Why Hop Prices are Really Rising? Opening the Kimono.

We touched briefly on this in our previous post, Greedy Growers & Dirty Dealers  However, recently an interesting article by Eric Connor in USATODAY has been making the rounds among hopheads the past days on the Twittersphere.  It claims the rise in the cost of hops is responsible for the high prices of craft beer. The article touches on the surface of a very real problem within the industry, but doesn’t explore the deeper question of WHY prices are increasing. Although the title is a bit sensational and gives a little too much credit to hops for affecting beer prices, it’s a great excuse to dig in a little deeper into one of the most serious problems the industry today and ask WHY. 
In the article, Eric states, “In many cases, farmers don’t know how or what to plant in an uncertain market…”  That’s just not true! My guess is that Eric didn’t have the opportunity to talk to many farmers before writing the hop piece. Farmers are pretty good at responding to market signals by planting hops when prices are good, and to a lesser extent, removing hops when prices are bad. Growers are great at figuring out ways to produce more hops per acre when no restrictions are placed on them. Eric Connor probably did not … or more likely was not able … to look into the economics of hop or beer production. Perhaps he was not privy to what insiders know about the system. That’s not hard to believe. The industry is very closed to outsiders. It’s hard to find somebody who will answer the question WHY. Eric … Drop me an email. I’d be happy to share what I can with you. Just like in the Wizard of Oz, there is a man behind the curtain. There may be some smoke and mirrors too. 
Most proprietary varieties, although grown by many growers, are strictly controlled on both the production and sales sides. Sure, you may be able to get your favorite proprietary aroma variety through several merchants, but that’s all part of the illusion of a free and open supply chain. Like sand through an hourglass, most of those proprietary varieties, regardless of where they start and where they ultimately are sold, flow through one central control point. That is the most likely reason you can’t get your favorite variety today, or if you do, why it’s costing so much. It’s not because growers are demanding a fortune for them. According to several growers with whom I’ve spoken, they are actually not being offered enough to grow them in greater quantities. That’s strange with the market in its current state. Of course, those who sit in the center of control want to maintain the status quo. They’ll argue that everything is peachy. They won’t acknowledge publicly the waiting lists for hundreds of thousands of pounds they won’t be able to fill this year or next. That would mean their system isn’t working. They’re focused on retaining control so tightly that they don’t see the consequences. The problem with blaming a shortage of land or picking capacity is that money at the grower level, fixes all those problems. Land and machines can all be bought if money is available.
There is, of course, temptation to control something you’ve created. A monkey will get his hand caught in a trap because he won’t let go of the banana he wants. He is a victim of his own circumstance. As with the monkey, the solution to the problem of supply of proprietary hop varieties is simple. Of course, if you create a hop variety it’s your baby, but just like when your baby rides their bike for the first time without training wheels, at some point you have to let go and see if they can ride on their own. In this case, there’s not just a skinned knee at stake. That makes it even harder to let the banana go. Letting go though does not mean letting go of the returns on a well-developed breeding program. In fact, letting go means reducing the cynicism developing among brewers about new varieties, who currently think they don’t stand a chance of getting the existing varieties, not to mention any new varieties that may come unless they are somebody’s favorite brewer. Letting go means removing some very negative vibes circulating out there right now. Letting go also means increasing market share for the varieties while there is still demand.  Eeek eeek!
Those in control of managing the most popular aroma varieties seem to not be reading the tea leaves correctly. Perhaps, they are reluctant to believe that craft is a trend, not a fad!  Those who own the proprietary varieties and have done a great job at bringing them to market while they were in their infancy won’t shift gears now that the varieties have gained popularity. They don’t have a second play in their playbook. Now that that has happened, the next move should be to allow growers to buy the hop roots and pay royalties on strictly monitored production with heavy fines for non-reporting. That would allow growers to plant more and would quickly unlock the vast potential of those varieties, which, ironically, would very likely earn them even more money. 
Power is the great aphrodisiac 
– Henry A. Kissinger
Continued deficits in very popular and very unavailable, proprietary varieties lead brewers to conclude they must want the hops they can get instead of getting the hops they want. I’ve had conversations and signed contracts with brewers frustrated about this very topic. They’ll find the flavors some other way, like by adding actual citrus fruit to a brew or something even more off the wall. Craft brewers are a pretty creative bunch. Instead, the almighty Oz has chosen the path that any world dictator would admire and respect, one of tight central planning and control, but that doesn’t usually work out very well, as we’re seeing now. That’s why you have hops selling at prices up to $20 per pound right now … supply and demand are out of balance. The market doesn’t have to be that way.
