Navigating the Hops Market

How much should you lock in on a hops contract, and for how long? How much should you rely on the spot market? Here are three perspectives on how to make sure your brewery has the hops it needs.

Joe Stange Mar 7, 2020 - 20 min read

Navigating the Hops Market Primary Image

Photo: Jamie Bogner

The hops market is an iffy place. On one side are growers who must predict the future and depend upon the weather. On the other are brewers in an increasingly anxious industry, pressured to keep down costs while keeping up with that ever-growing thirst for variety.

Given the lack of assurances on either side, it’s a marvel that the hops market works as well as it does.

Among the reasons it does work (usually) are

  • the prevalence of multi-year contracts, helping growers to know how much to plant and in which varieties, meanwhile locking in predictable prices and assured supply for breweries;
  • the work of hops merchants whose livelihood depends on keeping that supply and demand balanced;
  • the flexibility of the spot market, with increasingly sophisticated tools to help brewers fill in the gaps when needs arise.

Here are some things to know about today’s hops market: Growth in the hops-intensive U.S. craft-beer market has slowed (recently growing 4 percent year-on-year, compared to the peak 18 percent mark of 2014). Many of the country’s largest brewers are seeing sales declines. However, growers are increasing acreage—by 4 percent, from 2018 to 2019.

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The United States has never had more acres of hops planted than it does today, and it continues to increase. Yet beer sales overall have been flat, and some breweries are struggling. Is there a risk of oversupply, due to breweries not being able to fulfill their contracts? It depends on whom you ask.

Below are a few different perspectives on the state of the hops market today—all from people who know it well—including insights for brewers who want to navigate it safely (without breaking the bank).

The Grower-Owned Merchant

Yakima Chief Hops is a network of family-run farms in the Yakima Valley, Washington. It’s also the country’s largest hops company.

Bryan Pierce, vice president of North American sales, says that while some brewers are facing tough times, “realistically, on the whole, we’re still seeing a lot of growth in beer and hops. We’re buying more hops, and they’re going out faster than they ever have. So that narrative has changed quite a bit.”

Pierce acknowledges the view held by some—“a vocal minority,” he says—that there are too many hops in the ground for where the U.S. beer market is. Anecdotally, that view gets a boost any time a brewery closure or acquisition makes a splash in the news.

On the other hand, the number of breweries just keeps on growing—now more than 8,000 in the United States, though the vast majority are on the smaller end. Demand for American hops also is growing abroad. So the hops keep moving.

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“There’s this perception that we were long on hops—market-wise, not just Yakima Chief,” Pierce says. “We didn’t really see that when we looked at the numbers and what people were purchasing.”

As a grower-owned company whose customers are brewers, Pierce says, “it’s really in our best interests to make sure there’s a balance of supply and demand.” To keep that balance, “the last couple of years, we weren’t recommending increase in acreage at all. We were recommending change-over of varieties.”

For example, acres of Citra increased by more than 2,500 in 2019, while Cascade—long the king of American craft hops—lost about 900 acres. In short, growers are switching over to the most in-demand hops. “We’d rather have growers being into varieties that have a home,” Pierce says.

“From our perspective, I really don’t see things slowing a whole lot. A lot of new breweries are coming.”

That’s not just in North America; Yakima Chief sells its hops worldwide. It includes emerging markets where craft still has room to boom. The international scope, Pierce says, is beneficial “because it allows us to balance supply and demand on a global scale. That allows more flexibility for breweries in general.”

Is it possible that foreign demand for American hops is helping to offset the slowing U.S. beer market? “I would honestly say that growers never really over-planted,” Pierce says. “I think there were definitely certain varieties where supply may have felt larger than demand, but this was all based on contracted business that may not have been real demand.

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“If you were to look at the numbers of what was contracted versus acreage, things are in balance. It is about having accurate and realistic projections; that really makes the difference.”

Pierce also notes that harvests and yields can vary, so acreage doesn’t tell the whole story. Having a hops market that is truly international can help to mitigate the ups and downs.

“Craft beer becoming a more global market in general has been very positive to create more balance in our industry for sure, as it allows for more changes on a global scale and not just one market,” Pierce says. “I know that a huge benefit Yakima Chief Hops has been able to offer our customer base is a lot of flexibility since we have a global focus. So even in a slowing U.S. market, craft on the whole continues to rise rapidly.”

Pierce’s advice for brewers is straightforward: Use contracts, but don’t over-commit. He suggests contracting out no farther than three years and lowering the commitment those second and third years to 50 to 75 percent of the first. Needs change, often in surprising ways. Those amounts can always be increased later, he says.

