In my previous article, “Who Sets Hop Prices … And How?”, I mentioned that the USDA September 1 Hop Stocks report is one of the most important reports regarding U.S. hop production you should follow. Here’s a link to the USDA page where you can download the report and sign up to receive notifications by email when new reports are published.
IF YOU DON’T LIKE FIGURES, YOU MIGHT ENJOY THIS ARTICLE ANYWAY.
The September 1 Hop Stocks Report
The USDA numbers are not perfect. They are the only hop stocks figures publicly available in the world. Germany’s inventory levels, which would be useful to know this year considering anticipated yields there will be approximately 40% lower than normal, are not available. We should be grateful for the numbers we have … while we have them. If we use U.S. hop stocks figures as a guide to understand the direction the industry is headed, they are very useful. So let’s analyze the latest information with that in mind. (Figure 1)?
Figure 1: March 1 and September 1 Hop Stocks 2002-2022.
Source: USDA NASS 2022 September 1 Hop Stocks Report[1].
Honestly, I’ve always found this graph hard to interpret. It doesn’t tell me anything useful at first glance. I’m afraid that might be the case for many people who stop there. Nothing to see here … move on. Right? That would be very wrong. The September hop stocks numbers provide valuable insight … just not in this form. We need to do a little work to extract their value. The table reveals more relevant information to understanding changes particularly when viewed over time.
Figure 2: Hop Stocks Held by U.S. Farmers, Merchants and Brewers 2020-2022
Source: USDA NASS 2022 September 1 Hop Stocks Report[2].
Unfortunately, in this report, only three years are presented. The view is too focused to understand much more than there is a mountain of hops out there somewhere today. Let’s look at the numbers going back a bit further to see what has really changed.
The Depletion Rate
Before we have a look at what has changed, let’s look at what has stayed the same. I’ve been told many times by people working for large merchant companies, “Of course stocks are growing. The size of the crop is growing. That just makes sense.” As a recovering hop merchant, I am suspicious of statements like this. One goal of a hop merchant is to manage emotions in the market. That means redirecting attention away from early signals of trends (i.e., surpluses or deficits) to get their house in order before their competition and to prevent a runaway market.
The depletion rate represents the quantity of hops shipped out between two September 1 inventory reports (e.g., September 1, 2021, and 2022). There are hops from other countries and other crop years in storage in the U.S. included in this number.
When graphed over time, the depletion rate relative to the size of the previous year’s crop, the change in the annual depletion rate reveals the supply/demand situation (Figure 3). Due to the existence of an extra year’s crop in storage, the presence of foreign production, and fluctuations in U.S. production, the amount shipped out of inventory can be greater than the crop (greater than 100% in the graph in figure 3 below). It’s possible to include import and export numbers to get a more exact demand for U.S. hops, but the extra work doesn’t yield significantly more valuable results.
Figure 3: The Percent of the U.S. Depletion Rate (year n-1, n) Relative to the Previous U.S. Crop (year n-1)
Source: USDA NASS Hop Stocks Reports[3]
But the September 1 hop stocks report reveals more interesting things than that.
Nothing to See Here … Move on.
Still … Increasing hop stocks numbers resulting from increasing crop size sounds like a reasonable explanation. That’s a good bit of magic. It is not the gross size of the inventory on which we should be focused. The size of the U.S. crop has increased significantly since 2013 (Figure 4). That is true. Instead though, we should be interested in who is holding those stocks … and why. That is what has changed in recent years (Figures 5 & 6).
With a broader perspective, data from the September 1 and March 1 reports from 1947 until 2022 reveal changes in the possession of inventory over time. The ratio between farmer / merchant stocks and brewer stocks tracked until about the year 2000. Between 2001 and 2012 there were large fluctuations in supply (Figure 4). In 2013, when the craft beer revolution shifted into high gear, a significant change in the possession of inventory occurred (Figures 5 & 6)[4]. Farmers and merchants possessed increasingly larger hop inventories in both March and September surveys while brewer inventories decreased.
