A BREWER S PERSPECTIVE ON HOP PURCHASING Karl Ockert Director of Brewery Operations Deschutes Brewery
Agenda Defining the hop market Some history How IPA saved the American hop business Current hop market What s going on with the beer side of the equation Hop contracting 101
USA Hops Set USA Craft Brewers Apart US hops define our beer flavor platforms Brewers come from all over the world to buy US hops US hop varieties are grown in other countries Germany changed its rules for making beer to allow for post kettle hop use We need to take care of and work with our hop industry!
The Hop Business is a Pricing volatility Bit Different Hops have almost no other use than in brewing Inventory levels are hard to track Little or no pricing discovery outside of dealer sites and Lupulin Exchange Few opportunities for excess quantities Shelf life issues
Hop Economics A new Picker/Kiln/Baler shed will process about 300 acres of hops in 30 days and costs about $3.75 Million Trellising costs about $7,000/Ac for new fields Installing 300 new acres with trellis and picking capacity costs about $5.85 Million
Hop Economics Labor costs drive production costs 2017 H2A wage was $13.78/hour Plus transportation from/to the Border Plus housing Realities: Diminished labor pool Competition from other crops (piece-work work = $18- $20/hr) Constant transitions/training
Grower Expectations Growers use $/Acre for all input/output calcs Operating margins include relatively quick payback on major capital expenditures, 3-5 years Most contracts written between 2014 and 2016 used $12,000/acre return Forced a move toward higher yielding varieties to manage the cost per pound
Hop Yields per Acre 1,000 lb/acre 1200 lb/acre 1600 lb/acre 2000 lb/acre 2000 lb+ Fuggle, Perle, Tettnanger Golding, Centennial, Willamette Chinook, Citra, Cascade Crystal, Nugget, Amarillo CTZ, Equinox, Bravo
The Hop Market from the 1980 s to 2000 s From the early 1980 s to mid 2000 s spot pricing, along with limited contracting, were the model for Craft brewer hop purchasing. Easy for brewers Shop for hops without forward commitments Competitive pricing Limited 3 year contracting But problematic for hop farmers Sometimes could not cover price of production Difficult to make investments Many farmers got out of the business
The 2007 Shortage Enter the shortage in 2007 and end of the Spot Market Warehouse fires Kiln fires Brewers discovered Risk Management The spot market dries up. All of a sudden growers and dealers demand forward contracts. Contract terms go from the 100-75-50 model to 100% volume five year shot gun marriages.
How IPA Saved the American Hop India Pale Ale was first brewed in England in the 1860 s. Strong ABV and high hop as a preservative (pre-pasteurization) Business Featured about 5 lbs/bbl in the kettle and another 3 lbs/bbl dry hop in the cask. USA Craft IPA uses from 1 to 6 lbs per bbl Hot Side and another 2-10 lbs/bbl in Dry Hops.
IPA Rediscovery 1996: BridgePort Brewery breaks trail with a mind boggling 50 IBU IPA By the late 2000 s: IPA has taken over the market and enjoys double digit growth.
Other Market Forces at Work 2009: ABI merger, very large (stabilizing) hop contracts are cancelled. 2009: Alpha Production peaks producing a Glut of KGA on the market and a Dearth of aroma varieties available. Meanwhile.IPA is gaining popularity. 2010-11: Alpha Acreage pulled or converted to Aroma By 2014: Aroma acreage is higher than alpha acreage.
2015 Hop Grower Convention Craft at 20% Market Share in 2020 25% increase in total hop demand! With aroma hops, this will require a 30% increase in acreage Add 12,000 acres within the US (39,000 in 14) At $15,000/acre = $180m What happens when 25 million pounds of additional hops are required? Trellis/Harvesting/Drying capacity = $275m Capacity to pelletize? Storage capacity?
They Did It
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Enter Long Term Contracting With the shortages in aroma varieties, planting increases so do prices. Farmers think in $/acre and Aroma varieties yield less Harvest windows tighten, need more infrastructure Growers re-invest and want long term contracts The spot market almost vanishes Brewers are forced to sign long term contracts to get hops they need now! Risk is now centered on Brewers. SPOILER ALERT! They may not need them in five years!
WHERE ARE WE NOW? Changes since 2007 Hop shortage in 2007 stimulated planting & contracting, leading to oversupply then rationalization ABI merger & cancellations destabilized farms Proprietary aroma varieties proliferate, acreage increases each year. Spot market vanishes, replaced by longer term contracting. IPA drives the hop business. Silver Lining: The Brewer-Grower Direct sale model develops!
