FLASH SALE
From June 10-24, Yakima Chief Hops™ offered 25% off on specific lots of Citra®, HBC 394 and Mosaic®, HBC 369 in what they called a “Flash Sale” (Figure 1)[1]. Low prices do work to move some hops. The problem with them is that they don’t increase demand.
Figure 1. Yakima Chief Hops™ Flash Sale Instagram Post
Source: Instagram
HOP DEMAND
Hops have an inelastic demand. That’s economist lingo that means there is very little change in demand resulting from a change in price (Figure 2)[2][3].
Figure 2. Inelastic versus elastic demand.
Source: Economicshelp.org
Examples of products other than hops with inelastic demand are gasoline for people who own cars, college textbooks for students or lifesaving medical procedures for people with potentially terminal diseases[4][5]. There’s some amount those people need to buy no matter what the price. Hop merchant/farmers know that brewers can’t brew beer without hops. They know they can charge high prices when brewers believe their hop supply is threatened. That’s one reason why merchants/farmers and the organizations representing them highlight events creating supply insecurity. Information that doesn’t serve that purpose isn’t promoted. I demonstrated examples of the industry using propaganda in my May 2023 article, “Propaganda, half-truths and fear porn”[6].
The other side of inelasticity does not favor the hop industry. When there is a surplus, prices crash. Many brewers walk away from contracts, buy cheap spot market hops instead of their expensive contracted inventory or delay payments by a year or more causing. It is always during these times that merchant/farmers resort to discounting prices to increase sales. The mistake is to confuse sales with demand. Cheap prices don’t increase a brewer’s hop usage. Oftentimes, cheap hops purchased at a discount today are used to satisfy future demand. It’s a great opportunity for brewers.
Contrast hops with fast food. In 2023, there were 201,865 fast food restaurants in the United States[7][8][9]. The U.S. Centers for Disease Control (CDC) reports that 37% of Americans eating fast food daily[10][11]. Dissatisfaction with soaring prices resulting from inflation have resulted in fewer sales[12][13]. To stimulate demand this summer, U.S. fast-food chains are waging a value war to attract customers back[14]. It may be too little too late as consumers opt to eat at home to save money[15]. Unlike hops, when fast food is too expensive consumers can opt to not buy fast food. Substitutes for expensive and less efficient hop products exist, but they are still hop based. When prices skyrocketed in 2007, many macro brewers switched to extracts and downstream products to save money. At best, downstream products are a double-edged sword. Their success reduces the total demand for hops[16]. Fortunately for farmers, so far craft brewers have been slow to adopt them citing off flavors, undesired cloudy haze, or lack consistency from batch to batch as barriers.
HOP SUPPLY
Hops have an elastic supply. That means that changes in price result in changes in production (Figure 3)[17]. This is especially true of unregulated public varieties, which farmers are free to plant without permission from a patent owner. With proper management that does not have to be the case with proprietary varieties.
Figure 3. Elastic supply graph
Source: Economicshelp.org
Supply elasticity has been the cause of and solution to the hop industry’s decades-long battle with supply. The free market regulated production through the hop cycle[18]. Between 2012 and 2023, however, U.S. hop acreage grew to over 70% proprietary varieties. The variety owners had the power to regulate supply. Adherence to an archaic and inappropriate contract system prevented them from aligning supply with demand. This resulted in the largest hop surplus in history[19]. Brewers should assume they will not make this mistake again.
Thousands of inexperienced craft brewers entering the industry between 2012 and 2022 accelerated and exaggerated the misalignment between supply and demand. Delayed signals between changing hop demand don’t align with slow changes in supply created by five-year contracts. Annual production cycles don’t align well with changing seasonal brewing demands. That and farmers producing “a little extra” to ensure they fill their contracts regardless of market changes (i.e., Covid) guarantee oversupply. Under normal circumstances, the risk of oversupply from contracts is worth the recurring income. Rising interest rates made carrying the surplus expensive.
