Hidden Truths Behind U.S. Acreage Reduction
Why the 2023 acreage reduction is less meaningful than it appears
There have been several articles analyzing the June Hops Strung For Harvest publication that came out earlier this month. If you haven’t already seen it, here’s a link to the original data from the USDA.
There have already been several reports summarizing the details of the report. I’ll keep this brief and focus on information not yet discussed. If you haven’t read the other articles yet, here’s a sample of the ones available at the time of publication.
The Barthhaas June 2023 Hop Update[1]
This is the most complete global hop report you’ll find in June. It provided a complete update regarding Germany. The Czech Republic and Slovenia reports provided less detailed information. That level of detail didn’t extend to the U.S. crop situation. Information regarding U.S. acreage changes and crop development were minimal. The U.S. was the largest producer of hops in the world in 2022[2]. American crop development impacts global hop supply. The company’s influence upon the American industry through their ownership of John I. Haas, Inc.[3] makes them a key player in that industry. The report acknowledged an oversupply in “flavor” varieties, but mentioned “… a strong reduction in the aroma varieties Citra, Mosaic and Cascade …”. They neglected to discuss the crop development. Perhaps Yakima Chief Hops™ or Hopsteiner will offer a more thorough perspective on their company blogs. If you are interested, you can read the Barthhaas article for yourself here.
HopTalk Live
Claire Desmarais wrote a very nice article detailing the specific changes by variety[4]. If you’d like to see the highlights of the varieties that increased or decreased without calculating them for yourself, this is a good place to do it. The article has a noticeable farmer bias and portrays an optimistic view on the changes. The article was the first documented case of Strata™ OR 91331 and Triumph production in Washington State. Those are valuable data points that would otherwise be unavailable. If you are interested, you can read the June HopTalk Live article for yourself here.
Stan Hieronymus, Hop Queries[5]
Stan summarized the highlights of the acreage strung report. He implied that more reduction is needed to correct the current oversupply problem. He mentioned the general agreement within the industry that the alpha market was balanced and pointed out how that does not support the significant planting of alpha acreage in 2023. He discussed the specific acreage of several varieties and explained the limitations of the USDA data reporting methods. If you’re interested, you can read the article yourself here.
Erric Sannerud, Hop Notes
This article provided an overview of the data released by the USDA. It calculated the differences between 2022 harvested acreage and 2023 strung acreage. He discussed the depth of the cuts and his belief that they will be inadequate to address the 40-million-pound surplus referenced by Alex Barth at the 2023 Hop Growers of America convention. If you’d like to read the Hop Notes article for yourself, click here.
Forecast
When I was director at Hop Growers of America and responsible for reporting the estimated crop to the International Hop Growers Convention (IHGC), I used to use the June USDA report as a baseline and adjust based on anecdotal reports I would gather between June and harvest. It was an accurate method. In the copious reports linked above, to my surprise, nobody mentioned 2023 estimated production. I have provided a production estimate by state and variety for 2023 based on a five-year average yield for each variety (Tables 1 – 3)[6]. The estimates below represent an excellent starting point but will require adjustment as the season unfolds. They consider high and low yields from the previous five years.
Table 1. 2023 Proprietary / Protected Variety Production Estimates
Table 2. 2023 Public Variety Production Estimates
Table 3. 2023 “Other” and “Experimental” Variety Production Estimates
ANALYSIS AND OPINION
Some merchants will use the current acreage reduction to generate fear among brewers so they continue contracting for their hops[7]. Contracts are the lifeblood of the farmer and the merchant. The more they have the healthier they believe they are. Brewers would be foolish to believe that a shortage is imminent when such a massive surplus exists. There are thousands of brewers with less than 15 years of experience buying hops. They have not yet experienced a hop cycle. They don’t know how the market works. They are vulnerable to messages that sound rational and normal, but which do not apply to the hop industry. If you are a brewer reading this and you know a brewer who hasn’t been in the industry for more than 15 years, please consider sharing this article with them so they don’t fall into the merchant/farmer contract trap.
