The world’s independent merchants and farmers are under attack. Under the status quo, the industry will be under new management by the end of the decade. This won’t be good for brewers unless they enjoy record high hop prices. It won’t be good for independent farmers and merchants. They will either find their place by partnering with the establishment or find themselves watching from the sidelines. I believe the possibility to change the course of events exists if enough people unite toward that common goal.
The U.S. has always been at the forefront of hop industry developments, and this time is no different. Many American farms are in critical condition. Since 2012, according to Hop Growers of America the value of the U.S. hop crop tripled. During that time, farmers in the Pacific Northwest (PNW) produced $5.8 billion worth of hops[1]. The problem is farmers and merchants spent billions keeping pace with anticipated demand. Of course, fortunes were made along the way. Some benefited more than others.
“The future is already here – it’s just not evenly distributed.”
- William Gibson
Moo
Royalties are marketed as a method for funding future variety development[2]. While that is true, it ignores the massive windfall profit successful varieties generate. A variety like Citra ®, HBC 394, which was developed from a cross in 1990 and patented in 2009 is a cash cow[3]. If we apply the royalty rate I documented in my April 2023 article, “The Secret Behind Who Controls the Hop Industry” to production of HBC varieties between 2013-2022, the four families that own that company made somewhere between $200-300 million in royalties[4][5]. It alone has likely paid for the entire HBC breeding program since its inception and will continue to for the foreseeable future. From the way proprietary varieties are marketed, their purpose seems to be exploiting brewer FOMO[6] to create a competitive advantage for their owners … not advancing the good of the industry. Follow the money.
Those four families that own HBC varieties own farms that profit from the hops they produce. They own merchant companies that profit from the hops they sell. By the time a brewer receives an HBC variety, these four families have profited three times. It’s a brilliant scheme! Owning the varieties produced on half of the U.S. acreage has not only made them wealthier and more powerful, it’s created a competitive disadvantage for anybody who opposes them.
The farms to which they licensed those varieties during the good times profited well from their alliance. Now that the industry is scaling back, farmers without ownership in Yakima Chief Hops™[7] or who don’t have a deal with John I. Haas to access HBC varieties are in trouble. That is a consequence of the system the craft brewing industry created by chasing one company’s proprietary varieties. Farmers wanting the attractive prices agreed to grow proprietary varieties they didn’t own. Unlike the breweries that had to sign five-year contracts, farmer contracts could be canceled each year. That left them vulnerable to downturns in the market, which is causing the imbalance in the market today.
The Four Hops of the Hopocalypse
This article is a public service announcement to alert craft brewers about the consequences of their unhealthy addiction to Citra ®, HBC 394, Mosaic ®, HBC 369, Simcoe ®, YCR 14, and Pahto ™, HBC 682. Maintaining the status quo (i.e., the idea that you must have these varieties to make good beer) may cut the number of farmers by up to half. In 2023, according to the USDA, those four HBC varieties represented 20,098 acres (8,136 ha.) or 37% of the acreage planted in Washington, Oregon and Idaho[8]. That concentration of power enables them to determine who advances to the next round and who gets voted off the island. This is a system that resembles feudalism more than capitalism[9]
Patent Law 101
According to the U.S. Patent and Trademark Office (USPTO), The intent of a patent is to give the inventory a temporary advantage for 20 years unless the exclusivity is extended by the USPTO[10]. Under U.S. patent law when a patent expires a few things happen:
The intellectual property (IP) enters the public domain,
Others are free to use and market the invention,
The inventor may stop receiving patent-related royalties, and
Patent-related licensing agreements are no longer enforceable[11].
When a patent expires, generic brand products can enter the market[12]. Patent holders often try to extend their IP rights beyond the 20-year period[13]. Highlighting the value of the brand (i.e., Simcoe®, YCR 14) versus the patent name (i.e., “YCR Accession No. 14”) is one strategy to extend the value of the patent during Loss of Exclusivity (LOE)[14]. The patent for Simcoe ®, YCR 14 expired in 2019[15]. The patent for Amarillo®, VGXP01 expired in 2020[16]. Why, then, have they not entered the public domain?
