Proprietary varieties are a Trojan horse and craft brewers have let down their guard. For centuries, the hop market experienced cycles of high and low prices due to recurring shortage and surpluses. Brewers enjoyed low prices during the surplus years, which outnumbered the high-priced shortage years ten to one. When a shortage came, every dollar the brewing industry saved buying cheap hops was recaptured during spot market price surges and the long-term contracts that extended them. The entities that saved money were often not the ones that paid the price[1]. Larger breweries get special treatment since merchants’ fear losing their business. The resulting long-term contracts at high prices were borne by smaller breweries with less bargaining leverage[2]. Brewers with dedicated purchasing agents understand the cycle and play the game to their advantage. Those who don’t, get played.
“History never repeats itself.”
- Mark Twain, “A Gilded Age: A Tale of Today” 1874
The number of brewers who don’t understand how the hop industry works far outweighs those who do. That has expanded with the growth of craft beer. Merchants and farmers know this. The result of that lack of understanding is that a lot of brewers have been into contracts they didn’t want and don’t need as this reddit conversation shows[3]. More important, between 2012 and 2022 craft brewers through their purchases emboldened a few hop companies in Washington State to dictate the prices, terms and conditions under which they could buy the hops they needed as if there were no alternatives. In the spirit of the Choose Your own Adventure books[4] … If you’re a brewer and enjoy paying higher prices for hops each year, you can stop reading here. Thanks for stopping by. If that isn’t you, and you are ready to get red-pilled, keep going.
If you’re a brewer and you buy proprietary varieties, you should understand the following four things.
1. Proprietary Varieties Support BIG FARMER
Big Farmer represents the world’s largest hop farms and their global distribution networks[5]. When you buy patented American hop varieties, your money supports these entities and helps them grow larger. In 2022, 68.11% of U.S. proprietary varieties were owned by five companies[6]. Big Farmer drives small farmer out of business[7]. According to the USDA, nine percent of American farms are classified as Big Farmer based on their revenue alone. This has nothing to do with size, although size is important to Big Farmer whose revenues come from thousands of acres of monocrop production, which have been shown to damage the environment[8]. These nine percent of big farms in the U.S. account for 85% of agricultural sales[9]. Every hop farm in Washington, Oregon and Idaho (i.e., the Pacific Northwest) fall in that nine percent considered by the USDA to be Big Farmer.
The U.S. is the largest hop producing region in the world[10]. It is controlled by a handful of farmers (Figure 1). Big Farmer represents vertically integrated family-controlled corporations that rely on foreign born labor at scale. In Washington State in 2019, 72.6% of farm labor was foreign born. Of those, 46.6% were undocumented (a.k.a. illegal)[11][12]. In 2021, U.S. farms imported 28,727 foreign workers brought into the U.S. to work through the H-2A Guest Worker Program[13][14]. Most Washington hop farms rely on these programs for their labor[15].
Figure 1: BarthHaas Estimated Number of Hop Growers in the Pacific Northwest of the U.S.
Source: 2021/2022 BarthHaas Report[16]
American hop farmers don’t think of themselves as Big Farmer. You’ll never hear them refer to themselves as such. American hop farmers self-identify as “family farmers”. That’s a term that conjures wholesome images rather than foreign laborers spraying pesticides on hop fields that can stretch for miles. Dodge captured the family farmer stereotype when they ran this 2011 Superbowl ad called “So God Made a Farmer”.
Capitalizing on the farmer stereotype to align their product with a nostalgic image from a bygone era. When a massive farming corporation refers to itself as a family farm, they are trying to associate themselves with that image. A dichotomy exists between the perception they create by using the term “family farm” and the truth. If craft brewers choose to believe the legend they are told, that is their problem.
“Caveat Emptor”
- Latin for “Let the buyer beware”
Heineken’s ownership structure enables that family to retain control of the company decision-making process[17]. By the liberal definition of “family” used in the U.S. hop industry, Heineken is a “family brewery” that recently adopted Bill Gates[18]. If Heineken, Samsung and other family-run companies wanted, they could call themselves family businesses despite not resembling the stereotypical mom and pop image of a family business[19][20][21]. That would be a bit disingenuous, although technically not a lie. Hop farmers are smart to promote the image of a family farm. Reinforcing established stereotypes and myths is effective propaganda[22]. It’s true American hop farms are owned by families so it’s not a lie. Some American hop farms, however, can be seen from space[23].