FACT:
American hop acreage is never removed as quickly as it is planted.
I first documented this effect in 2021. I called it the Delayed Surplus Response (DSR). American farmers planted 11,533 acres between 2006 and 2008 in response to increased prices[8]. Their reaction demonstrated that farmers were highly responsive to increasing hop prices when the market was free (i.e., when the market is less than 50% proprietary varieties). Supply increased rapidly to meet demand. Farmers were free to decide which hops they would produce. The delay occurs when the market is oversupplied, and fewer acres are necessary. I published a paper about the DSR in August 2022 in which I discussed the effect[9].
The 2023 acreage reduction and replanting of nearly half that acreage is a textbook example of the DSR. Based on previous DSR cycles, it is possible to calculate the likely duration of a DSR and the time before corrections necessary to address an oversupply occur. I believe the current correction will be delayed longer than a normal DSR cycle. I will discuss the size and scope of the current surplus and quantify the length of the delay in an upcoming article. If you haven’t already subscribed to my articles, please consider doing so now. You won’t want to miss that one.
Why farmers will lower their prices
Why is there a delay at all if the market is oversupplied? In your high school economics class you probably learned that if demand is low then supply will decrease to meet demand. That is a rational decision-making process that does not apply in the hop industry as you would expect. The most optimistic and/or uninformed farmers will idle acreage. They will wait to see what happens in the hopes that the surplus is temporary and better opportunities will arise. For the more aggressive, experienced and/or informed, the forced removal of proprietary varieties from their trellised acreage created a need to use their existing trellis to plant different varieties. Due to the permanence and lost opportunities, selling hops at lower prices is more attractive than removing trellis.
Here’s why … by the numbers:
If a trellised field remains empty, a farmer must still pay $165 per acre ($407 per hectare) for taxes and water[10]. That does not include expenses incurred to maintain idle acreage (i.e., pesticide application and other fieldwork). The farmer will have still incurred sunk costs associated with owning the land. He must pay for that whether he produces hops on trellised land or not. The official reported costs, however, will be much higher than a farmers’ actual costs.
The 2020 WSU cost of production survey listed the cost to build new trellis at $8,095 per acre ($19,994 per hectare). An investment of that size requires the type of pricing that results from a hop shortage. That does not include the price of the land on which that trellis is built. The same 2020 survey reported the value of bare land at $15,000 per acre[11]. It calculated the expense for every acre on a hop farm as if it is newly purchased at 2020 market prices regardless of the date or price at which it was originally purchased.
I mention the WSU cost of hop production survey because it is the cost of production the industry claims to be true. You should not believe the numbers from the 2020 WSU cost of production survey. You can read how these surveys have overstated the cost of production since 2010 in my October 2022 article, “How Much Do U.S. Hops Really Cost?” or in my September 2022 article, “Are You Overpaying for American Hops?”. The changes to the methods of calculation, in my opinion, are at a minimum misleading. In the worst-case scenario they may be potential violations of U.S. antitrust law.
All these fixed expenses a farmer incurs on idle acreage helps justify selling hops at reduced prices. That is a more attractive option than incurring costs on land not generating revenue. Farmers are well capitalized after a decade-long bull market. They can afford to wait to see what next year’s market will bring. There is idle trellis in the Yakima valley. I did not see any trellis being removed. Perhaps I missed that field.
The continued existence of idle hop trellis in Washington and Idaho prolongs the DSR. It will lead to price-based competition between farmers on public varieties as time passes[12]. Farmers there can plant hops in the spring when an opportunity arises and harvest an average yield in the fall on many varieties. The rest of the world cannot compete with that. I believe the commitment to hop acreage reduction is permanent once the trellis is removed. Why keep idle hop trellis if you do not intend to produce hops on that acreage?
