As a high-demand agricultural commodity, hops are subject to myriad forces that can greatly impact the price and availability of certain varieties. Weather conditions, total acreage, harvesting and processing infrastructure, consumer demand, and shifting tastes all affect the market.
Sometimes the equation temporarily swings out of balance and corrects, as is the case with the drought and unseasonable heat that caused a dramatic reduction in Germany’s alpha hops harvest in 2015.
And other times a groundswell of sustained momentum—such as the red-hot growth of the American craft-beer industry—radically and permanently alters the global hops landscape.
America’s hops growers have responded to the demand for high-intensity, high-value aroma varieties of American hops by switching over acreage from primarily alpha hops to aroma and dual-purpose hops, as well as by planting new fields.
Conversely, in response to softer demand for traditional Noble aroma varieties and a need for more alpha acreage from the world’s macro brewers, German growers have switched over from primarily aroma varieties to mostly growing alpha hops—so much so that, over the past five years, the proportion of alpha-versus-aroma hops in each country has flip-flopped along a roughly 70/30 percent split.
While American craft brewers are largely insulated from the immediate impact of last year’s alpha shortage—there’s still plenty of surplus supply to cover existing contracts, and it’s not a variety that most craft brewers use anyway—the longer-term implications underscore the interconnected nature and volatility of the global hops market. Shifting dynamics and a tighter supply overall also highlight several reasons why American craft brewers of all sizes should think proactively and strategically about contracting for the hops they need, especially to cover their flagship brands and projected growth.
Alpha use is on the rise, and acreage is limited.
The last time there was a significant alpha-hops shortage, during the 2008 growing season, big brewers responded by stockpiling hops and driving up the prices. Growers responded to the proposition of a higher-dollar return per acre by planting more acres of alpha, and the 2009 growing season resulted in a bumper crop—so much so that many of the macro brewers have since largely been out of the hops market as they’ve worked through surplus inventory.
“We did go into this past season with a fairly decent carry-over of alpha,” says Ann George, executive director of Hop Growers of America. “But it’s certainly going to get to the point where brewers who rely on alpha are going to be coming back into the marketplace and probably increasing their contracts sooner rather than later.”
Macro brewers are also starting to use more hops in their beers. According to statistical analysis compiled by the German-based Barth-Hass Group, the world’s largest hops supplier, hopping rates in mass-market beers had been in steady decline since the late 1960s until 2013 and 2014, when hops usage began to tick upward.
“That’s one of the main reasons why the hops industry, over the past forty-five years, has been more of a boom-and-bust cycle, because it’s been in secular decline,” says Eric Desmarais, owner of CLS Farms in the Yakima Valley region of Washington state. “[Big brewers] are brewing huge amounts of beer worldwide, much more than they were in the 1970s, but they need way fewer acres of hops to do it. But that trend has bottomed out and has actually kicked upward.”
Craft brewers also use hops at a much higher intensity than macro brewers, and as more craft breweries enter the marketplace, the demand for hops only intensifies. All of this leads Desmarais and other growers and hops brokers to conjecture whether, outside of what’s dedicated to the U.S. craft-beer industry, there’s enough acreage of hops in the world to supply macro brewers with what they need.
“At the grower level, we respond to what varieties give us the most gross revenue per acre,” Desmarais says. “Right now, the hops that craft brewers are demanding are easily providing us a higher revenue-per-acre proposition than alpha hops, and that’s why we’ve pivoted all our acreage there. But in 2008, that was a hops boom driven by the macro brewers, and the prices were two- to three-times higher than what they are right now.
“What I would classify as the bigger threat to the craft brewers is not from the variety that Germany was short, but from the longer term consequence that more acres globally have to get devoted to alpha. And if the bigger brewers are short, they will run the price very high very quickly. It’s much more challenging for craft brewers to compete in that environment on price.”
There’s less leeway on the spot market.
Any stresses or shortages in the hops market typically show up first on the spot market, where brewers can purchase whatever hops remain after contracts have been satisfied for that year’s harvest.