The free market can control everything if allowed to and sends signals to those who can read them which way to move. Right now, the market is screaming, “give us some more of those damn proprietary aroma hops”. Although there have been acreage increases, they’re hardly what the market demanded. Somebody is not listening, or are they choosing not to listen? Hopefully that’s not the case. Maybe the ones in control use a cloudy crystal ball or a broken Quija board to figure out how many acres of those varieties to plant. It doesn’t seem they’re responding to market signals, which are clearly saying via extremely high prices on the secondary markets that there is a shortage of certain varieties. That inefficient structure could ultimately cause more harm than good to the industry, but hop growers seldom act in unison. They are more accustomed to building fences than bridges. 
What is a great variety worth if you can’t get it?  Nothing!  The ones who suffer most are the small or start-up craft brewers who are not the darlings of most of the long-established hop merchants. They prefer the bigger brewers because of the large volumes and easy deals they represent. The problem in the industry now is not a lack of great varieties. There are plenty of those. The problem in the industry now is being able to produce more of the great varieties we already have. All the while, breeding programs continue to efficiently churn out new amazing varieties every year further exacerbating the problem.
Nothing is ever black and white in this world. To be fair, the higher prices we’re seeing today are not exclusively the fault of one man behind the curtain. Although, just looking at the surface, it would be easy to say that’s the case, that’s giving him too much credit. Prices are increasing also because they’ve been kept too low for too long during times of surplus. Those $3 Cascades you hear about so often and may even remember were a result of big breweries strong-arming growers and merchants to sell for less during times of oversupply. When a hop merchant can sell Cascades at $3 per pound, nobody wins except the big brewer. Some merchants seem to enjoy doing that to get a customer for bragging rights … I still don’t get that, but to each his own. The grower loses money at those prices. An industry is not sustainable when price spikes every 10 years keep the industry alive and 8 years out of 10 prices are below the cost of production. That’s not good business. Since the early 90’s, NO grower has been able to grow Cascades at a price that allows the merchant to sell them for $3 per pound. The fact that they’ve regularly sold at that price until just recently proves how heavily things were stacked against the grower most of the time. Every pound of hops that sold for $3 was farmer and merchant equity going out the door. Prices are correcting to where they need to be now to maintain current acreage and finance necessary growth. While the hops may be even more expensive soon, that’s not a bad thing if hoppy beers are what you crave. Is it wrong for a business to want to survive? 
We’re not in Kansas anymore!  Growers, finally empowered by reasonable craft brewers who are willing to pay a sustainable price for their hops, have the courage to say NO to the terrible prices below the cost of production offered by the big brewers and, in turn, by some of the big hop dealers too. Craft brewers are expanding as quickly as possible to keep up with their demand by investing in new brewery equipment and everything else that comes along with growing a business. Every so often we read of millions borrowed or invested by one of the large craft brewers to expand. They deserve kudos for being able to figure out ways to expand in a growing market and keep up with cash flow. Hop growers are trying to do the same, but all we read are articles explaining how higher hop prices are bad for craft beer. Why the double standard?
Don’t get me wrong … I’m not an apologist for hop growers. Just like anywhere, there are some good ones, some bad ones and some ugly ones. People are people after all … as the song goes. Regardless, good, bad and ugly alike deserve to make enough of a profit to be able to keep up with the increasing demands for the crop they grow. That means they need to calculate for expansion, and … God forbid … profit. That’s sustainable … and it’s the right thing to do. If 47 Hops was an old school hop merchant, higher prices would actually be the last thing I should be calling for. For a merchant company, higher prices mean more money out of pocket to buy hops from growers, which means more risk. Your old school merchant might buy long on the grower side and sell on the spot market in an up market increasing his prices every year because that’s where the most profit could be made. Some guys are using that strategy right now. Higher prices are what is necessary and they are what is right in today’s market. The grower has to make enough to sustain his business and so does the merchant. For the record, 47Hops has bought on long-term contracts from the growers before it became the obvious thing to do and we sell on long-term contracts to the brewers. We’re interested in stability and getting our brewers through the even rougher times we foresee ahead instead of exploiting the weaknesses in the system. We used to get a lot of push back from brewers on 5-year contracts. We’ve been accused of trying to strong-arm people into contracts. When that happened, we shared with them our philosophy and what’s going on in the industry and then they understood WHY. There’s much less resistance to the idea today. 
Hop growers should be compensated for their hard work. Without them, there is no beer!  Do you really want to drink a beer knowing that with each sip you’re bringing a farm closer to bankruptcy?  That’s the pillar on which the multinational brewers have built their fortunes. They strived to get the lowest possible prices for ingredients so they can make more money for themselves and for their shareholders. Their empires were formed on the backs of broken farmers. They used their great power to get what they wanted. It doesn’t seem to be the mantra of most craft brewers now and hopefully it never will be. They have changed the dynamic of the hop market. In today’s market, that lowest possible price will be sustainable and it will include some profit for the grower and the merchant. 
LONG LIVE THE HOP REVOLUTION!!