Figure 4: U.S. Hop Production in the Pacific Northwest (PNW) 1948-2022
Source: BarthHaas Reports 1948-2021, Douglas MacKinnon Estimate of 2022 U.S. Production
Figure 5: U.S. September 1 Hop Stocks 1947-2022
Source: USDA NASS September 1 Hop Stocks Reports 1947-2022[5][6].
After 2013, the possession of those stocks flips dramatically toward merchants and farmers. If everything was “normal” as I was told, I would expect brewer inventory to track upwards together with growing farmer / merchant inventory … as it did for most of the past 75 years as seen in figures 5 and 6. As you can see, that’s not the case.
Figure 6: U.S. March 1 Hop Stocks 1947-2022
Source: USDA NASS March 1 Hop Stocks Reports 1947-2022[7][8].
When the same information is presented as a percentage of inventory in storage in the U.S., it is clear the possession of the inventory in storage has shifted dramatically since 2013 (Figures 7 & 8).
Figure 7: Percentage of March Hop Stocks Held by Brewers & Farmers/Merchants 1947-2022
Source: USDA Hop Stocks Report Data 1947-2022[9][10]
Figure 8: Percentage of September Hop Stocks Held by Brewers & Farmers/Merchants 1947-2022
Source: USDA Hop Stocks Report Data 1947-2022[11][12]
Possession
Hop merchants who don’t want to think about this change will point out that small breweries just don’t have the space to store so many contracted hops. Since the craft industry is comprised of so many small breweries, that explains the shift. That also sounds reasonable at first glance. That also is not true. Smaller breweries don’t have to find space for huge quantities of hops. A brewery’s hop storage problem is proportional to the size of the brewery. In effect, every brewery using similar hop products has a similar problem regardless of their size. A small brewery can buy a chest freezer that plugs into the wall to store a few months’ supply of hops, but most already have refrigerator space for kegged product where they can keep a few boxes. A big brewer solves the problem with a warehouse. The problem, therefore, cannot be explained away simply by the number of smaller craft breweries in the industry in 2022. The reason must be more complicated than that.
Hops sitting in storage are not all from the previous crop. Based on my experiences, I estimate that in 2022 some of that 139 million pounds (63,000 MT) dates to crop 2016 or earlier … and I’m not referring to inventory intended for Lambic beers. That old inventory likely isn’t going anywhere unless it’s in another form (i.e., extracts, etc…). The soaring rate of hops in storage in farmer / merchant possession is an ominous foreshadowing of a potential looming crisis.
If brewers try to get out of those contracts, merchants will remind them that those hops are contracted and belong to them. I’ve had those conversations. They suck. I’ve recently read emails between other hop merchants and brewers that were leaked to me (Thank you DJ). Every merchant has the same problem. There are plenty of brewers that do not consider those contracted hops to be theirs regardless of what is written on a piece of paper in Yakima. What matters more to them is the price of that contract relative to the market. I will write an article about the value of hop contracts later this year where I’ll discuss this further because it’s an interesting topic.
So … Who owns all those hops in storage? The merchants who have those hops in storage tell their bankers that those hops are contracted … The bankers infer that the brewers own them. Bankers like to think that. That too is not true. The brewer doesn’t own the hops until they’ve paid for them. Merchants who don’t like the sound of that need only have a look at their prerequisites for delivery. Either payment up front or an agreed upon payment within a certain number of days is required before those hops are transferred. If we are to believe the hops belong to the brewers to whom they have been contracted, then aren’t merchants illegally withholding brewer property from them using extortion? That seems like an unreasonable barrier to taking delivery of product you already own. Obviously, I’m purposely making a ridiculous argument to demonstrate the ridiculousness of the opposing argument, which is that contracted hops are the property of the brewers.
“Possession is 9/10ths of the law.”
The banker I used when I was a hop merchant recommended we sue our customers if they didn’t honor their contracts. The banker’s world is very black and white. They manage documents, which are also black and white so that makes sense. The real world is full of shades of gray. I’ve found the bank employee who verified inventory every month or so didn’t understand what he was looking at and didn’t know which questions to ask. He was doing his job as best as he could and creating the necessary paper trail, which his boss passed along to his boss … and so on.
