It’s been three years now since the beer world became familiar with the term Hop Crisis and a lot has been said about the causes and consequences of it since then. On one hand we remember the initial reports blaming the crisis on a perfect storm of catastrophes in the hop world: the warehouse fire in Washington; a devastating hail storm in Europe; growing demand; fewer acres. What followed this storm was a controversial and mostly ignored period where brewers were strongly persuaded into long term contracts with farmers at astronomical prices, creating a miniature boom in hop farms in the United States. With the wonders of hind-sight we can now rationally look back at the crisis that was and hopefully learn to avoid the crisis that is coming.
The Perfect Storm
News of the hop warehouse fire spread like, well, wildfire across the country. Major news outlets ran it, brewers and beer geeks talked about blogged about it. To refresh, the fire took place in October 2006 at S. S. Steiner’s 40,000 square foot warehouse and was reported to have destroyed approximately 4% of the US hop harvest. That’s a lot of hops.
In 2007 the hop-watching world was rattled by the online videos of massive hail storms obliterating much of the region’s Saaz hop crops. The storm provided good visuals, but in fact the storm only added to the bigger problem that was a second straight year of weaker harvest numbers for the region.
It was right around this time that prices for hops skyrocketed. In 2005 farmers averaged $1.86 per pound for their hops. In 2006 hop prices had a modest increase, averaging $1.98. 2007 prices, however, jumped nearly a buck to fetch an average of $2.94. This was the year of the crisis, mind you, the year that was supposed to be the worst of it. Mind you, this is the average price for hops, said generically, that the farmers were paid. The vast majority of independent brewers in the country don’t buy hops directly from the farmer, but through wholesalers like Hop Union and Yakima Hops. When you factor in the costs associated with processing, storing and delivering hops, as well as any administrative fees associated with a wholesale entity, you should not be at all surprised to learn the brewers paid significantly more for their hops.
Background and Controversy
For brewers this was a troubling time. Many of the lower alpha acid hops (aroma hops), that the average beer geek may or may not know of, were in short supply – and for good reason. Hops are bought by major producers for their alpha acid. When an industrial brewer needs to achieve a level of bitterness for its beer, it doesn’t necessarily matter to them what the variety is. For this reason we see more and more farms moving to super alpha acid hop farming, which many of the American IPA fans appreciate. That said, there’s more to the brewer’s world than sticky, resinous IPAs. Delicate pilsners, Common Ales and beer styles of beer geeks go nuts over rely on the delicacy of low alpha hops, hops that don’t contribute much bitterness, but prove themselves for the soft notes of flowers and earthiness not found in super alpha acid hops. When a brewery buys hops for the alpha acid, it can buy fewer pounds of high alpha hops in order to achieve its desired IBU content in the beer. As much as the small brewery movement has grown in America, it still accounts for less than 10% of beer consumed in America and, therefore, lacks the influence in industry needed to dictate how farmers plant their crops.
In order to guarantee supply for the hops small brewers needed, many took the advice of top industry wholesalers and secured multi-year contracts at current market prices, which were very high. This is where the rub is for many small brewers in America. At the time it was perceived that the only rational stance for a small brewer was to accept that hop prices would never decrease and that it was prudent to lock in on the prices while they were seemingly low. Clearly, none of these assumptions panned out and today there are a more than a few breweries taking a significant hit on the price paid for hops.
How bad were these assumptions? As mentioned above, hop prices in 2007 soared to a whopping $2.94 on average. In 2008 hop prices continued to increase to an average of $4.08, thus leading some believe the hype of the previous year. In 2009, however, prices for hops dropped significantly, down to $3.52. In 2010 prices are expected to fall even further (this year’s hop report is due in the middle of December).
Another Crisis Looming
A concept that is easy to understand for any industry is supply and demand. After the scare of 2007 there was a massive overcorrection in acres of hops planted in America. Take a look at the state of Washington, the country’s largest hop growing region. In 2005 Washington had 21,000 acres of hops planted; 21,500 acres in 2006; 22,750 acres in 2007; 30,600 acres in 2008; 29,600 acres in 2009. The United states as a whole followed a similar pattern: 30,911 acres planted in 2007; 40,898 acres in 2008; 39,726 acres in 2009.
