Mafia Tactics Used in the Hop Industry
PREMIUM AMERICAN HOPS
For decades, brewers have paid more for American hops than for those from the largest competing hop producing country, Germany. Inflation and exchange rates alone don’t account for the difference. In 2015, with the increased popularity of American proprietary varieties, that premium soared to record highs (Figures 1, 2 and 3)[1].
Figure 1. U.S. & German Season Average Prices in Dollars per Pound 2009-2021.
Source: IHGC, Macrotrends[2]
Country representatives seem to be reluctant to estimate season average price data for the IHGC when hop prices are low and competition for market share is high[3]. I served as chairman of the economic committee of the IHGC for three low-price years. It was difficult to extract that data from everybody. I suspect that was because the merchants that made up most of the IHGC membership did not want to share their positions while sales were difficult to find.
Figure 2. U.S. & German Season Average Prices in Euros per Kilogram 2009-2021[4].
Source: IHGC, Macrotrends[5]
Figure 3. Size of the Price Gap Between U.S. and German Hop Varieties.
Source: IHGC, Macrotrends[6]
CREATING SCARCITY
A 2014 paper in the Journal of Economics explained how scarcity is “a tool through which the mafia imposes its interests and rules.” In their more legitimate and legal business dealings, an established mafia group will “… use artificial scarcity to reinforce its already established power.” This contradicts the traditional belief that scarcity results from natural cycles[7]. Intellectual property rights (IP) enabled the owners of proprietary hop varieties create artificial scarcity. The fear of missing out (FOMO) revealed how much brewers were willing to pay for a variety.
The hop industry has long understood the solution to boom-and-bust cycles is a mechanism that allows for a perpetual short supply. Before proprietary hop varieties enabled the control of supply, the industry attempted to create artificial scarcity in the U.S. market by using a federal marketing agreements[8] to regulate the quantity of hops for sale. They tried this three times, in 1938[9]-1944, 1949-1952, and in 1966-1985[10]. The creation of artificial scarcity was the primary features of these marketing orders. The third attempt was the most successful. It failed after 15 years resulting in a massive surplus. It was terminated five years later[11].
When the U.S. hop market was free and unrestricted (1980-2010[12]), it cycled between periods of prolonged surpluses and short deficits. These cycles were caused by the capacity to overproduce, the reluctance to destroy surplus hops and the delayed response in removing acreage. Prices responded accordingly. Hop demand is inelastic while supply is highly elastic. The results of a perceived shortage, like that of 2007, are extreme (Figure 5).
Figure 5. U.S. Hop Production and Season Average Price 1972-2022.
Source: USDA
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Merchant/farmers have no interest in shorting the market and cause panic. Brewer panic results in skyrocketing prices, which leads to uncontrolled and irrational planting decisions. That leads to brewers renegotiating or abandoning contracts when the market returns to normal levels. This happened between 2007 and 2009. U.S. farmers increased production by 34.4 million pounds (15,603 MT) during that time. By 2010, most of that acreage was removed as figure 5 demonstrates. Merchant/farmers benefit from a sustained profitable market. They need a market that is short enough to create the fear needed to enable inflated prices and long-term contracts, but one that offers the promise of a steady future so there is no panic (These are not my words. I am paraphrasing the words of a member of a very well-known hop family. They were spoken during an IHGC meeting I attended in November 2007). A slight deficit incentivizes brewers to sign long-term contracts at inflated prices. The owners of proprietary hop varieties appeared to follow that strategy between 2010 and 2022 by managing production and restricting which merchants could distribute their varieties. Brewers played their role brilliantly.
The Merchant/farmer’s interests regarding pricing and contracting are clearly not aligned with their brewery customers. The rigidity of the hop contract system resembles an adversarial relationship[13]. Prices remain high and contracts remain long for U.S. proprietary aroma varieties not because they are more valuable than public varieties or European varieties. Their value comes from their owners’ ability to control their supply. If somebody could control the supply of public hop varieties with the same iron grip as that applied to proprietary varieties, prices for public varieties would also be high.
