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Forward Contracting Hops

When breweries contract their hops usage at least three years in advance, it lets hops growers better project the varieties to grow and whether to expand the farms, helps prevent shortages or overages, and creates more stability in the hops market.

Stan Hieronymus April 18, 2017

Forward Contracting Hops Primary Image

Among the many things Sierra Nevada Brewing Co. got around to before 5,000 other American breweries was learning about hops contracts. Founders Ken Grossman and Paul Camusi discovered from the beginning that the hops market can be volatile. They ran into their first hops shortage in 1980, the year they started the brewery. “While planning the beers we were going to produce for the year, we projected that we would need to purchase about ten 200-pound bales of whole-cone hops to cover our needs,” Grossman writes in Beyond the Pale: The Story of Sierra Nevada Brewing Co. When they placed their order, they learned there were varieties they might not be able to get and that the prices had gone up dramatically from the previous year.

Prices surged from $2 to $3 per pound on the spot market to more than $14 for some varieties. Sierra Nevada found the hops the brewery needed, most notably Cascade, but at almost three times more than Grossman had budgeted. “Because there is no realistic substitute for hops, you either change your recipe or you pay up,” he writes. “We learned our lesson and started contracting the following year.”

Giving the Industry Direction

In 1985, Steve Dresler was in his third year at Sierra Nevada when he traveled to Washington’s Yakima Valley with Grossman to select hops from the current harvest to use in 1986. “We go up there to buy, and we hear one of the major breweries—I don’t remember which one—had pulled out of Cascade. Everybody told us [Cascade] could go away. That’s when we began contracting three years forward,” says Dresler, who recently retired as head brewer.

Those contracts not only assured the price Sierra Nevada would be paying for Cascade in the following years, but they also signaled interest in the variety to farmers. Cascade production shrank 80 percent between 1981 and 1988 before it stabilized and began to rise again. Today, it is the best-selling American-grown hops used for aroma purposes.

“I can’t stress enough the importance of contracts. It gives the industry direction,” says Alex Barth, president of hops merchant John I. Haas. Barth’s family has been in the hops business since 1794. “There needs to be clarity in the supply chain,” adds Ryan Hopkins, national sales director at YCH HOPS, emphasizing the importance of writing contracts based on realistic predictions. “[Otherwise], that creates false demand.”

Chris German, Midwest sales director at Brewers Supply Group, put it another way last fall during a presentation to Iowa craft brewers, few of whom were in business during the last hops boom-and-bust cycle. “Contracting is a form of communication,” he says.

He explained the roles of each of the participants. “Dealers need reliable forecasting. Brewers need a reliable supply of hops, good storage, and reasonable prices,” he says. “Growers need reliable projections and expect prompt payment.” BSG pays farmers when they deliver harvested hops. What are officially known as “forward hops contracts” obligate brewers to start paying for processed hops when they receive them and to complete payments about the time a new harvest begins.

Historical Perspective

Farmers in Massachusetts first wrote contracts almost 200 years ago. At the time, Middlesex County was a hops-growing hub, shipping most of its crop to France and Germany. Violent price fluctuations were common. For instance, the market hit a high of 34 cents per pound in 1817. By 1819, the price collapsed to 5 cents per pound. The following year growers began to make advance contracts, covering several years, with buyers who guaranteed they would take the production from a specified number of acres at a fixed price.

Nonetheless, the hops market remained volatile and cyclical, in part because hops serve almost no other commercial purpose outside of brewing. “The U.S. hops industry has been marked by long periods of oversupply and low prices interrupted by brief periods of hops shortages and high prices,” Patrick Smith, vice president of Loftus Farms, explained during a presentation at the 2016 Craft Brewers Conference. One of those price troughs lasted from 1985 until 2007. As a result, American hops acreage shrank nearly 40 percent in the 8 years before the brief hops shortage of 2007 and 2008 that resulted in the first real spike in prices most small breweries had ever experienced.

Structural Change

That shortage was induced by a demand for alpha acids from breweries around the world that use them primarily in extract form purchased by the kilogram. The price for uncontracted hops, which had been between $1.95 and $2.80 per kilogram alpha in 2005, blew up to $198 to $220 per kilogram alpha by the end of the 2007 harvest. A pound of Cascade soared from $1.65 in 2005 to as high as $30 after the 2007 harvest. Breweries and dealers quickly wrote contracts to assure a stable future supply, and growers planted almost 10,000 additional acres in 2008, raising the total in the Northwest to 40,898 acres. Within 3 years, prices dipped and acreage tumbled to 29,787 in 2011.