DISCOUNT BACKLASH
Five effects of selling hops at a discount[20]:
1) They inflate the perceived demand for hops,
2) They increase hop sales … not hop usage,
3) They mask and delay signals to decrease future production,
4) They encourage continued overproduction,
5) They decentralize the oversupply making it more difficult to track.
So if low prices are so bad, why do merchant/farmers offer discounted prices? As somebody who has sold discounted hops in the past, it’s simple. They bring in revenue. They get rid of hops you don’t want to see in storage anymore. At some point it’s smart to cut your losses. Discounts fix a merchant/farmer’s surplus problem in the short-term. If you don’t make it through the short-term, the long term doesn’t matter.
“In the long run, we’re all dead”
- John Maynard Keynes[21]
A brewer may lead a merchant/farmer to believe they’re buying for unsatisfied demand. That may be true. It may also be that the brewer saw the low price as an opportunity to save money for next year’s production. Hint hint brewers.
PRO TIP:
Brewers willing to pay for hops on delivery will be able to negotiate very low prices between now and October 2024. Smart brewers know that last year’s crop is just as good as this year’s crop. Really smart brewers will know that hops from the 2020 crop can still be excellent. The propaganda that “fresher is better” was used to move the current crop. The truth is that under the proper storage conditions, hop shelf life can be six years or more[22]. The perceived value of older hops will decrease still further after harvest. Their brewing value doesn’t change just because a new crop is available. Brewers should look for value opportunities between now and harvest as merchants make room for new inventory and following harvest as they try to move older inventory at any price. The position each merchant holds will determine the varieties, and the extent to which they will discount prices. I have found that most brewers don’t know how to negotiate hop prices. They don’t do it often enough. This is a buyer’s market. Brewers who don’t haggle deserve the high prices they get.
It’s safe to assume brewers buying hops at discounted prices now will use some of those hops to produce beer after the 2024 harvest. Beer consumption and hop usage doesn’t increase because the price of hops decreases 25 or 50 percent. Discounted hops push the surplus problem out into the future. That’s part of the delayed surplus response (DSR), a term I coined during my doctoral research[23]. Regardless, merchant/farmers need to stop the bleeding and make room for a 2024 crop that will yield 78-80 million pounds (35.4 - 36.3 mt.). It’s still early to make forecasts, but I’ll make one. I think the September 1 U.S. hop will be approximately 124 million pounds (56,246 mt.). Assuming that is close, and that the 2024 U.S. crop yields 80 million pounds (36,287.7 mt.), there will be 204 million pounds (92,533.7 mt.) of hops in warehouses in Yakima by October. This does not include hops stored around the world. That’s still a massive surplus.
The good news for the hop industry is that the 2024 harvest marks the beginning of the efforts to fix the surplus. The bad news is that at the current rate, it will take another three to four years to bring September 1 hop stocks back in line with historical averages (Figure 4). At the time of this writing, the end of the U.S. hop harvest is nine weeks away. Brewers can expect more sales soon.
Figure 4. Estimated September Hop Stocks situation
Source: USDA, *2024 estimate calculated by Douglas MacKinnon
READING THE HOP LEAVES
That YCH tried to move 2023 inventory rather than older inventory is significant. This is when those varieties should be used by breweries. That company is long on those varieties. For that reason, non-owner farmers producing those varieties (if there still are any) can expect more cuts in 2025.
The February BSG sale that offered $0.25 per pound ($0.55 per kilogram) for crop year 2016 was different. It represented a last attempt to recoup value for hops before they were written off as a total loss. For more on dumping old inventory, you can read my May 13, 2024 article, “M.O.A.B. The Mother of All Busts”.
BRANDED VS. GENERIC
Deep discounts on surplus branded proprietary varieties with high alpha, although bad for the market for many reasons, are better than selling them into the extract market from a cash flow perspective. The two varieties YCH discounted could make good generic hop extract[24]. I’ve heard from reliable sources that this happened to preserve the branded market price. There are three big problems with selling branded craft varieties into the generic extract market.
The alpha market is saturated,
Extract and downstream products can last in storage for a decade or more, and
The price in the generic extract market can be 70% less than the branded variety market price to craft brewers.