A SHORTAGE OF SCARCITY
Anybody holding inventory in the U.S. first noticed the slowdown of inventory shipments in 2017[14][15]. The data demonstrate this. I pointed that out in my article, “The Truth Behind the Hop Surplus”. Merchant/farmers continued to tell brewers they would not get proprietary varieties without a contract. Brewers continued to sign away their freedom. They were played by a hop industry interested more in building book value than in aligning production to the needs of breweries.
The scarcity narrative collapsed in January 2023 when Alex Barth announced a massive surplus of proprietary aroma varieties and the need to cut 10,000 acres[16]. The U.S. industry will tout the unprecedented acreage reductions that occurred like they did in 2020 during Covid[17]. The 2023 reductions are historic and notable in that they occurred at a time when prices were at record highs[18][19]. This would not have been possible without the absolute control proprietary varieties facilitate. The proprietary variety acreage corrections are an attempt by their owners to restore balance and regain control over the supply situation. The goal can only be to return to the perception of scarcity and the inflated pricing it encourages.
In April 2023, there were one million pounds of hops (453MT) available on the Lupulin Exchange (Figure 1)[20].
Figure 1.
Source: Lupulinexchange.com
This volume is noteworthy due to the proportion of varieties previously thought to be “scarce” that are now widely available. At the time of this writing, there were 88,451 pounds (40.1MT) of Citra®, HBC 394 (Figure 2) and 95,623 pounds (43.37MT) of Mosaic®, HBC 369 (Figure 3) available on the Lupulin Exchange. That equates to 18.4% of the total available on the platform.
Figure 2.
Source: Lupulin Exchange
Figure 3.
Source: Lupulin Exchange
The one million pounds of hops available on the Lupulin Exchange in April 2023 was impressive, but it was not a record. Between 2016 and 2019, the quantity of hops available increased until it reached 1.6 million pounds (725.75MT) on the platform (Figure 4)[21].
Figure 4.
Source: Wayback Machine available at https://web.archive.org
SIDE NOTE:
Many brewers are uncomfortable selling their hops through the Lupulin Exchange because it is a public platform. Hop merchants monitor the hops available to see who is selling. Brewers fear retribution from their supplier if they discover contracted hop volumes available on the platform. I have experienced this first-hand. I used Lupulin Exchange on several occasions to source hops from breweries. When the merchant involved learned I was the buyer, they added a surcharge of $0.50 per pound ($1.10/kg.), which the brewer had to pay. The brewer was not happy. There are confidential outlets through which brewers can sell surplus hops. If you’re a brewer and you don’t already know about these outlets, I will be happy to put you in touch with them. You can DM me on LinkedIn if you want to know more. I have no financial interest and do not benefit from their deals. I’m still a recovering merchant.
Not all brewers, however, are accustomed to competing in the market to sell hops. Many still list their surplus varieties at their original contract price regardless of crop year because they do not want to take a loss. To push those hops into a saturated market, they will need to sell them at a discount. Selling discounted hops into the market hides real demand from producers. Reduced inventories lead farmers to believe they can continue to produce at their current acreage, which perpetuates the surplus.
FUN FACT:
In five months (by October 1, 2023), another 100 million pounds (45,359 MT) of American hops will join approximately 135 million pounds (62,235 MT) of inventory that will be left over from previous crops in warehouses across Washington, Oregon and Idaho.
FOCUS ON THE U.S.?
I’ve been asked why I focus on the U.S. hop industry. Let me explain. The U.S. is the most significant hop producing region in the world. That’s not because they produce more hops than their competitors. It’s not that U.S. hops are higher quality. Below are five competitive advantages that explain why it is important to focus on U.S. hop production. There are likely more.
1) Hop farms in Washington and Idaho are the two places on Earth that can plant and harvest a crop in the first year[22]. They enjoy the perfect growing conditions for hops.
2) American merchant/farmers use their massive resource wealth acquired over generations to secure large lines of bank financing. This enables them to operate beyond their means. Some use networks of entities to insulate and preserve their wealth from the market.
3) The market is highly concentrated. A few decisionmakers affect 70 million pounds (31,751MT) of hops. Many American farms produce more hops than many countries. Some are so large they can be seen from space[23].
4) American merchant/farmers are good at propaganda … a.k.a. marketing. They capitalize on the stereotype of the poor farmer, which appeals to smaller brewers trying to support the little guy. Meanwhile, they present themselves as cutting edge agribusinesses using state-of-the-art technology. That appeals to the big brewer. It seems the brewing industry does not notice or discuss these contradictions.