Dichotomy
There is a dichotomy between the perception that the global alpha acid market was in balance as recently as February 2023[13] and the increases of U.S. alpha producing varieties in 2023[14]. Some of the reports above tried to justify these plantings as necessary. What none of these reports mention is the desire by farmers to maintain acreage. In the past, to maintain acreage farmers sold at lower prices (relative to their competitors) to gain market share. To the farmer selling, or to the merchant facilitating the deal, these purchases appear to be real demand at a lower price point.
In the February 2023 edition of HopTalk, Claire Desmarais of CLS Farms paraphrased something Alex Barth said at the convention,
The same lack of understanding applies to the current contracted alpha production. It may or may not represent real or new demand. It may be demand shifting from one producing region to another due to price. Farmers and merchants have no way to know because they do not cooperate. The brewing industry could track hop prices and demand … but they do not.
The hop market has been cyclical since hop prices have been recorded. Price competition was the modus operandi of the hop industry before proprietary hop varieties dominated the U.S. industry. Concentration of two thirds of the industry into a few hands enabled more managed growth. According to the International Monetary Fund (IMF), the economic effect on merchants (i.e., U.S. hop farmers and merchants in 2023) is amplified due to the duration of the previous market cycle[15]. Between 2012 and 2022 U.S. season average prices increased eight out of 11 years (72%). During that time, the farmgate value of the American hop crop tripled[16]! It was an unprecedented bull market for hops.
“The Bigger They Are The Harder They Fall.”
- Robert Fitzsimmons, 1891 (multi weight world boxing champion)
Proprietary varieties change the equation. In the U.S. hop industry today, farmers who own the companies that own popular proprietary varieties decided which of their competitors removed acreage and they decided how much they would remove. The 2023 acreage reduction was too small to be meaningful, which means they will do that again in 2024. Their decisions will influence the efficiency of their competitors’ farms and may determine which farms continue producing hops in the coming decade.
[1] https://www.barthhaas.com/ressources/blog/blog-article/hop-update-june-2023
[2] http://www.hmelj-giz.si/ihgc/doc/2022_NOV_IHGC_EconComm_SummaryReport.pdf
[3] https://www.johnihaas.com/our-history/
[4] https://www.hoptalk.live/post/usda-hop-acreage-reports-9-decline-bigger-story-to-tell
[5] https://tinyletter.com/fortheloveofhops/letters/hop-queries-7-2-2023-hop-acreage-s-are-in-nz-survivables
[6] USDA 2022 National Hop Report and June Strung for Harvest data were used to produce these tables. Where five years of yield data were not available, I calculated an average yield for each variety by state based on the number of years of data available in the USDA reports. Where 2023 was the first year of recorded production and no previous yield data was available a zero was input.
[7] https://www.crosbyhops.com/news-blog/blog/is-hop-history-repeating-itself
[8] https://www.usahops.org/img/blog_pdf/12.pdf
[9] https://agricecon.agriculturejournals.cz/artkey/age-202208-0002_the-delayed-surplus-response-for-hops-related-to-market-dynamics.php
[10] This is a result of a $70.00 tax payment per acre and $95.00 water payment per acre for each acre idled according to the 2020 WSU cost of production survey available at: https://pubs.extension.wsu.edu/2020-estimated-cost-of-establishing-and-producing-hops-in-the-pacific-northwest
[11] https://pubs.extension.wsu.edu/2020-estimated-cost-of-establishing-and-producing-hops-in-the-pacific-northwest
[12] I remember farmers selling hops for $0.50 per pound between 2002 and 2005 to recoup their picking costs.
[13] https://brewingindustryguide.com/rightsizing-the-hop-market/
[14]https://www.nass.usda.gov/Statistics_by_State/Regional_Office/Northwest/includes/Publications/Hops/2023/HOP06_1.pdf
[15] https://www.imf.org/-/media/Websites/IMF/imported-flagship-issues/external/pubs/ft/weo/2012/01/pdf/_c4pdf.ashx
[16] https://www.usahops.org/img/blog_pdf/435.pdf