Some background: Few craft breweries were using contracts to secure their hops supply before the infamous shortage of 2007–2008. That led to some shocking prices for popular varieties. After that—with no small encouragement from the Brewers Association—the rate of contracting went up significantly. By 2014, the percentage of BA-defined craft breweries using contracts was 96.6 percent.

By 2018, according to the BA, that rate was just 63 percent. According to the most recent survey from the BA, that rate jumped to 73 percent. Are newer breweries getting the message?

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The relatively lower rates in recent years are largely due to an influx of smaller breweries that enjoy the flexibility of the spot market—and, at a smaller scale, can better absorb unpredictable pricing. Online platforms today (such as the Lupulin Exchange, see below) also offer more options for shopping the spot market.

Notably, there were only about 1,500 breweries around for the last big shortage. More than 6,000 others have opened since then, some of them run by people who might have been in middle school back in 2007. To them, it’s ancient history. There is a generational difference in play.

Yet even for tiny breweries that can change next week’s brewing plan based on the latest trends, Pierce recommends using contracts to fill baseline needs.

“There are certain hops you know you’re going to use,” he says, citing the increasingly popular Citra and Mosaic as examples. “I would apply that to really any varieties.” Those contracts also are a form of communication to the growers. “Without those hops being in contract, hops growers aren’t getting those signals that people want more or need more.”

Want to make sure you have enough Mosaic for next year? “We’re making recommendations to growers now,” Pierce says. “Talk to your hops supplier as early as possible and as often as possible.”

And be ready to make adjustments. “Hops contracts are not a ‘set it and forget it’ kind of thing. Just like everything else in the brewhouse, they need maintenance.”

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Overall, Pierce says, the current hops market is in a sort of equilibrium. “I think things are really healthy. I don’t think we’ve ever been as balanced as we are today, across the board.”

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John Bryce, founder of The Lupulin Exchange, disposes of nearly $20,000 in hops. In 2014, Bryce signed multi-year contracts on behalf of several breweries that he either owned, operated, or planned to open. One of those breweries was sold, another closed, and another never opened. Bryce says that he used many of the contracted hops in other breweries and sold plenty—often at a loss—but ultimately could not give away the last of the excess. Bryce says that he hates to throw away hops but that it’s better than not having enough to brew, something he experienced firsthand in 2008.

The Brewer/Marketplace Facilitator

The Lupulin Exchange—an online platform where brewers, growers, and merchants can find needed hops or sell off surplus—turned five years old in 2019. In 2015, it facilitated sales of about 200,000 pounds of hops. By 2018 that number had increased to 1.2 million pounds.

John Bryce founded the exchange after brewing professionally for 12 years. He had grown frustrated with a spot hops market that was, well, too spotty. He still brews today, at Mount Ida Reserve in Charlottesville, Virginia. He also hosts the Master Brewers Podcast for the Master Brewers Association of America.

Bryce’s view of the hops market today is not especially rosy. “I think that we’ve watched craft growth really slow,” he says. “We had all those periods of double- digit growth. And I think a lot of people who obviously jumped into the industry during that period didn’t know anything but double-digit growth and had pretty big eyes for the future and signed some very aggressive hops contracts it turns out they’re not going to need.

“And a lot of those breweries, where they were seeing double-digit growth before, are now seeing no growth or very, very small growth. So I think it’s going to take quite a few years to work through that glut.”

There is another problem for hops on the immediate horizon, Bryce says: the dreaded S-word. “I mean, I’m sure you’ve noticed the big shift to the hard-seltzer trend and that sort of thing. Those are things that are, again, taking away from craft volume and replacing that volume with a liquid that doesn’t really use any hops. So that’s not going to help.”

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Breweries are still multiplying, true. But most of them are tiny.

“That number of breweries growing doesn’t mean much because you can add a whole bunch of breweries that make only a couple hundred barrels a year, and it doesn’t really move the needle,” Bryce says. “I’d look more closely at the actual barrelage of craft beer produced, which of course gets a little tricky to define when you’ve got things like New Belgium possibly moving out of that number.”

In its midyear 2019 report, the BA said that the craft segment had grown 4 percent over the previous year. The number of microbreweries was growing at an increased clip over 2018, while the larger regionals were facing leaner times.

“I think you’re always going to see the large craft breweries contract, on some level, but again it goes back to those small taproom breweries and brewpubs that are nimble and that aren’t producing beers for distribution. They can be a little bit more flexible in which hops, which varieties they use. They’re not necessarily trying to produce the same beer time after time, the way a Founders or a Bell’s or a big craft brewery like that is. [Those breweries] have a different problem set where people expect to be able to buy the same beer year after year, so that big breweries are going to have to do a high level of contracting.