As more brewers contract for a greater percentage of all of their projected hops needs, more of the available acreage is spoken for before the bines even begin to flower. Simply planting more acreage isn’t as easy as it sounds, as growers aren’t as limited by available acreage as they are by the infrastructure to harvest and process the hops in the limited time window when they must be picked. Many growers are hesitant or unable to make the huge investment that it takes to put in a new unit, picking facility, and the related infrastructure, so they look to maximize efficiency and yield of their existing acreage to service their contracts.
Roy Farms, in the Yakima Valley, is unique in that it sells all of its inventory directly through contracted relationships to brewers, roughly 70 percent of which are craft brewers, says Jim Boyd, senior vice president of hops sales.
“Now that there’s better communication between the end user and the grower, the ability for the merchants to play that buy/sell speculative spot market is going away,” Boyd says. “It’s still there, but the risk associated with it is greater than what is used to be.
“There’s not a whole lot of room to put in new contracts, and a lot of farmers will not grow on speculation. The merchants are getting more adverse to risk, too,” he says. “We’re looking for customers who are looking for a long-term relationship.”
Contracts are the best form of communication to let growers know what you need, although Boyd warns that over-contracting and hoarding behaviors—as typically happens during boom cycles when growth is at a fast clip—can result in miscalculation by both growers and the brewers. It’s best to remain conservative in your estimates, while also considering contracting for most, if not all, of your needs.
“There’s an organization that’s sized to handle every brewer, whether you’re a macro brewer or you’re the new guy on the block and you need just 5,000 pounds,” Boyd says. “There’s no reason why you cannot have a contract.”
Forecasting the unknown
Stone Brewing Co. has certainly seen its share of growth over the company’s twenty-year history. As the company prepares to open new breweries in both Berlin and Richmond, Virginia, Head Brewer Mitch Steele reflects on how forecasting strategies have changed over the years.
“When I first got to Stone, the common industry practice was to contract for about 75 percent of what you thought you would need, and then in the late summer buy the remaining 25 percent on the spot market, if that turned out to be what you needed,” Steele says. “And then, when we had that first hops shortage in 2007/08, I couldn’t get some of our core hops on the spot market—they just weren’t out there—and it really created a lot of problems for us.
“So now, we’re a little more conservative, and we’re contracting what we think we’ll need, factoring in projected growth year-to-year,” he says. “You never know what the volume’s going to be, so your projections are based on estimates, and if it doesn’t pan out or if we sell more than what we thought, then you have to make adjustments.
“The beer industry is also changing so fast and the brand mix for a lot breweries is so volatile—brands are coming and going at a rate faster than I’ve ever seen—and that’s impacting our ability to successfully project what kind of hops we’re going to need,” he says. “It’s very difficult.”
Victory Brewing contracts about three years ahead for close to 100 percent of what the brewery anticipates needing, says Victory President and Cofounder Ron Barchet.
“Typically what happens is you have a couple of winners and a couple of losers in your portfolio in terms of how they’re growing compared to what your projections were,” Barchet says. “It becomes tricky because you want to have enough hops so that if a brand takes off you have that brand and you can roll it, and if another brand doesn’t do as well, then you have an excess of those hops.”
Brewers might choose to reformulate their beers if they can’t get enough of a particular hops variety, or use the same base bittering hops or blend of hops across a variety of brands. It’s best not to put all of your hops in one basket, so to speak.
“It would be probably wise to formulate beers that are not singular hopped, just for flexibility, and contract for what you know you need, because I think we’re still going to be in tight supply for the foreseeable future,” Barchet says.
“I think there’s a little bit of hops hoarding going on right now because everybody wants to make sure that they have what they need,” he says. “You do wonder if, at some point, [the hops market] is going to become saturated and the prices are going to go through a downward cycle this time, which will lead to the next upward cycle. It’s really been that way for decades.”
Barchet also agrees that better communication between farmers and brewers in the form of sound contracts has helped to minimize some of those swings, although future trends, available acreage, and the nature of market behavior will likely continue to drive periodic boom-and-bust cycles.
“Now the problem is predicting what the consumer is going to want,” he says. “Everybody loves Citra and Mosaic, but what is it going to be in five years?”