5) The American profit-oriented focus combined with market concentration and the ability to quickly react to market changes enables American merchant/farmers to capture temporary upside in the market. Hop farmers outside of Washington and Idaho are slower to react and as a result are more conservative.
The American hop industry’s capacity to oversupply combined with the reluctance to reduce acreage (as we will see when 2023 data becomes available) facilitates the cyclical nature of the global hop market. Proprietary varieties have concentrated the wealth and power into very few hands. The 2023 acreage correction appear to be a new version of the hop cycle. What it means is that several merchant/farmers in the Yakima valley now affect the livelihood of hop farmers from Brooklyn, New Zealand to Prebold, Slovenia … and everywhere in between. The U.S. hop industry deserves greater attention and focus because the decisions of the few in control affect the global hop market.
A FORECAST BASED ON AVAILABLE INFORMATION
What follows is my opinion and analysis based on more than two decades working in the hop industry. Please consider that when reading the rest of this article. If the U.S. removes 9,000 – 10,000 acres of proprietary aroma varieties, it will remove approximately 14-15 million pounds from the market. At that rate, the 54-million-pound (24,494 MT) surplus will take four years to disappear. I discuss the size of the surplus and how I calculated that number in my article entitled, “The Truth Behind the Hop Surplus”.
TANGENT:
The reduction would be greater except for the low yields of some of those proprietary varieties. Low yield is one of the characteristics contributing to the high carbon footprint of the least environmentally sustainable U.S. varieties[24][25].
Hop farmers hate to see idle trellis unless it’s on their neighbor’s farm. There will be decreases in the proprietary aroma varieties that were overproduced over the past six years. Some those same fields will be planted with different varieties. That number will be significant. I will link to the exact numbers in a future report. They are not yet public. I believe there will be increases in public aroma varieties like Cascade, Centennial and Chinook and alpha varieties.
As time passes and trellis remains empty, more aggressive farmers will lower the prices at which they are willing to produce public varieties. They will plant and sell at competitive prices before they remove trellis. When brewers buy public varieties, farmers will regain their independence breaking the chains that bind them to the hop mafia.
The 186 million pounds (84,369 MT) of contracted hop inventory in the U.S. is aging[26]. Merchant/farmers will continue to collect storage fees and interest on the unpaid hops in storage. Once brewers realize the way to move inventory is to lower prices there will be downward price pressure on the secondary market. Inflation will mask some downward pressure on new crops making older crops more attractive still. Smart brewers looking to save money in the coming years will find bargains in one-, two- and three-year-old aroma inventory, which, if stored correctly, retain their brewing value.
ALPHA OPPORTUNITY
There will be a significant amount of alpha acid producing varieties planted in 2023. The U.S. has moved away from alpha production over the past decade, but they were all alpha producers at one time. Large brewers looking to save on their alpha acid expenses can exploit this trend if they choose. There are three reasons I believe this will happen.
1) The surge in proprietary aroma varieties over the past decade distributed global alpha acid production risk unevenly. German aroma varieties met with little success. The German industry is not concentrated as in the U.S. Farmers there were not emboldened by inflated hop prices. They seized the opportunity to produce alpha varieties at prices that would have been rejected by their American counterparts. Open acreage in the U.S. represents an opportunity for large brewers to evenly distribute their future hop risk.
2) Generic extract created through the extraction of surplus proprietary aroma varieties has not been an acceptable substitute to variety specific alpha for every brewer. Since 2010, American farmers were more interested in producing lucrative proprietary aroma varieties than alpha, which would have to compete on price with the Germans. U.S. farmers believed they could benefit more by working with craft brewers after macros renegotiated and canceled alpha contracts in 2009[27]. Many welcomed craft brewers and the promise of sustained high prices through proprietary variety production with open arms. Now that the potential with proprietary varieties has stalled, open trellis represents an opportunity to take back alpha market share from the Germans.