There are still hop farmers in the U.S. who drive their own tractors, who work the land themselves and who struggle to make ends meet. As Big Farmer power grows supported by purchases of proprietary varieties, the chance that small hop farms will thrive decreases. This was not the case in other hop producing countries in 2022. Germany was the second largest hop producing region in the world[24]. The structure, however, is different. The average American hop farm is 1,840.2% larger than the average German hop farm (Figure 2).
Figure 2: BarthHaas Estimated Number of Hop Growers in Germany
Source: 2021/2022 BarthHaas Report
2. Proprietary Varieties Reduce Competition
In many agricultural industries in the U.S., the four largest firms control more than half the market (Figure 3). That’s called the concentration ratio. When that ratio grows above 40%, economists believe the result is reduced competition. This is also when companies are more likely to abuse their power[25].
Figure 3. Concentration Rates Across American Agricultural Industries.
Source: Farm Aid[26]
The concentration ratio among the four largest proprietary hop variety development firms in the U.S. was 22.46% in 2012. That number peaked when it increased to 65.13% in 2020 and declined by 2022 to 63.23% (Figure 4). It will continue to decline in 2023.
Figure 4. Concentration Rate in the U.S. Hop Industry 2002-2022
Source: USDA NASS National Hop Reports 2002-2022
Note: The above figures include estimates of ownership of the CTZ varieties
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Some bankers must not understand that “Hop contracts do not equate to hops sold”[27]. It seems they keep financing more production despite building inventories. I learned that lesson along with many others a few years back. When a brewers pays for his hops and the money is in the merchant’s account … that’s when hops have been sold. Who owns all that inventory in warehouses in 2023? The myth is it belongs to the breweries.
In 2022, proprietary varieties occupied 68.11% of hop acreage in Washington, Oregon and Idaho. That should not be misinterpreted to mean 68.11% of U.S. hop farms exclusively produce proprietary varieties. Proprietary variety production has been distributed across almost every hop farm in the pacific northwest between 2010 and 2022. Defense contractors in the U.S. use a similar strategy to ensure funding for their projects pass each year. They locate production for parts they need in various Congressional districts around the country. This increases their influence over those Congressmen. That influence is the source of real power. The inferred threat of lost campaign donations or jobs in their district ensures defense contractors get favorable treatment[28].
In the hop industry it works a little different. The roles of perceived and actual power have reversed. The threat of losing the right to produce proprietary varieties has given a handful of individuals the ability to control the U.S. hop industry. Hop farmers self-censor so as not to offend them. Much like hop merchants several years earlier, farmers helped proprietary variety owners increase market share for their varieties to later have their access revoked. Some only realized how it works when Alex Barth announced the existence of a 40-million-pound (18,143 mt.) surplus at the 2023 Hop Growers of America convention[29].
3. Proprietary Varieties Kill Independence
The Brewers Association defines what an independent craft brewer is. On their website, they ask the question, “Does Independence Matter?” to which they respond, “Yes it does”[30]. They define the metrics that determine which brewers are “Craft”. One of those three characteristics follows:
“Less than 25 percent of the craft brewery is owned or controlled (or equivalent economic interest) by a beverage alcohol industry member that is not itself a craft brewer.”[31]
To get a more accurate indication of the extent of the influence of patented varieties over the U.S. hop industry we could apply a similar definition. It might read:
“Less than 25 percent of the hop farm acreage is influenced or controlled (or equivalent economic interest) by an industry member that is not itself a hop farm.”
By this metric, there would be very few independent hop farms in the pacific northwest. Patented varieties produced on contract often remain the property of the patent’s owner. Farmers who were once independent are resigned to becoming contract farmers who spray pesticides and harvest when they are told. Since the Brewers Association is so keen on promoting independence, it could educate its members about the consequences and risks associated with purchasing a disproportionate amount of proprietary hop varieties. They could warn brewers how putting all their eggs in the proprietary hop variety basket increases prices, reduces selection and strips them of their ability to negotiate. I offered to give such a presentation at the upcoming Craft Brewers Conference in May 2023. They weren’t interested. Hop Growers of America is won’t present such information to brewers since its members have made billions in additional profit from the trend[32].
In 2022, the U.S. was produced 39.3% of the world’s hop acreage and 43.9% of the world’s hops (Figure 5)[33]. The influence of American proprietary varieties has extended beyond U.S. borders.
Figure 5. Hop Producing Regions’ Share of Global Production[34].
Source: International Hop Growers Convention (IHGC)[35]
“Our food system belongs in the hands of many family farmers, not under the control of a handful of corporations.”