There is no incentive to release proprietary varieties into the public domain. That’s why. Private hop variety development programs do not exist to further the development of the industry. A 2018 Yakima Chief Ranches (YCR) PowerPoint presentation no longer available online provides insight into their reasoning. In it, Jason Perrault explained why proprietary hop varieties are named the way they are today (i.e., using both the brand name and the variety patent name):
“The reason for identifying both the brand and the variety name is patents expire after 20 years, and if the two names were the same US Patent and Trademark law views this as extending the life of the patent beyond the 20 years.”
This may not be accurate. There is a legal argument that trademark protection and varietal protection are mutually exclusive[17]. The handful of men controlling the hop industry have concentrated their power and wealth during the past decade. Their opponents grow weaker with each passing crop. No farm or group of farmers can challenge whether this strategy extends exclusivity without fear of retribution. It all sounds very cloak and dagger or like something you would see in a mafia movie. The fear is real.
Change of the guard
In July, 2022, in my article entitled, “Has a Cartel Taken over the Hop World?” I explained how the power of proprietary varieties would change the industry.
In a section called “The New Market Share”, I wrote:
“Under the old paradigm, a grower that had more acreage might be viewed by his neighbors as more relevant because they controlled more resources. This is a farmer rendition of seeing who has the biggest penis. With proprietary hop varieties and contract production, the size of a farmer's ... tracts of land ... no longer determines relevance. With proprietary varieties and contract farming, a new power dynamic is governing the hop industry.”
The acreage reductions of 2023 and 2024 demonstrated this to be true. The biggest burden has fallen on the competitors of the proprietary variety owners. If you’re a brewer and don’t care, you will regret that decision by 2030. If you think the success of proprietary varieties represents capitalism at work, keep reading. You’ll understand why it will impact every brewery within the next five years if no action is taken.
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Death by 1,000 cuts
The acreage reductions of 2025 will be the final nail in the coffin for some farms. If nothing is done, they will bring the end of free market competition in the hop industry. It may take a few years for hop farmers and merchants to realize there is no longer a place for them. The barriers to become a hop farmer are enormous so they are slow to leave. According to the 2020 WSU Cost of Hop Production Survey, the cost to start a hop farm in 2020 was over $20 million[18][19]. Once farmers leave the industry, the odds they return are low. They will, therefore, attempt to stay relevant at all costs. Once they leave, the feudalist system that will flourish will not let them reenter. It will control production, dictate prices and further concentrate wealth and power among a few oligarchs.
“Competition is a sin”
- John D. Rockefeller
In addition to favoring specific farmers and merchants, today’s acreage reductions favor proprietary acreage. According to the USDA, the percentage of U.S. proprietary acreage is higher in 2023 than ever despite massive acreage reductions (Figure 3). What is the incentive to market public hops when the owners of the biggest hop merchants profit from the royalties on proprietary varieties to which they have exclusive access?
Figure 3. U.S. Proprietary Variety Acreage not including “other and experimental” acreage 2010-2023
Source: USDA NASS National Hop Report 2010-2023
What acreage reductions are necessary to restore balance? It’s a moving target so the honest answer is nobody knows yet. The data offer a glimpse where American acreage will be before balance is restored. Inventory buildup among merchant/farmers began to develop in 2012 when craft production surged. A noticeable increase occurred between the 2015 and 2016 crop (Figure 4). That signaled the existence of a growing surplus.
Figure 4. 50-year trend of March 1 hop stocks separated by brewer-held and merchant/farmer-held inventory
Source: USDA NASS March 1 Hop Stocks 1974-2024
Another obvious signal of a building surplus is that the inventory depletion rate decreased and stayed below long-term averages (Figure 5).