3) American farmers have the resources to wait and see what happens in the market in 2023. For that reason, I believe we will see empty trellis around the Yakima valley this year. The desperation to plant will increase the longer their trellis remains empty. Water bills and property taxes must be paid whether or not hop acreage generates revenue. American farmers know how to produce alpha hops efficiently. Empty American hop acreage represents an opportunity for large breweries to save money by signing direct deals with farmers for alpha acid at competitive prices as they have in the past. Extraction is a bottleneck controlled by the largest hop merchants, but alternatives exist.
All of this means the next four to five years will be full of exciting market corrections and opportunity.
[1] German data is only available through 2021. American data is also available for 2022. According to the 2022 USDA National Hop Report, season average prices in 2022 increased from $5.72 to $6.10 per pound.
[2] https://www.macrotrends.net/2548/euro-dollar-exchange-rate-historical-chart
[3] The data available for comparison in figures 1, 2 and 3 was limited to 2009-2021, which is why a longer period was not analyzed. There was also data for 2001, at which time American hop prices were 46% higher than German prices.
[4] For the convenience of those familiar with the metric system and prices in Euros/Kg. this chart was created using average annual exchange rate data combined with reported season average price data.
[5] https://www.macrotrends.net/2548/euro-dollar-exchange-rate-historical-chart
[6] https://www.macrotrends.net/2548/euro-dollar-exchange-rate-historical-chart
[7] Champeyrache, Clotilde. “Artificial Scarcity, Power, and the Italian Mafia.” Journal of Economic Issues 48, no. 3 (2014): 625–39. http://www.jstor.org/stable/43905833.
[8] Federal marketing agreements are also known as Federal marketing orders.
[9] https://www.govinfo.gov/content/pkg/FR-1938-08-13/pdf/FR-1938-08-13.pdf
[10] The Hop Atlas (English Edition) The History and Geography of the Cultivated Plant. Published by Jon.Barth & Sohn. Nuremberg, Germany. January 1, 1994.
[11] An article entitled “THE US HOP MARKETING ORDER: THE PRICE OF SUCCESS IS MISUNDERSTANDING” by Raymond Folwell published by Washington State University, Pullman in 1982. Received during a 2019 Freedom of Information Act request by Douglas MacKinnon as exhibit 28 of the 2003 Federal hop marketing order hearing transcripts.
[12] It was 1980 when the third Hop Administrative Committee (HAC) of the Federal hop marketing order decided to radically increase the saleable volume of hops in response to several years of low yields in Germany. The goal was to take market share away from the Germans. This failed when German yields returned to normal. Although the marketing order continued until 1986 when it was terminated, it had strayed from its primary purpose, which was to regulate the available supply of hops to the market. The year 2010 is mentioned because that is when craft beer demand accelerated, and production of proprietary aroma varieties soared.
[13] https://www.forbes.com/sites/katevitasek/2022/04/04/tips-to-prevent-and-avoid-adversarial-supplier-relationships/?sh=5a0065ca79e1
[14] https://brewingindustryguide.com/rightsizing-the-hop-market/
[15] I was a hop merchant at the time. This statement reflects my first-hand observations regarding the supply situation at the time.
[16] https://www.hoptalk.live/post/too-many-hops-10000-acre-cut-needed-says-barth
[17] https://www.yakimaherald.com/news/local/hop-growers-make-changes-adjust-acreage-in-response-to-covid-19-pandemic/article_64c56709-9fca-513f-8b59-73095458b508.html
[18] https://www.usahops.org/img/blog_pdf/435.pdf
[19] https://www.nass.usda.gov/Statistics_by_State/Regional_Office/Northwest/includes/Publications/Hops/2021/hops1221.pdf
https://lupulinexchange.com
[21] https://web.archive.org/web/20190410051637/https://lupulinexchange.com/
[22] https://visityakima.com/yakima-valley-craft-brew-hop-history.asp
[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] https://www.hopsteiner.com/blog/hop-varieties-with-reduced-carbon-footprint/
[25] https://brauwelt.com/en/news/hopsteiner/644506-environmental-impact-of-hop-varieties
[26]https://www.nass.usda.gov/Statistics_by_State/Regional_Office/Northwest/includes/Publications/Hops/2023/hops0323.pdf
[27] https://pubs.extension.wsu.edu/2010-estimated-cost-of-producing-hops-in-the-yakima-valley-washington-state