“But some of these small ones that can be flexible with what they use and aren’t really trying to put beer out into the market, you see a lot of them not contracting or contracting in very small volumes and getting most of their needs from the spot market.”

Bryce built the Lupulin Exchange to help his fellow brewers do just that. Realistically, he says, they are always going too long or short on some varieties.

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“And I think a very, very important point is that’s always going to be the case, no matter what,” Bryce says. “I mean, you can take the position that everyone should contract. And I’m sure that’s what the merchants would like and that the growers would like it. And to a certain degree, that makes a lot of sense.

“But even for the brewery that has been around for a while, has stable sales, and is really, really good at forecasting and running their business, forecasts are just forecasts. They’re always wrong, right? So you’re always going to be a little bit long and a little bit short on this or that. And sometimes you’re a lot long or a lot short on something because in this day and age, you never know. You don’t know what your flagship beer is going to be next year or maybe later this year. You don’t know.

“Things are just changing so fast now,” Bryce says. “It’s harder than ever to even forecast accurately. And because of that, people are always going to need some sort of clearinghouse where they can sort of even out that slack.”

Bryce’s brewery at Mount Ida has a taproom—shared with the Reserve’s winery—but it doesn’t distribute. Their malt comes from barley grown on the estate, but they don’t grow hops. He says he is still dealing with surplus hops that are spillover from a long-term contract he signed in 2014. He doesn’t see the need to sign another one.

“For me, at this point, it doesn’t make a lot of sense for me to contract for anything,” Bryce says. “Now, if there were a few proprietaries or something like that, that I said, ‘Look, I’ve really got to have this variety,’ then I would contract at small amounts, and you can do that.

“There are some merchants that will sign very small contracts, and that’s not a bad idea if you’re a small brewer and you know, ‘Hey, I need five boxes of Citra every year.’ If you know that, you should sign a contract for that, so you can get stable pricing and be guaranteed that you’re actually going to get some. But if you don’t know that you actually need it and are definitely going to use it, then don’t sign a contract.”

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Bryce also is not an advocate of multi-year contracts for the smallest breweries.

“I would say that even if you’re one of the smallest breweries in the country, I would just do a year at a time because you just don’t know what’s going to happen. And you don’t want to be locked into an agreement to buy hops three years from now if you don’t have absolute certainty that [your] place is going to not only be open three years from now, but also be selling that same volume of beer and needing that same variety of hops.

“It absolutely makes sense to sign multi-year contracts if you’re a large brewery that’s got stable sales and you’re distributing and whatnot. But if you’re small, I wouldn’t sign more than a year contract.”

The Industry Group

The Brewers Association has long been a champion of contracts—not only so that brewers can lock in the hops they need at fair prices, but also as a force for stability in the market, as an effective means for brewers to communicate to growers how much to plant and in which varieties.

After the contracting rate apparently dropped in 2018, BA Supply Chain Specialist Chris Swersey called it “a huge alarm bell for me and our industry. We really need to turn that around.”

They may have done it. The most recent BA Hop Usage Survey, published in the November/December issue of the Association’s New Brewer magazine, found a contracting rate of 72.8 percent—up almost 10 percent over the previous year. In that report, Swersey and longtime brewer Dick Cantwell write about the current market’s relative stability: “It’s tempting to say people have gotten smarter about managing all this.”

In an email to the Brewing Industry Guide, Swersey adds more context.

“Since the disastrous hop shortage of 2007–2008, Brewers Association’s durable message to all brewers has been to purchase hops under contract. Hop contracting is more important than ever, especially for small U.S. brewers. Our 2019 hop survey measured a significant increase in the proportion of craft brewers who purchase hops under contract, after two years of decline.

“Over the past two to three years, we’ve observed a large overall U.S. supply surplus dwindle back to a balanced market. The thousands of breweries that opened during this time of surplus are likely accustomed to buying open-market hops at will. Brewers without contracts for cherished public and licensed varieties will begin to experience variety-by-variety market tightness.

“Contracting remains the single most important tool for communicating demand to growers, by signaling that the grower will have a market to sell into. Many brewers choose not to purchase hops under contract for reasons valid to their businesses. By definition, those brewers are flexible in their needs based on variety-by-variety supply and demand; but those brewers are also subject to the whims of an often-fickle market that relies on Mother Nature and needs years to respond rather than days.

“Brewers who simply have to have a supply of certain varieties can only ensure their needs will be met via contracting.”

Joe Stange is Managing Editor of Craft Beer & Brewing Magazine® and the Brewing Industry Guide®. Have story tips or suggestions? Contact him at [email protected].

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