Considering the economy in 2022 and the impacts it will have on the hop and brewing industries going forward, bankers financing hop operations with inventory should be very concerned about the future ownership of those hops rather than the suspension of disbelief. This is something I unfortunately have quite a bit of experience with. If you’re a banker and would like to understand what to look for before I write an article on that subject, DM me on LinkedIn or Instagram. I’ll be happy to chat with you. If you know a banker who might be interested in this sort of thing, please consider sharing this article with them.
Cost of Carry
At the 2021 U.S. season average price of $5.72 per pound[13] (€12.6 /Kg.) U.S. farmers received, that mountain of 139 million pounds of hops in storage is quite valuable. The sunk costs associated with the inventory in storage on September 1, 2022 (before harvest began) was well over $1 billion[14]. Then there are the ongoing expenses of keeping that much inventory refrigerated … and so on. Interest alone, at 6% (just for the purposes of this example), would be $60 million per year. The declared market value shared with the bank based on contracted value, however, would be significantly higher … That’s relevant to the bank and is used as a base for lines of credit.
So … Why the Change?
In the past, September 1 hop inventory levels increased when prices were high (Figures 9 & 10). Brewers could purchase less expensive hops on the spot market so they did. They let the more expensive inventory sit or buy a mix of expensive contracted inventory with cheap inventory over many years to lower their overall costs. That likely plays a key role in the current increase in stock levels. Hop prices are very high right now. Hard economic times will drive them still higher. In a year or two, however, inflation will make the expensive contracts of today appear cheap relative to the prices farmers will demand for future contracts. Brewers trying to reduce costs certainly are calculating that the longer they wait to take delivery (for those contracts that do not have specific delivery schedules), the more affordable they will become. They would be correct.
But why are farmers and merchants carrying over 80% of the inventory when in the past they have carried so much less? These are six of the top reasons in my opinion:
1. Brewers have been forced by merchants and farmers into long-term contracts for varieties or quantities they did not want and do not need.
2. Forward hop contracts lasting three to five years does not fit the smaller craft brewery model whose needs are constantly changing. There are probably about 9,000 craft brewers for whom long-term contracts are not an ideal method for purchasing hops.
3. Finances for most of the smallest 9,000 craft brewers in the U.S. are tight. For brewers in Europe, they are even tighter. They delay purchases of hops until necessary. They buy cheaper hops on the spot market from different merchants, other brewers, or even on the The Lupulin Exchange, if opportunities become available and let relatively expensive hops sit in inventory.
4. Merchants and farmers get the benefit of increased lines of credit by holding valuable contracted inventory.
5. For brewers, contracted inventory is not always reported as a liability on their balance sheets. In effect, it is a form of off-book financing for their business as many contracts have zero associated costs. The longer they can delay purchasing them, the longer they can delay the liability.
6. Farmers and merchants carrying extra inventory can afford to carry that inventory because profits have been very high for over 10 years. This enables different behavior than they would have exhibited a generation ago. The increased wealth in the industry delays traditional reactions to surplus inventory. The very existence of the inventory is proof that this is true, or the industry would not act in this way.
I suspect there are more reasons for the increase in inventory. I’d love to hear your thoughts on that. Does this seem normal to you?
“Prediction is difficult, especially when dealing with the future”
- Danish Proverb
It’s all Relative
The percentage of hops in storage on September 1 relative to the crop produced oscillates above and below one full extra year of hops in storage over time (Figure 9). Let me explain that in different terms. It seems the brewing industry collectively feels most comfortable with approximately one full year’s crop in storage before hop harvest. Season average prices in the U.S. have been very sensitive to surplus / deficit levels relative to that 100% level in the past. That sensitivity can be measured. Price changes exhibit an inverse relationship to changes in inventory levels (i.e., high inventory = low price) (Figure 10).
