to think that just because the demand for craft beer seems insatiable so too is the demand for hops. Nothing could be further from the truth!

Have you heard the one about the Florida Department of Agriculture and how they funded a grant for $158,000 to study the feasibility of growing hops in Florida? If so, you’ve probably also read that there’s private equity money investing in a farm in hop Michigan. Just today, I read this article on Salon.com that details the plans of several breweries to grow their own ingredients, including hops. Everybody and their dog wants to be a hop grower today. It’s like Pets.com all over again … irrational exuberance … and it has the capacity to get out of control. The hop industry is at a tipping point. If you don’t remember what Pets.com was, Google it. 

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Some proprietary varieties that have been improperly managed have caused silos of supply that isolate valuable information from the industry making an already opaque industry even more secretive, if that is possible. This causes growers not involved to make choices they might not otherwise make thereby accelerating the likelihood of a market collapse. Some in the industry are actually arrogant enough to believe they can manage the entire market even though they represent only a small piece of the pie. Even the largest players cannot manage the hop market. It is too opaque and there are too many players each heading in their own direction.

The hop industry has always endured bitter turf wars for market share brought about by the intensity of the bad times. The cutthroat dog-eat-dog mentality is alive and well and is driving the push toward proprietary varieties. Meanwhile, the hop production machine continues to churn away … ka-chunk ka-chunk ka-chunk. The hop industry needs to better understand its current position or the times when growers can receive a price that covers the cost of production will quickly come to an end. 

As the old saying goes … “Money talks”. Merchants are not buying the extra varieties in surplus because … simply put … there is no demand for them … at any price. Meanwhile, brewers are trying to sell two-year old inventory at high prices online. They overbought. Nobody wants to write down the prices just yet hopeful that they will recoup their investment. The ones who sell cheap might actually sell their old inventory. There are still pockets of demand in the industry so all is not lost.

The theme of the Hop Growers of America convention in January should be “Moderation and Restraint”, but that’s nowhere on the menu. Nobody likes to hear the message that they need to be proactive and think of the greater good before they think of themselves. Many growers have plans to expand acreage in 2017. At the moment, rumors are that there will be an additional 4,000 acres of hops in 2017. Given the current situation, that’s crazy!

That’s not all though … There is an Idaho cattle rancher planning to invest $20+ million into a hop farm in 2017. He has missed the boat, but he doesn’t even know it yet. Another well-financed member of a hop growing family from Oregon has moved to Idaho to start a new hop farm because he wants his own piece of the action. Idaho is a beautiful state, but it doesn’t rain manna from heaven there. It seems they’re just living in a consensus reality fed by incomplete market information.

The market does not need additional acreage to support the current level of demand considering the moderate growth expected in the craft industry going forward. Their plantings and others like it around the country will hasten the collapse of the hop market if they continue unabated. If either of those guys or any of the people who are only now thinking of getting into hops are reading this, I encourage them to reach out to me. I’d be happy to offer a perspective on the hop industry they probably haven’t considered and one that might save them a lot of money.

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Let me be blunt … The hop industry should stop expanding for a while. Let’s say we’re taking a break. What the industry needs to satisfy demand is an adjustment of the existing acreage so varieties in the ground more closely resemble demand. Considering there are plenty of contracts already signed for highly desirable varieties, but against which no hops have been delivered or paid for, increased acreage is the last thing the industry should be considering. An additional 8 million pounds of aroma hops will not encourage brewers who already aren’t taking delivery on existing contracts to take them and pay for them sooner. If somebody doesn’t Wake up and smell the aroma soon, all the happy times in the hop industry will soon be just a memory.

 

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