- Willie Nelson, Farm Aid Founder and President
4. Proprietary Varieties Cause Higher Prices
Increased market power is the ability to affect price. If you recall from earlier in this article, 40% is the threshold for market concentration where competition is reduced and abuses of power occur. The effects of the control over the U.S. industry by proprietary variety owners are felt worldwide. Several of the more well-known networks extend beyond U.S. borders. Yakima Chief Hops®, Hopsteiner and Barthhaas® all boast of having facilities on multiple continents[36][37][38]. On their social media accounts, they each promote the proprietary products in which they have a financial interest. Who has a financial interest to promote and distribute public varieties? It resembles accusations of unfair trade practices regarding big beer distributors, committed lines and pay to play when you consider royalty revenue from proprietary varieties[39].
FUN FACT:
Between 2017 and 2022, assuming the royalty per pound of proprietary hops ranges between $0.45 per pound and $0.65 per pound, proprietary variety owners received between $165 - $238 million. That does not include profit on the hops produced during that time.
In many industries merchants are separate from producers. That is the structure in most hop producing regions around the globe. In those cases, merchants can drive producer prices down, so they are at or below the cost of production[40]. The farmer suffers. An oligopoly among merchants enables them to maintain high prices to consumers so they can make huge profits[41]. Much of the literature regarding oligopolies in agricultural trade reflects this. That is NOT the structure of the U.S. hop industry in 2023.
Since 2010, the line between hop farmers and merchants has blurred. The size of and financial resources available to U.S. hop farms enables direct sales between farmers and large breweries. Farmers often do this at merchant prices to capture additional profit for themselves rather than discounting prices to breweries. That’s not all. Merchant production of hops and farmer ownership of merchant entities amplifies the impact of the already high market concentration by unifying separate factions[42][43][44][45]. The pièce de resistance of market concentration, however, are proprietary varieties. They add a layer of market consolidation, control and complexity not otherwise possible. Since 2012, the U.S. hop farmer/merchant class has extended its reach such that it influences price in their favor even during a massive surplus.
The sustained high prices that existed between 2016 and 2022 during a growing surplus are an excellent example of the farmer/merchant class ability to influence market forces (Figure 6).
Figure 6. U.S. Season Average Prices Adjusted for Inflation Using the Consumer Price Index to 2022 USD with Standard Deviation Demarcation and Mean. 1948-2022.
Source: USDA NASS, Bureau of Labor Statistics
I have written about the size and development of the surplus in previous articles. To avoid repetition, if you have not read them already, you can find them at the following links:
The Truth Behind the Hop Surplus
Hop Forecast 2023
New Hop Data Reveals Future Trends
Massive Hop Inventory in the U.S.
Craft brewers who rebelled against macro beer while asking people to support their local breweries enabled a powerful duopoly to influence a significant portion of global hop sales. If craft brewers are content with farmers and merchants dictating the terms and conditions of the high prices they pay for hops, they can stick with the status quo. If, instead, they would prefer to return to a market in which they can negotiate, that too remains within reach.
If you’ve made it to the end of this article, I sincerely want to thank you for investing your time. I enjoy writing these articles. If you enjoyed reading this one, I would love to hear your thoughts. Please do not be shy about contacting me with your thoughts on this or any other articles I’ve written.
[1] In November 2006, for example, alpha acid sold for $30-35 per kilo alpha. By January 2008, it sold for over $1,200 per kilo alpha. These are numbers I experienced in the market during my time reporting on it and trading hops during that period.
[2] The incidents about which I wrote come both from my first-hand experiences with large and small breweries as well as stories told to me by other merchants who had similar experiences.