With such vast increases in hops available, the industry was able to avert catastrophic shortages of hops available for brewing around the world (not just the United State). However, with such significant growth in acreage, more so than demand, there was a necessary downward trend in hop prices that has yet to hit bottom. While final numbers are not available at the time of writing, it is expected that hop prices will once again see modest declines in 2010. But this is just the beginning.
Compounding the issue of hop pricing is the growing stockpile of hops in America. In March 2008 it was reported that America had a processed hop inventory of 66 million pounds (hops stored at breweries and warehouses). In March 2010 hop supplies were reported at 102 million pounds, or 36 million pounds more than 2008. This isn’t just an American concern, either. Worldwide it is reported that, for the 2010 hop harvest alone, there is a 1,500 metric ton surplus in alpha acids. It is safe to say that the market over corrected. Many brewers and industry experts expect the price for hops will continue to decline and if not properly addressed, could lead to another supply crisis by 2015.
That’s one over-correction. What many brewers fear is the second over-correction, the expected sharp drop in hop prices that inevitably lead to fewer hop farms, fewer hops produced and a strong rebound in hop prices that necessarily follows. If left to its own devices, however, the beer industry should be gearing up for perhaps a greater hop crisis in the year 2015, if not sooner.
*UPDATE: There were 31,251 acres of hops planted in America in 2010, or 8,475 acres LESS than 2009. Forgot to include that.
To Make Matters Worse
There are few who know that would argue Dr. Val Peacock is one of the world’s top minds when it comes to anything to do with hops. With that understood, folks in the know took notice when he published his piece in this summer in New Brewer, an industry publication put out by the Brewers Association. While the article offered many great insights, one key thing to focus on in the context of this piece, is the lack of quality assurance small brewers may have to contend with today and in the foreseeable future, especially when it comes to purchasing low alpha/ aroma hops. Peacock contends, rightfully so, that the large brewers in America worked with farmers to assure quality and improve practices – something the entire beer industry benefited from. After the harvest of 2008, all such programs sponsored by these large breweries ceased. With this in mind, if we can assume a lower yield of aroma hops as acreage declines and new / upstart hop farmers are left to their own devices, we could see significant issues in overall hop quality and production in an already scarce market. Read: poorer quality in an already short supply of hops.
How to Avoid Hop Crisis Part II
To be certain, hop supply shortages are nothing new. If you read old brewing accounts, you’ll see that hops shortages have been part of the brewing world for well over one hundred years. That said, there are things that can be done to avoid shortages of necessary hops in the future. Likely the most effective way to guarantee supply is for brewers to work more with the farmers. Granted, this method requires more work on behalf of the brewer, but the benefits are many. First, communication with the farmer is a good way to see where his/her concerns are from harvest to harvest, and years down the road. Farmers have all this information, too, and will be certainly planning accordingly. Most importantly could be the advice given by Dr. Peacock in his New Brewer piece: “… don’t expect to buy your hops on the spot market every year below the cost of production and still get good quality, or for that matter, delivery of your hops in short years. This will cost you even more in the long run than paying a sustainable price, and sends a signal to growers that you don’t care about investing in hop quality!”
The sustainable price will be the biggest key to mutually assured success in the hop market and beer industry for years to come. Brewers cannot be taken to the wood shed in terms of pricing and long-term contracts, and brewers should become more familiar with the true costs of hops and what farmers need to keep the rhizomes in the ground year after year. The bigger independent brewers in America are already working to assure their supplies; smaller brewers should follow suit.
While we don’t have the European model that guarantees a base level of quality in the hops we buy from farmers, we can still work closely with them to express our needs and desires. Most small brewers in American can’t afford the time or money to visit farmers, but utilizing the regional guilds popular in America could be a great way to start. Regional guilds are great because, typically, they’re comprised of brewers that work together on some level and know what each other’s business needs are (more so than a national association or hop wholesaler). Aroma hops are prized among American small brewers, but ultimately not the business of American hop farmers looking to sell hops for alpha acid content. If we fail to work with the farmers, if we assume the aroma hops will always be around because they always have been, I fear we could lose out big time. Additionally, while there were more than a few brewers in America that got burned by negotiating and signing contracts under duress, the best way to ensure supply and quality is to contract it. Farmers are like any well-run business, they plan years out and always keep an eye on the bottom line. While ‘spot buying’ may save money in the short term, relying on this practice could ultimately cost more than brewers are willing to pay.