Figure 5. Percent depletion relative to total available supply 2002-2023
Source: USDA NASS September 1 Hop Stocks 2002-2023
Despite these signs, people who knew better continued aggressive sales tactics. They forced long-term contracts on craft breweries. I explained why in my March 2023 article entitled, “Surplus Contracting Tactics”. As a result, acreage continued to increase between 2017 and 2021 (Figure 6).
Figure 6. Total Hop Acreage in the Pacific Northwest
Source: USDA NASS National Hop Report 2014-2023
To fix the surplus the U.S. industry must decrease acreage to somewhere around 2015 levels, 43,333 acres (17,543.7 ha.). That corresponds to the statement made by Tom Davis, John I. Haas CEO, to reduce 10,000 acres from 2023 levels at the 2024 Hop Growers of America convention in January[20][21].
FUN FACT:
A “farming unit” according to the WSU Cost of Hop Production Survey is 600 acres (242.9 ha.)[22]. The reduction of the industry from its peak of 60,872 acres (24,644 ha.) to my estimate of 35,000-39,000 acres (14,170 – 15,789 ha.) means 36 - 43 farming units will shut down in the coming years. That represents approximately three quarters of a billion dollars in infrastructure that will be mothballed in the next few years.
What Tom did not account for … or perhaps what Tom preferred not to say … was that deeper cuts will be necessary in 2025. The industry must create a deficit to give the surplus somewhere to go. Either that or surplus inventory must be extracted to remove it from the aroma market. I believe they are doing both. Even creating a deficit for the surplus is not enough. There is a bigger problem.
“I skate to where the puck is going to be, not where it has been.”
- Wayne Gretzky
I hope this article provides some value for you. I enjoy writing them. You probably won’t read about the topics I write about anywhere else. If you find them interesting and entertaining, or if you just want to keep up with what’s being discussed, please consider becoming a paid subscriber today.
On the move
While everybody tries to determine how large the surplus is and how many acres must be produced in the future, the target has moving. Rising costs of production[23], a more competitive beer market[24], changing drink preferences[25], and more efficient hop products like oils and downstream products are increasing the size of the acreage reduction needed. How much is unknown. Companies offering extracts and oils boast increased efficiencies for breweries between seven and 500%[26][27][28]. That’s quite a range! With more companies offering oils, and a difficult economy, extracts and downstream products gain greater acceptance by breweries looking to save money.
This play comes from the alpha playbook of the late 1970s and early 1980s. The release of Galena[29] and Nugget[30] in 1978 and 1981 respectively increased the alpha acid farms produced per acre. The creation of private hop breeding programs in 1988[31] led to the first proprietary “super alpha” varieties in the 1990s. Farmers thought in acres and pounds of hops at the time, not kilos of alpha produced as they do today. They produced the new varieties on existing acreage rather than decreasing production in proportion to the increased efficiency. Alpha production soared. Prices, in turn, plummeted and stayed low for 20 years (Figure 8). Voluntary acreage reductions have been difficult in the past. That is one advantage of proprietary varieties. They offer absolute control over production.
Figure 8. 75-year history of U.S. Season Average Prices Adjusted to 2023 dollars 1948-2023
Source: USDA NASS
With such wide-ranging claims of efficiency by the oil companies, if they are successful, an additional 10-20% decrease in global acreage is reasonable. Since American proprietary varieties are the most expensive, they are the logical first targets. That means the target acreage for the U.S. is somewhere between 35,000 and 39,000 acres (14,170 – 15,789 ha.) within the next five years.
“Above all, don’t lie to yourself. The man who lies to himself and listens to his own lie comes to a point that he cannot distinguish the truth within him, or around him, and so loses all respect for himself and for others.”