Correlations like those calculated by using the Pearson method[15] are good, but ultimately, correlation does not equal causation. Using the Bayesian theorem[16], however, it is possible using available hop industry data to predict the movement of hop prices one year in the future with a high degree of accuracy.
Figure 9: Size of U.S. Hop Stocks in Inventory on September 1 as a Percentage Relative to the Size of the Crop Produced that Same Year.
Source: USDA NASS historic hop stock information[17]. USDA Hop Stocks September 1 reports[18] Personal estimate of 2022 crop based on conversations with industry participants[19].
Figure 10: Percent Change in U.S. Season Average Prices 1949-2021
Source: USDA NASS historical price information[20]
A Shift in the Force
Prior to 2013, when the majority of U.S. production was not proprietary, when inventories increased, the market sent a signal in the form of lower prices that a reduction in acreage was necessary[21]. On the rare occasions when inventory appeared to be insufficient, merchants managed price increases to farmers gradually so as not to encourage runaway production[22]. When merchants’ collective efforts were insufficient to counter market deficits, prices spiked[23].
When I reported on the USDA figures for 2022 in my, June Acreage Strung for Harvest report, I analyzed the changes that took place in 2022 in response to the growing surplus of hops and alpha acid. These changes demonstrated how the industry is reacting under the influence of proprietary varieties. The changes indicate how old problems will manifest themselves in the future. More on that in another article.
The key change to the U.S. industry since 2013 is the overwhelming presence of U.S. production by proprietary varieties. The price of admission to the proprietary variety world is long-term contracts. Without them, brewers and merchants will not receive them. I told brewers that myself because in my previous life as a hop merchant I was forced to sign similar supplier contracts. The source of contracts for public varieties is the farmer. The sources for proprietary variety contracts are the owners of the patents and trademarks. They alone dictate the terms under which their varieties may be purchased. The farmers that grow them (in most cases) have no choice but to follow their direction. Many of those contracts are a source of stress when market prices fall as hop contracts have been for centuries. The benefit of proprietary varieties is that they enable their owners to keep that from happening.
Proprietary varieties don’t change the way markets work. They isolate supply and demand signals. Patent and trademark owners can see and respond to signals before they become public knowledge. They can adjust supply to keep inventory at optimal levels to achieve their goals (i.e., in the case of American farmers, this is a steadily increasing price).
Increased American Exports
One way to adjust supplies would be to destroy surplus inventory of proprietary varieties when there is a lack of demand. If surplus proprietary aroma varieties from one year continue to be available to brewers, they compete with future crops. Since production is not easily adjusted due to expensive infrastructure, this leads to depressed prices. Hops are seldom destroyed. An American hop farmer will not destroy hops if he can get a reduced price for them … that is one of two Achilles heels of the American hop farmer. The other, I’ll discuss in a future article.
Many of today’s proprietary aroma varieties have levels of alpha acids that make them candidates for use as bittering hops. That means they are also good candidates for alpha extraction. To do this, they are quietly sold into the alpha market. Brewers are not aware that the same hops for which they might pay $10-20 per pound (€22-44/kilo) for are later sold at a 70-80% discount to be competitive in the extract market. Those discounted hops ensure the high prices craft brewers pay in the following years and eliminate the discussions about falling spot market prices. As extract, they no longer compete in the aroma market and eliminate any possible aroma variety surpluses. No surplus, no threat of low prices. That extra production creates a surplus in the alpha market, however, depressing prices there. That seems to be a price the owners of the entities involved in proprietary development are willing to pay (pardon the pun).
The influence of U.S. proprietary varieties travels far beyond the fields they occupy in the PNW. In 2022, 47 % of German acreage was alpha varieties. In the U.S., in 2022, alpha acreage comprised only 21.1% of the total[24]. For all intents and purposes, the Americans have figured out a way to export the problem created by their overproduction to Germany and the rest of the world. This hurts hop farmers worldwide. The policies that lead to what American farmers call sustainable prices create very unstainable situations for hop farmers from other countries.
