Record Inventory Unsettles Hop Industry

For the first time in more than 100 years, the Annen family’s farm near Mt. Angel, Ore., is taking a break from cultivating hops — perhaps indefinitely.

Contract prices quoted by hop buyers are below the cost of production, prompting the farm to idle most of its hopyards, aside from a portion rented to another grower.

“We decided not go broke growing hops for nothing,” said John Annen, the farm’s owner.

Annen plans to lease his property for a while, but may decide to get out of the hop industry altogether.

Judging from the 169 million-pound mountain of hops held by U.S. growers, merchants and brewers, the crop’s oversupply will probably take time to recede, experts say.

The nation’s hop stocks this spring are at the highest level seen in more than four decades, having jumped about 20 percent from last year’s record amount, according to USDA.

“I don’t think this hop situation is going to straighten itself out anytime soon,” said Annen. “There’s just too many hops. Too many planted, too many in storage.”

The hop industry is accustomed to the boom-and-bust cycle. A shortage of the crop around 2008 spurred enough production to cause a surplus within three years. At this point, though, hop stocks are 40 percent above that earlier peak.

“That was a pile of peanuts compared to now,” Annen said.

Despite this tremendous heap of unused hops, many farmers and merchants are still in denial about the implications of the oversupply, said Doug MacKinnon, president of the 47Hops, a merchant in Yakima, Wash.

“Nobody wants to admit the severity of the problem today,” he said.

While the hop inventory has continued to accumulate, the crops were grown under contract, which some in the industry find reassuring, he said.

In MacKinnon’s view, that tranquility is based on a delusion because there’s still an excess of hops for which brewers have no immediate demand.

“The farmer will tell you it’s sold. Some merchants will tell you that too,” he said. “And technically, it is, but it’s not moving.”

The imbalance between supply and demand is based on overly optimistic projections of beer sales, said Jim Solberg, CEO of Indie Hops, a merchant in Portland, Ore.

Major international brewers and larger independent brewers “over-revved on how much could be accomplished and how fast” while the U.S. also saw a profusion of small breweries, he said.

There was a sense that craft beer sales will continue surging as long as brewers invest in more capacity, convincing them to contract for additional hop production, Solberg said.

However, the astronomic growth that brewers were counting on didn’t materialize.

The rate of growth for craft beer sales fell by more than half between 2014 and 2016, from 22 percent to 10 percent in value, according to the most recent statistics from the Brewers Association.

Sales of craft beer are still rising, but not enough to consume the amount of contracted hops, Solberg said. “It’s just piling up. It just backs up and piles up.”

Much of the hop industry’s expansion was paid for with borrowed money, said MacKinnon.

For growers, investing in poles, trellises, drip irrigation and hop plants amounts to about $10,000 per acre, while merchants spent about $1.5 million to $3 million per warehouse building, he said.

With brewers not using as many hops as expected, some will take the financial hit of honoring contracts but others will abandon their contractual obligation to buy the crop, MacKinnon said.

For merchants, there’s no easy way to deal with brewers who reject hops for which they previously contracted, he said. “You don’t want to sue all your customers.”

Sitting on an inventory of hops isn’t cheap — merchants currently have an inventory of about $1 billion worth of hops on which they must pay interest, MacKinnon said.

That financial strain makes it harder for them to honor contracts to buy hops from farmers, who have their own debts to pay back, he said.

MacKinnon said he expects the hop industry will face a reckoning within a year, such as the failure of a major company that causes hop inventories to be severely devalued.

His own company filed for Chapter 11 bankruptcy last year, from which it expects to emerge with a restructuring plan by June, he said.

One way or another, the industry will end up in the same place: With a seriously diminished acreage of hops, MacKinnon said.

Accomplishing this reduction voluntarily would be hard work, but preferable to more bankruptcies, he said. “Everybody needs to be flexible to make this work.”

Source: Capital Press

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