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Wednesday, July 02, 2014

The Coming Hops Crisis?

Via 47 Hops comes this potentially alarming report (.pdf) about the supply and cost of hops in the near future (quotes come from both sources):
Rapid growth of the American craft brewing industry presents a challenge unlike any the American hop industry has previously faced. The State o f the U.S. Hop Industry and of the hop market is stable. However, that stability will not be long lived. The industry is moving perilously toward a wall of production capacity. The craft industry expanded at 15% in 2012. If growth in the U.S. craft brewing industry continues between 10 – 15 % per year in 20 13, and if the varieties in demand do not change to include those from other countries or those harvested earlier or later, fierce competition for limited production and higher prices are inevitable. This does not take into consideration the return of the multinational mega - brewers en masse into the alpha market, something we anticipate will also happen within the next 2 - 3 years. Since 2008, they have been using up inventory purchased in 08 while buying at reduced volumes. When they reenter the market, their needs will compete for scarce acreage and capacity.

47 Hops estimates the US industry as a whole needs to invest between $500 million and $1 billion in the next 5 years if craft beer growth stays somewhere between 10-20% per year.  Banks want their money back in roughly 5 years +/- a year or two.  Current prices are simply not high enough to pay for the continued growth of the industry.  To reach that level of return plus a reasonable 15-20% return on investment for the grower, prices will need to roughly double from where they are today.  [My bold]
If you want to spend some time reading through the material, there's a lot more there--both hard data and some extrapolation.  (47 Hops is a hop dealer and they seem inevitably to come to a conclusion that supports their business model--get a contract now!--but I don't know that it makes the analysis wrong.)  Something to put in the back of your mind.


Dan Hughes said...

I'd like to here what Beeronomics blog has to say about this. It seems like intentionally shorting the market in order to drive higher prices is the bigger issue here. It's not like damand curves have flattened or weakend in the last decade.

Pete Dunlop said...

Sounds like a good time to run a CrowdBrewed or Kickstarter on a hops farm. You in?

47Hops said...

Dan … The idea of somebody intentionally shorting the market sounds nice on the surface, but in reality it's simply not possible. You're giving the hop industry too much credit. True, it's a small industry, but it's not so well organized. Everybody acts either independently or together in small groups with like-minded colleagues (and even then they don't trust each other and act independently). They never agree on anything unanimously. Look at their track record with Federal Marketing Orders in the US if you'd like some proof. The increasing price is really just good old-fashioned supply and demand at work with all its plusses and minuses … real invisible hand type stuff … a-la Adam Smith. I like your conspiratorial nature though!

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