[3] https://www.reddit.com/r/TheBrewery/comments/z59doy/renegotiating_hop_contracts/
[4] https://www.cyoa.com/collections/vintage
[5] Big farmer is a play on the term Big Pharma. “Whilst being a collective term in the same way that the largest global tech companies such as Google, Apple and Microsoft are referred to as ‘Big Tech’, the term ‘Big Pharma’ is also known as a less positive reference. Due to the size, power and influence of the world’s biggest organizations, some people have a distrust and an anti-corporation stance. With the rise of alternative medicine and an anti-vaccination rhetoric globally, the term has been adopted to describe the biggest organizations having a negative influence over public health.” The previous definition was accessed from the following URL: https://clarity-pharma.com/what-is-big-pharma/
[6]https://www.nass.usda.gov/Statistics_by_State/Regional_Office/Northwest/includes/Publications/Hops/2022/hopsan22.pdf
[7] https://www.producer.com/news/big-farm-vs-small-farm-survival-of-the-fittest/
[8] https://ec.europa.eu/research-and-innovation/en/horizon-magazine/rise-and-fall-monoculture-farming
[9] https://www.usda.gov/media/blog/2010/05/18/small-farms-big-differences
[10] http://www.hmelj-giz.si/ihgc/doc/2022_NOV_IHGC_EconComm_SummaryReport.pdf
[11] https://research.newamericaneconomy.org/report/immigration-and-agriculture/
[12] https://www.dshs.wa.gov/faq/what’s-difference-between-legal-and-undocumented-immigrants
[13] https://fewaglobal.org/h-2a/?gclid=Cj0KCQiA6LyfBhC3ARIsAG4gkF93Jsvj4SOEkpBLSxDZNIJswDJS-4Vdwt08ILubpA2aMOwabS3qakMaAq0aEALw_wcB
[14] https://www.yakimaherald.com/news/local/business/demand-for-h-2a-workers-continues-to-grow-in-yakima-valley-washington-state/article_59bd4e00-0311-56d1-8462-914cd8b34612.html
[15] https://www.tricitiesbusinessnews.com/2021/06/hop-output-focus/
[16]https://www.barthhaas.com/fileadmin/user_upload/kampagnen/barthhaas_bericht/2022/BarthHaas_Report_2021_2022_EN.pdf
[17] https://www.theheinekencompany.com/investors/governance/ownership-structure
[18] https://www.reuters.com/markets/deals/bill-gates-buys-376-stake-heineken-holding-filing-2023-02-22/
[19] https://hbr.org/2012/11/what-you-can-learn-from-family-business
[20] http://junsungwong.com/2020/10/11/how-samsung-has-been-a-family-business-since-1938/
[21] https://continentalgrain.com/about-us/
[22] https://web.stanford.edu/class/e297c/war_peace/media/hpropaganda.html
[23]https://earth.google.com/web/search/moxee,+washington/@46.55799421,-120.35255513,342.2874839a,32815.87907991d,35y,359.99999914h,0t,0r/data=CigiJgokCUogYfkEEDhAEUcgYfkEEDjAGWURMh4SV0pAITYJhgG4EkvA
[24] http://www.hmelj-giz.si/ihgc/doc/2022_NOV_IHGC_EconComm_SummaryReport.pdf
[25] https://www.farmaid.org/issues/corporate-power/corporate-power-in-ag/
[26] https://www.farmaid.org/issues/corporate-power/corporate-power-in-ag/
[27] https://www.hoptalk.live/post/too-many-hops-10000-acre-cut-needed-says-barth
[28] https://www.pogo.org/analysis/2022/08/representatives-are-too-invested-in-defense-contractors
[29] https://www.hoptalk.live/post/too-many-hops-10000-acre-cut-needed-says-barth
[30] https://www.brewersassociation.org/independent-craft-brewer-seal/
[31] https://www.brewersassociation.org/statistics-and-data/craft-brewer-definition/
[32] MacKinnon, D.; Pavlovicˇ, M. Proprietary Varieties’ Influence on Economics and Competitiveness in Land Use within the Hop Industry. Land2023,12,598. https:// doi.org/10.3390/land12030598
[33] http://www.hmelj-giz.si/ihgc/doc/2022_NOV_IHGC_EconComm_SummaryReport.pdf
[34] In pie chart form since today in the U.S. is national pie day. Due to the way Americans write the date, March 14th is 3.14. Some people will recognize that from math class as the value of pie. Enjoy.
[35] http://www.hmelj-giz.si/ihgc/doc/2022_NOV_IHGC_EconComm_SummaryReport.pdf
[36] https://www.yakimachief.com/commercial/connect/contact
[37] https://www.hopsteiner.com/contact/
[38] https://www.barthhaas.com/company/sites
[39] https://www.brewbound.com/news/massachusetts-craft-beer-distributor-charged-in-pay-to-play-investigation/
[40] https://www.files.ethz.ch/isn/56471/2006-09-14_Concentrated.pdf
[41] https://www.govinfo.gov/content/pkg/CHRG-107shrg76970/html/CHRG-107shrg76970.htm
[42] https://www.yakimachief.com/meet-the-growers
[43] https://www.johnihaas.com/news-views/haas-yakima-golding-farm-achieves-global-gap-certification/
[44] https://www.hopsteiner.com/growing-and-purchasing/
[45] https://www.brewbound.com/news/supplier-news/hopsteiner-licenses-cls-farms-to-grow-and-market-four-of-its-proprietary-varieties/