Until now, brewers who buy these hops have been unknowingly supporting this type of behavior. I’ve heard plenty of farmers and merchants say, “it’s just business”. From my experience, “it’s just business” is a saying used by people to absolve themselves of guilt while continuing to do things moral people would be ashamed of … usually with the goal of making more money. There’s nothing just about what is happening, but it is completely legal so it will continue so long as brewers remain unaware and unconcerned. Blood diamonds and conflict minerals that employ slave labor are somebody’s idea of “it’s just business”. Where should we draw the line? The fact that it’s not happening in your backyard (NIMBY[25]) doesn’t make it right. Do you know a brewer who uses proprietary varieties and might not be aware the harm they are causing to hop farmers around the globe through their support of American proprietary varieties? If you think that person might care about the sustainability of hop farms that owned and run by families across Europe, please consider sharing this article with them.
I appreciate that you invested your time to read this article. Thank you. I hope it created value for you. If you found value in anything you read here, I would like to ask you to please share it with somebody else who might also find this type of information valuable.
I will never try to charge for the articles I am posting on Substack. My reward for the time and effort I invest into them is hearing your thoughts … good and bad. The many discussions I had with people at the Drinktec about the things I’ve written these past few months was one of the highlights of 2022 for me. Thank you to the many people who spent time talking with me there.
And … Thank you again for reading. I am truly grateful for your time.
[1] https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Hops/index.php
[2] https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Hops/index.php
[3] U.S. Hop Stocks 1947-2014 available at: https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Historic_Data/index.php#hops
[4] When I first saw this hockey stick style line, I thought I had made a mistake. I went back to the original source data to confirm that I had entered all the data correctly in my excel spreadsheet. The graphs you see are accurate.
[5] https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Hops/index.php
[6] U.S. Hop Stocks 1947-2014 available at: https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Historic_Data/index.php#hops
[7] https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Hops/index.php
[8] U.S. Hop Stocks 1947-2014 available at: https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Historic_Data/index.php#hops
[9] U.S. Hop Stocks 1947-2014 available at: https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Historic_Data/index.php#hops
[10] https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Hops/index.php
[11] U.S. Hop Stocks 1947-2014 available at: https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Historic_Data/index.php#hops
[12] https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Hops/index.php
[13] USDA 2021 National Hop Report available at https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Hops/index.php
[14] Assuming the merchants processed 97 percent of those 139 million pounds (63,000 MT) of hops into pellets (incurring a processing loss of three percent), that represents 147.7 million pounds (66,996 MT) of hops purchased from the farmer now sitting in processed form. There’s an additional cost and additional losses incurred to process pellets into extract. That increases the raw hop equivalent in storage still further.
[15] A definition of the Pearson Correlation Coefficient as well as the potential problems with this method are available at: https://www.statisticshowto.com/probability-and-statistics/correlation-coefficient-formula/#Pearson
[16] For more on the Bayesian Theorem: https://www.investopedia.com/terms/b/bayes-theorem.asp
[17] U.S. Hop Stocks 1947-2014 available at: https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Historic_Data/index.php#hops
[18] https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Hops/index.php
[19] The estimate I included for 2022 production in figure 6 includes a 10% reduction in yield according to rumors that are circulating that the crop is not weighing out as expected. Whether that estimate is accurate, will only be known with any certainty when the USDA publishes its National Hop Report in December.
[20] WA Hops 1915-2013 available at: https://www.nass.usda.gov/Statistics_by_State/Washington/Publications/Historic_Data/index.php#hops
[21] U.S. season average prices from 2009, 2010 and 2011 as seen in figure 9 were good examples of this.
[22] U.S. season average prices from 2006 and 2006 as seen in figure 9 were good examples of this.
[23] U.S. season average prices from 2007 and 2008 as seen in figure 9 were good examples of this.
[24] IHGC April Economic Committee Summary Table available at: http://www.hmelj-giz.si/ihgc/activ/apr22.htm
[25] https://www.britannica.com/topic/Not-in-My-Backyard-Phenomenon