What has occurred since suggests a structural change. Until quite recently, hops acreage around the world had been declining for more than a century. In 1911, farmers strung hops on more than 240,000 acres, and brewers used those hops to make 273 million hectoliters of beer. Growers plant little more than half as many acres today, but brewers produce seven times more beer. In addition, acreage for aroma hops shrank 49 percent between 1991 and 2011. United States aroma acreage hit a 25-year low in 2010 before demand from craft brewers reversed the trend. American aroma acreage tripled in the next five years.

Adding more than 10,000 acres of aroma varieties was relatively easy because much of the infrastructure was in place following the alpha build-out in 2008. If the recent demand for aroma—driven by hops-forward beers—is the structural change it appears to be, then 10,000 or more acres, and the accompanying infrastructure, will also be needed. They will be more expensive. A recent study at Washington State University determined that it costs more than $23 million to commission a 600-acre hops farm. “The growth of the U.S. craft-beer industry has stretched the production capacity of the U.S. hops industry to an extent we have never seen before,” Smith says.

An Important Tool

Planning was much easier when there were fewer, and mostly larger, breweries buying hops. They’d say they needed 20 million pounds, dealers would go out to growers and write contracts for 20 million pounds with fourteen growers,” says Eric Demarais, who operates CLS farms near Yakima. “Now with craft, you’ve got 4,000 small incremental buyers.”

Since 2008, the Brewers Association has collected information from members about hops usage and future plans. Although only 75 of the 5,000-plus breweries in the country took part in the 2016 survey, the results clearly represent ongoing trends. “The best information we get is from the BA,” Smith says. And the BA has sent members a clear message about the importance of contracts. It is one everybody considers worth repeating. Contracts “are an incredibly important tool for hops growers, so they understand demand. They aren’t going to grow based on speculation,” Hopkins says.

There is more to writing contracts than putting in an order for the most popular new hops varieties. The process begins with taking inventory of hops on hand and committed to, then continues with realistic projections about hops needs in the current year and predictions for the years that follow. Almost every dealer will advocate customers use some variation of forward contracting that includes stair-stepping down, or layering. Basically, brewers contract for lower quantities in more distant years but top up each year, so that by the time a crop is harvested, they will be fully covered for the next year.

Gerard Lemmens introduced this approach to American brewers in 1994 when he went to work at Yakima Chief Hops, which has since merged with Hop Union to create YCH HOPS. He learned the basics as a partner at Morris Hanbury Hop Merchants in England while working with Scottish & Newcastle Breweries, at the time the second largest brewery in the United Kingdom. “Their accountants had worked out the contract prices against the world-market hops prices,” Lemmens, who is retired and living again in England, explained via email. S&N contracted hops 10 years forward, topping up 5−10 percent each year.

Initially, many brewers were hesitant to contract forward because they could almost always find the varieties they wanted and often at prices less than they would have contracted for. “If forward contracting puts you in the position of slightly overstocking yourself, then a good hops merchant will have a solution,” Lemmens wrote. “Mind you, it is also up to the brewer to get [the] administration, and hence, [the] forward-contracting situation, right.”

A stroll up and down the aisles at BrewExpo America reveals brewers have plenty of choices when it comes to picking a dealer. In fact, many brewers will choose more than one. Each will offer slightly different terms and approaches to contracting, but they will be much like those from YCH HOPS or BSG. (YCH contracts directly with breweries above certain barrelage levels—5,000 in the East, 1,000 in the Pacific Northwest, and 2,500 elsewhere—and has an agreement with Country Malt Group to handle contracts with breweries below those levels.)

A Hypothetical Example

Although contracts several years out are becoming more common, newcomers should be more cautious. Suppose that Hypothetical Brewery, either one in planning or a relatively new startup, plans to sell 1,000 barrels in 2018, 2,000 in 2019, and 3,500 in 2020. Those numbers might appear modest, but 3,500 barrels is more than 90 percent of the breweries in the country sold in 2016.