The problem with a sale like that offered by YCH in June is that brewers are wondering,
“Why am I paying the full price when they can sell them for 25% less?”
Discounted prices indicate:
Desperation … resorting to price-based competition eliminates the advantage of branded products,
Cash flow problems,
The varieties creating the most serious surplus for the merchant offering the sale,
A lack of ideas to move product into the market,
The collapse of the branded supply management strategy.
BRANDED VS. PUBLIC
Intellectual Property (IP) is attractive because the monopoly it offers eliminates price volatility, which plagues non-branded commodities[25]. According to the USDA, market concentration (e.g., one company owning the IP on 50% of American hop acreage) undermines price competition[26]. The return to price-based competition demonstrates the severity of the 2024 surplus.
NOTE TO BREWERS: This surplus problem will be fixed. When it is, you will pay the price merchant/farmers dictate again … and more. So long as you believe your survival depends on proprietary varieties, and if you aren’t big enough to use your size to get low prices, you empower proprietary variety owners. If you’re ok with them charging you whatever price they demand, stay the course. If not, now is the time to find public variety substitutes to diversify your hop bill and reduce your dependency on somebody else’s IP. Once the surplus is fixed, I believe the strategy will be to create a perpetual deficit of proprietary varieties. Brewers will be happy to sign contracts at inflated prices again. So, enjoy the discounted prices while they last.
[2] https://towardsdatascience.com/price-elasticity-data-understanding-and-data-exploration-first-of-all-ae4661da2ecb
[3] https://www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-tutorial/price-elasticity-tutorial/a/price-elasticity-of-demand-and-price-elasticity-of-supply-cnx
[4] https://www.thebalancemoney.com/inelastic-demand-definition-formula-curve-examples-3305935
[5] https://biz.libretexts.org/Courses/Lumen_Learning/Book%3A_Microeconomics_(Lumen)/07%3A_Module_5-_Elasticity/7.15%3A_Examples_of_Elastic_and_Inelastic_Demand
[7] https://www.cbsnews.com/news/mcdonalds-price-increases-fast-food-cost-popeyes-wendys/
[8] https://www.cnbc.com/2024/05/04/why-fast-food-price-increases-have-surpassed-overall-inflation.html
[9] https://www.nbcnews.com/business/consumer/mcdonalds-fast-food-rising-prices-backlash-rcna137709
[10] https://www.latimes.com/science/sciencenow/la-sci-sn-fast-food-america-20181003-story.html
[11] https://foodiepen.com/fast-food-industry-statistics/
[12] https://www.fastcompany.com/91144641/mcdonalds-summer-menu-deals-5-value-meal-free-fries-fridays-price-fast-food
[13] https://www.nbcnews.com/business/consumer/long-predicted-consumer-pullback-hits-restaurants-starbucks-kfc-rcna150299
[14] https://www.restaurantbusinessonline.com/food/fast-food-chains-wage-value-war-get-customers-door
[16] https://bsgcraftbrewing.com/tns-hop-oils-fragrant-and-flavorful-solutions-for-more-efficient-brewing/
[17] https://towardsdatascience.com/price-elasticity-data-understanding-and-data-exploration-first-of-all-ae4661da2ecb
[20] I say this as somebody who has learned from my own mistakes and experience. This is not a condemnation of anybody else.
[21] https://www.socratic-method.com/quote-meanings/john-maynard-keynes-in-the-long-run-we-are-all-dead
[22] https://pim.hopsteiner.de/en/products/slv
[23] https://www.researchgate.net/publication/362849068_The_delayed_surplus_response_for_hops_related_to_market_dynamics
[24] Generic hop extract is extract where the variety of the hop does not matter. The customer is simply interested in the bitterness provided by the alpha acid.
[25] https://blogs.worldbank.org/en/developmenttalk/commodity-markets-evolution-challenges-and-policies
[26] https://www.ams.usda.gov/reports/agricultural-competition-plan-support-fair-and-competitive-markets