- Fyodor Dostoevsky, The Brothers Karamazov
Club Hops
According to the USDA, the U.S. had 31,933 acres (12,928 ha.) in production in 2012 before the craft beer boom. Can’t farmers go back to their original size? That is not how the acreage reduction is being managed. Instead, it represents an opportunity for those in power to concentrate their hold on the industry.
Companies have weaponized the leverage of proprietary hop varieties to encourage sales of public varieties by making offers no brewer can refuse. Under the current regime, brewers can expect to be sold an ever-increasing basket of proprietary varieties from fewer independent merchants and farmers. Proprietary varieties will be sold as the answer to everything including climate change[32][33]. This article in the prestigious Journal of Nature Communications claimed European hop production would no longer be viable by 2050[34]. The article based its conclusions on faulty data. I debunked the article and their claims two weeks after the article was published in my October 2023 article, “Climate Change is NOT Coming for your Hoppy Beer”. Despite my reporting the misleading conclusions based on flawed data, six months later, the article has not been retracted.
On the industry’s current path, public varieties will become a novelty. This type of industry concentration has already happened in the U.S. corn and soybean industries where patented seed represents over 90% of acreage[35][36]. Anybody trying to operate outside the system is punished[37].
We like to believe that the company that produces the highest quality for the lowest cost is rewarded with success. Under the system we imagine exists, companies are incentivized to improve and become more efficient to stay ahead of their competition. Proprietary hop varieties changed that in just 12 years. Winners and losers are now hand-picked, not chosen by the market. Much like under the Soviet system, membership, nepotism and cronyism are rewarded instead of efficiency and quality[38].
There’s no published explanation about the relationships in the hop industry yet. I’ll write an article on this in the future. For now, this article about the Washington apple industry’s “Club Apples” offers a good comparison[39]. For those of you who don’t already know, many Washington hop farmers also produce apples. They would be familiar with this system.
Hopocalypse
If you’ve been reading my articles for a while, the acreage reductions are no surprise. You also know what’s coming next. If independent farmers and merchants don’t survive, brewer options in a post-hopocalyptic world will be limited. Brewers who would like to have a choice of merchants and farmers from whom they can purchase their hops in the future need to act if given the chance.
In the next few years the surplus will be gone. External shocks or demand instability is often responsible for destabilizing cartels[40]. If they survive the next few years, and if nothing has changed, a small group of people will control the industry. They will maintain perpetual deficits large enough to justify high prices and forward contracting yet small enough not to trigger panic. Every proprietary variety purchased today is a vote against the independent farmer way of life. There’s nothing wrong with proprietary varieties in and of themselves. It’s the disproportionate brewer reliance on proprietary varieties that caused the imbalance present today. I wrote about the Faustian bargain brewers and farmers made in my August 2022 article entitled, “Who Owns Your Beer”. If you want a fun summary of the story of Dr. Faust by Thug Notes, click here. In his analysis, the host explains how one version of the story represents the idea that mistakes can always be forgiven. I like that idea.
Balance is necessary to keep the free market intact. I believe there is something that can be done to change the course of the industry. A resistance movement highlighting ethical sourcing is necessary. I plan to talk with brewers across the U.S. this summer about the situation to gauge the demand for such a program. If that sounds interesting to you, let me know by messaging me either on Instagram or on LinkedIn.
Stay tuned!