Hypothetical Brewery would start with hops from the 2017 harvest to use in 2018, contracting for 90−100 percent of projected needs, with separate contracts for each variety. Hypothetical would contract for 75−80 percent of expected 2019 needs (2018 harvest year), 50−75 percent of 2020 needs (2019 harvest), and perhaps 25 percent of 2021 needs (2020 harvest). In 2018, Hypothetical would move each of those contracts forward, writing a second one for 2019 that fills out its needs to 90−100 percent, a 2020 contract that fills 75−80 percent of its needs, and so on, including adding contracts for more distant years.

That’s about as simple as it gets because projections about overall production and specific brands are likely to change, as are recipes. Writing contracts does not need to be a once-a-year habit. “You should check in often,” says Brewers Supply Group’s Chris German. “As the world becomes clearer, write more contracts. You might have five contracts (for a single variety in a single year) with the same dealer at five different prices.”

Call it a patient approach, although German finds that brewers are not always patient and may “contract for ‘my best hopes and dreams.’ ” When they get a chance to assure delivery of varieties that have been in short supply, they may step up their orders instead of step down and don’t necessarily consider the consequences. “They need to understand their ability to take and use these hops and whether they can afford to pay for them,” he says.

There are signs some breweries have contracted for larger quantities than they can use. “I think there is a lot of evidence out there,” Hopkins says. “We see a large increase in sub-selling.” More brewers are advertising hops for sale or trade in the Brewers Association’s Forum, at Pro Brewer, and at Lupulin Exchange. These platforms help the market maintain a level of equilibrium it might not have had in the past, but they are not a substitute for realistic forecasting and contracting. “If the hops industry is going to keep up with the craft-beer industry,” Smith told brewers at CBC, “we don’t have a choice but to work together.”

A Tale of Two Contracts

The first time he brewed Art of Neurosis, 2nd Shift Brewing’s Steve Crider had enough Simcoe, Cascade, Centennial, and Columbus hops to make two batches of the IPA. When he called to order more hops for 2nd Shift Brewing, the voice on the other end the conversation asked, “Do you have a contract?” He didn’t know what that meant, except that he wasn’t going to be able to get the same hops. Instead, he ordered Citra and Amarillo, and El Gato Grande IPA was born. When those varieties were in short supply, he used other varieties and wrote more recipes. “That’s why I have so many IPAs,” he says.

Crider started selling 2nd Shift beer in 2010, the same year David Stein and his partners began making plans to open Creature Comforts Brewing in Athens, Georgia. Stein was brewing at Twain’s Billiards and Brewpub in Decatur, and although he was not contracting for hops, he understood how hard it was to guarantee larger quantities of high-demand varieties. In 2011, Creature Comforts wrote contracts for the 2013 and 2014 crop years, although it wouldn’t open until 2014.

The breweries are on very different tracks. Crider brewed about 1,000 barrels in 2016 before moving his brewery from 60 miles west of St. Louis into the city. He’d be delighted if production grows to 2,000 barrels this year. Creature Comforts sold almost 10,000 barrels in 2015, its first full year of production. The brewery was running at full capacity, producing more than 2,000 barrels a month at the end of 2016, going through 1,000 pounds of Citra alone. Things will get even busier when a new brewhouse is installed by midyear.

Contracting works equally well for both breweries, although the spreadsheets Crider pulls up on his notebook computer look much simpler. In 2010, he signed contracts that ran through 2017, and he quickly learned they were just as necessary with harder-to-grow varieties—for instance Golding—that don’t end up in IPAs as they are for the hard-to-get ones.

Creature Comforts has contracts with seven suppliers. “We’ve learned we are happier with certain varieties from different suppliers,” Stein says. “Some of it is pricing, but quality is number one. It’s difficult to know what you are getting without the experience.”

Thousands of new brewers have not experienced what Sierra Nevada Brewing or even 2nd Shift Brewing and Creature Comforts have. “It seemed like [contracting] was something I needed to do a couple of years ahead,” Stein says. “It is also a risk. It takes a lot of cojones to commit yourself to a large amount of hops.”

The same is true for both growers and brewers. “It’s a little bit of a Wild West situation for everybody,” Stein says, talking about the shifting popularity of both beer styles and particular hops varieties. “I definitely feel for the farmers.”

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PHOTO: MATT GRAVES

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