Hop Shortage, Will it Hurt the Wallet?

The story of the 2008 hop shortage began in 1992 when worldwide hop acreage hit its all-time maximum at over 236,000 acres. Good times. Since bumper crops led to a great excess of hops, craft brewers did not need hop contracts with farmers or hop wholesalers; they could purchase hops at will.

On the other hand, farmers got the short end of the stick. Their excess supply was converted to hop extract, which remains stable for years if stored properly (say in a refrigerated warehouse or silo similar to the hop room in Sierra Nevada). The cans of extract were often sold at a loss due to overhead, which eroded the profitability of farming hops. Seeing how it sucks to lose money, farmers converted their hop acreage to more profitable crops or selling their land to developers overseas.

By 2006, worldwide hop acreage shrunk to about 113,000 acres. Some of the reduction in hop acreage was due to higher alpha varieties being introduced and hop products with better utilization being developed, but low prices were the main culprit. Fast forward to last year's harvest. Unusual weather in Europe caused the 2007 hop crop to fall below expectations. Germany and England's crop performed as expected, but the harvests in Czechoslovakia and Slovenia fell 30% below expectations. Hop farms in this region were devastated by a hail storm just prior to harvest.

Why didn't someone see this coming? Well, some folks did, but nobody accounted for hop inventory. Roger, the master brewer of Lodi Beer Company, pieced together the puzzle for the Hop Heads. Macro-breweries who manufacture piss-water and large craft breweries who make decent beer have contracts with farmers or hop wholesalers. Typical contracts provide these companies with adequate hop supply for day-to-day needs and a 'standing inventory' in case of line expansion, experimentation, research and design, and insurance against hail on the fourth of July followed by a stampede of elephants and one baby zebra.

In the early 2000s, contracted breweries did not feel the need to maintain their standing inventory. Seeing the decrease in acreage in 2006, contracted breweries immediately restocked their standing inventories to hedge the risk of a shortage. Fast-forward to 2007 and non-contracted breweries got screwed. Hop prices on the open market skyrocketed when distributors realized there was no shot in hell that supply would meet demand. Hops that sold for $2-3/lb in 2006, started to sell up to $26 a pound. Further, since the Euro is currently strong versus the US dollar, European brewers had an economic advantage over their US counterparts. European brewers bought up much of the hops on the open market.

Unfortunately, nobody can correctly assign an accurate number to the hop deficit. Not only are non-contracted brewers hosed, but home-brewers like yours truly, suffer too. Okay, so how much more will I be shelling out for my favorite 6-pack of craft brew? Several media sources and bloggers typically report that beer prices will increase by at least $1 to $2 per six-pack, I hypothesize that prices will not materially increase in the near future. I must be insane, but maybe there is a system to my crazy-ass logic.

First, non-contracted breweries will still compete with contracted macro and craft breweries (I.E. Sierra Nevada, Sam Adams, and Russian River are contracted). The term contracted usually means paying a fixed price for a supply of goods or services. Contracted brewing costs will not change and they will still pay the same price to produce the same amount of beer (as long as their malts are contracted too, but this will be a separate article probably in 2010).

According to Roger, hop inflation has eroded the cost of production. A 10-gallon batch of ale this year, costs as much as a 15 gallon did two years ago! Since non-contracted breweries face higher costs of production, we will most likely see less product on the shelves.

Okay, but won't non-contracted craft breweries raise prices to offset their short supplies? Would you be willing to pay an extra $2 for your favorite six-pack of non-contracted microbrew? Maybe, but the rest of America does not enjoy craft beer as much as the Hop Heads. My answer to the question above is: not likely. Let's face it America is in a recession. In order to save money to pay for gasoline or groceries, people will substitute these purchases with cheaper beer including Poors, Crud, and Filler or stay with contracted craft brews like Sam Adams, Sierra Nevada, etc. With an economic downturn in mind, non-contracted breweries cannot afford to raise prices or else they will ultimately lose customers. This is why I believe we will see less product on the shelves.

Okay swami, so what does the future hold? Fortunately, growers, hop dealers and brewers are all looking for a solution to the problem. New acreage is currently being planted, but it takes 2 years in the US, and 3-4 years in Europe, before new hop acreage will produce yields. About 5,000 acres were planted in 2007 and potentially another 15,000 acres will be planted in 2008, but getting farmers to convert land to hop acreage can be difficult. Planting new hop acreage requires that the farmer invest in trellises and forego at least a year of producing something they can sell. In addition, a brand new hop farm would additionally require the purchase of the harvesting machines and ovens for drying hops, and these cost millions. Don't hit the panic button just yet, but you may need to savor your beers.