[1] https://www.usahops.org/img/blog_pdf/474.pdf
[2] https://www.bendsource.com/special-issues-and-guides/hops-university-2318330
[3] https://patents.google.com/patent/USPP21289P3/en
[4] (i.e., John I. Haas, part of the Barthhaas Group (i.e., The Barth family), and Yakima Chief Ranches (the Smith, Carpenter and Perrault families)
[5] https://yakimachiefranches.com/history/
[6] https://www.merriam-webster.com/dictionary/FOMO
[7] These farmers are also listed in the article “The Secret Behind Who Controls the Hop Industry” https://mackinnonreport.substack.com/p/the-secret-behind-who-controls-the
[8]https://www.nass.usda.gov/Statistics_by_State/Regional_Office/Northwest/includes/Publications/Hops/2023/hops1223.pdf
[9] https://www.britannica.com/topic/feudalism
[10] https://www.uspto.gov/patents/basics/manage#rights
[11] https://www.goldsteinpatentlaw.com/what-happens-when-patent-expires/
[12] https://www.washingtonpost.com/archive/politics/1999/02/03/seeds-of-discord/c0f613a0-02a1-476f-b54d-af25413844f5/
[13] https://www.theatlantic.com/ideas/archive/2023/06/pharmaceutical-generic-drugs-pay-for-delay/674410/
[14] https://www.ey.com/en_us/life-sciences/navigating-pharma-loss-of-exclusivity
[15] https://patents.google.com/patent/USPP12213P2/en
[16] https://patents.google.com/patent/USPP14127P2/en
[17] https://www.knowmad.law/blog-post/plantpatents
[18]https://www.usahops.org/cabinet/data/TB38E%20Conventional%20and%20Organic%20Hops%20Enterprise%20Budget%20in%20PNW.pdf
[19] I believe the true cost to start a hop farm would be much lower than that and that the numbers in the 2020 WSU Cost of Hop Production Survey are wildly exaggerated. The point remains it would take millions of dollars, specialized knowledge and contacts to enter the industry. Each of these presents a formidable barrier, the least difficult of which is probably the financial component.
[20] https://brewingindustryguide.com/the-next-hop-market-correction/
https://hopqueries.com
[22]https://www.usahops.org/cabinet/data/TB38E%20Conventional%20and%20Organic%20Hops%20Enterprise%20Budget%20in%20PNW.pdf
[23] https://chicago.suntimes.com/consumer-affairs/2023/8/4/23816281/beer-prices-high-explained#:~:text=Watson%20and%20other%20beer%20industry,NielsenIQ%2C%20the%20consumer%20intelligence%20company.
[24] https://www.forbes.com/sites/louisbiscotti/2023/01/19/craft-beer-boom-slows-but-still-grows/?sh=184fe8a35e3e
[25] https://brandfinance.com/insights/shifting-habits-emerging-trends-in-the-north-american-alcoholic-drinks-market
[26] https://abstraxtech.com/blogs/press-releases/abstrax-innovates-dry-hopping-and-flavoring-process-for-beer-and-beyond
[27] https://abstraxhops.com/blogs/press-releases/abstrax-hops-unveils-quantum-brite-transforming-brewing-with-revolutionary-hop-extracts
[28] https://www.probrewer.com/companies/glacier-hops-ranch/
[29] https://beermaverick.com/hop/galena/
[30] https://beerandbrewing.com/dictionary/K2R8d4KQM2/
[31] https://www.nutraceuticalsworld.com/issues/2003-03/view_supply-source/supply-source-yakima-chief-exploring-the-nutraceut/
[32] https://www.just-drinks.com/features/climate-concerns-fuel-hop-growers-innovation/
[33] https://www.brewbound.com/news/supplier-news/hopsteiner-licenses-cls-farms-to-grow-and-market-four-of-its-proprietary-varieties/
[34] https://www.nature.com/articles/s41467-023-41474-5
[35] https://www.cleveland.com/nation/2009/12/monsanto_uses_patent_law_to_co.html
[36] https://www.marketplace.org/2013/05/13/monsanto-behemoth-controls-90-percent-soybean-production/#
[37] https://www.science.org/content/article/us-supreme-court-upholds-monsanto-soybean-patents-rejects-blame-bean-defense
[38] https://www.cia.gov/readingroom/document/cia-rdp87t00787r000400520001-5
[39] https://www.vox.com/culture/2016/10/6/13078268/honeycrisp-apple-explainer-club-apples
[40] https://www.hbs.edu/ris/Publication%20Files/07-011.pdf