Last week the USDA released the U.S. acreage strung for harvest statistics. What do they show? They show a huge migration toward proprietary varieties, some of which, as I have discussed in previous blogs, are locked down and controlled by only a few people. That’s a trend that should concern every brewer if they don’t like the idea of three guys deciding how much hops they can source. One thing that is suspiciously absent, however, in 2015 is a significant increase in Cascade acreage. There were less than 200 new Cascade acres in the Pacific Northwest. While that may sound like a lot if you’re starting a farm, there were over 6,600 acres in the U.S., so that represents a very small percentage, less than 3% to be exact!
Based on average yields, that means there will be +/- 275,000 pounds more Cascades in 2015 than there were in 2014. That sounds like a lot of hops. For any normal brewer, that would be enough … surely there can’t be a problem. Let’s dive into that number a bit deeper, because it’s nowhere near enough.
In 2014, Cascade production was 12.6 million pounds. Everybody knows the craft market is growing at roughly 18%. That would mean roughly an additional 2.2 Million pounds of Cascade should be necessary this year. That sounds a little optimistic though and that’s a really big number. In the interests of trying to get that number down a bit, and since some people might want to try other varieties, let’s say we need only an additional 10% Cascade volume. That means an additional 1.26 million pounds necessary. If all goes well, we’re short by about 1 million pounds. That sounds pretty bad. It actually gets much worse than that.
Last year, one large brewer was sitting on several hundred thousand pounds of 2013 Cascades. They didn’t need them for whatever reason and decided to sell them back into the market to several dealers at $2.50 per pound. They did this during harvest … coincidentally just as prices were starting to escalate due to a production deficit. I know the details because along the way we were also offered the chance to buy these hops. We declined.
When the 2013 Cascades came on the market, prices were rising quickly. Prices had increased about $3.00 per pound at the grower level in a period of about as many weeks. At the time, it seemed Cascade had the momentum to continue to $10.00 per pound to the grower as Centennials were doing at the same time in response to the deficit in that variety.
That’s right, there was a deficit of Cascades in 2014. Prices did not reflect that because of the hops that reentered the market. Let’s say, just to keep things simple that the deficit was roughly the same as the amount of 2013 hops that reentered the market, 300,000 pounds. Let’s try to estimate the actual 2015 Cascade demand … We have to start with what the actual 2014 Cascade crop demand. We should assume we started from a deficit position based on the way prices were skyrocketing. Let’s assume that to be the case. If we assume that the deficit was approximately 300,000 pounds, since that was enough to send prices back down, the actual 2014 demand was somewhere around 12.9 million pounds of Cascade. That would make our actual 2015 demand (if calculated at only a 10% increase) at 14.2 million pounds. If we calculate the growth of Cascade demand at 18%, the demand increases to 15.2 million pounds in 2015. The reasons to assume growth of greater than 10% are many. That is one of the flagship varieties of many beers. It’s also one of the gateway hop varieties for people trying American hops around the world.
Based on average yields, the 2015 Cascade crop should be approximately 13 million pounds. That is if 2015 produces an average yield. This year has been difficult already with powdery mildew pressure and early bloom challenging the Cascade and many other varieties, including one or two of those proprietary varieties nobody can ever get their hands on.
So, why are there not enough Cascades? It’s not rocket science. Growers react to price signals. When that brewer flooded the market with old Cascades last year, it instantly filled the market. It sent prices back down to where they had been prior to the time when the deficit became obvious. The brewery was most likely just trying to take care of a problem they were having with excess inventory and saw an opportunity to do that, nothing sinister or conspiratorial there. It is doubtful the brewery considered or understood the full consequences of their actions. In the absence of fact, conspiracies and rumors will fly though. Some say that brewer was influenced by the owners of the elusive proprietary varieties to sell those hops into the market, the mafia-like families to which we have referred in a previous blog. The theory is that those guys would benefit financially from the resulting royalties on the additional production. That would make sense because it would drive growers more toward their varieties instead of Open Source varieties, but it’s pure speculation. Some growers also speculate that that brewer, who usually does not like to pay market prices for their hops and who growers believe they can use their size as a threat to insure low prices, may have been trying to keep prices for Cascade reasonable. Whether either those theories are true or not is impossible to say of course. That’s what makes conspiracies so much fun. What we know is that the effect of their actions was that Cascade prices plummeted in 2014, at the very time growers were making planting decisions for 2015. That effectively steered growers away from Cascades and toward proprietary varieties that were commanding a higher return per acre at the time. The market really is that simple and open to manipulation from outside forces, intentional or otherwise.
We have seen all this before. It was only 2007 and 2008 when acreage switched from just about every conceivable variety to the CTZ variety due to the higher prices being paid for it at that time. The result was that other varieties, if brewers wanted to keep them in the ground, had to deliver to the grower as much or more than the price that could be had for the alpha hops. As a result there were brewers had to pay $20-25/pound for Willamettes and Cascades. The same thing is happening now.
The limit of production capacity about which I have been writing for the past year or two has arrived. It manifests itself in variety-specific shortages that will change from year to year as the limited amount of acreage chases demand. The varieties that return the highest yields to the grower will prevail. We anticipate double-digit prices for most varieties this fall. Only CTZ and a few other alpha varieties will stay below the $10 mark. A smart strategy for a brewer during this time is to secure supply and be less concerned about price. Of course, that sounds like something a dealer might say … dirty dealers. The truth is though that locking in at today’s prices will seem like a brilliant strategy 12-18 months from now and it could save you thousands, or tens of thousands of dollars, just as it has already for those who locked in a couple years ago and who can sit back and watch this all unfold.