Brewer-Grower Direct Unheard of before 2007 except for Fresh Hop Beers Benefits: Deal with the decision maker Know your producer, know your hops Eliminate some middle man costs Toll with pellet processor of choice and Risks: Smaller lot sizes Less lots to select from Lack of regional diversity Quality risks Supply interruption risks Storage issues
Current Market: USA Source: 2017 International Hop Growers Convention 57,324 acres in 2017 production USA planted 3,717 acres in 2017, 2017 crop +20% production! Could be another 1,000 to 1,500 acres 2018 Some tight Aroma varieties but mostly Alpha varieties Some conversions in 2018 Aroma to Alpha Acreage over next 2 years 80/20 Aroma to Alpha going to 75/25
Germany Source: 2017 International Hop Growers Convention 45,165 acres in 2017 production 1,872 acres planted in 2017 (about 50% Herkules and Polaris) Bad weather took toll on Alpha yield which is triggering a global Alpha shortage Germany will be planting more, estimates are 1,250 acres added, focusing on High Alpha (Herkules) in 2018 Keep an eye on the weather
BUT WHAT IS HAPPENING IN Craft is softening. THE BEER BIZ? Many larger Craft brewers were down double digits in 2016 and were down again in 2017. IPA, our growth engine, is slowing down.
SEGMENT OVERVIEW 0.6% 0.4% 3.8% 3.7% 2.5% 1.5% 1.6% $ Sales $ Chg vs YA YTD (48wks) 26wks 13wks 8.2% 7.1% 6.9% 10.5% 11.0% 11.0% 7.3% 6.6% 6.3% -0.2% 0.0% -1.3% -1.4% -2.0% TOTAL BEER CRAFT* FMB* BELOW PREMIUM COOLERS -3.9% -4.8%-5.0% DOMESTIC DOMESTIC PREMIUM SUPER PREMIUM IMPORT Source: Nielsen Total US xaoc + Conv - YTD 12/2/2017 Strong trends in Modelo 12pks, 18pk & 24pk help Imports Craft s trends continue to creep lower in the single digits
STYLE OVERVIEW PALE ALE 8% LAGER 8% ALL OTHER 14% IPA 31% VARIETY PACK 9% WHEAT ALE 13% SEASONAL 17% Source: Nielsen Total US xaoc + Total US Conv YTD 12/2/2017
TOP STYLE OVERVIEW Dollar Volume % Chg 27.5% 15.3% 3.8% 1.7% 1.4% CRAFT INDIA PALE ALE -4.6% SEASONAL WHEAT ALE -3.5% -5.4% -8.2% ASSORTED LAGER PALE ALE OTHER ALE RED ALE Source: Nielsen Total US xaoc + Total US Conv YTD 12/2/2017 Other Ale is being driven by Firestone 805
PORTLAND, OREGON STYLE REVIEW Dollar Volume % Chg 12.9% 14.6% 1.1% 1.1% -0.1% -1.4% -2.5% -6.0% Source: Nielsen Portland YTD 12/2/2017 CRAFT INDIA PALE ALE -18.2% SEASONAL WHEAT ALE ASSORTED PALE ALE LAGER RED ALE OTHER ALE Portland style trends are significantly different that Total US style trends IPA is still significant, representing 37% of all craft dollars (31% nationally)
13 W/E 03/01/14 13 W/E 03/29/14 13 W/E 04/26/14 13 W/E 05/24/14 13 W/E 06/21/14 13 W/E 07/19/14 13 W/E 08/16/14 13 W/E 09/13/14 13 W/E 10/11/14 13 W/E 11/08/14 13 W/E 12/06/14 13 W/E 01/03/15 13 W/E 01/31/15 13 W/E 02/28/15 13 W/E 03/28/15 13 W/E 04/25/15 13 W/E 05/23/15 13 W/E 06/20/15 13 W/E 07/18/15 13 W/E 08/15/15 13 W/E 09/12/15 13 W/E 10/10/15 13 W/E 11/07/15 13 W/E 12/05/15 13 W/E 01/02/16 13 W/E 01/30/16 13 W/E 02/27/16 13 W/E 03/26/16 13 W/E 04/23/16 13 W/E 05/21/16 13 W/E 06/18/16 13 W/E 07/16/16 13 W/E 08/13/16 13 W/E 09/10/16 13 W/E 10/08/16 13 W/E 11/05/16 13 W/E 12/03/16 13 W/E 12/31/16 13 W/E 01/28/17 13 W/E 02/25/17 13 W/E 03/25/17 13 W/E 04/22/17 13 W/E 05/20/17 13 W/E 06/17/17 13 W/E 07/15/17 13 W/E 08/12/17 13 W/E 09/09/17 13 W/E 10/07/17 13 W/E 11/04/17 13 W/E 12/02/17 CRAFT OVERVIEW Rolling 13 weeks - $ Volume % Chg vs YA 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Source: Nielsen Total US xaoc + Conv - YTD 12/2/2017 Experiencing the softest trends in Craft Beer history.
Why the decline?
1. General uneasiness related to politics & worldwide conflict 2. Trend toward spirits 3. Disruptive Weather
4. Marijuana legalization 5. Number of breweries in the market- Too much Choice? 6. distributors loss of focus 7. Acquisition by large brewers with big $$
8. Shelf sets guided by large brewers 9. Craft price increases
WHAT IS THE IMPACT ON HOPS? Brewers are holding expensive contract commitments for hops they do not need. Dealers are full. The spot market has reappeared as brewers try to sell their inventories. Spot pricing is very low Over planted Aroma varieties will be converted to Alpha, or pulled
The Barns are Full March 1, 2017 USDA Hop Stock report: Brewers 25% of Hops (Avg 37%) Dealers/Growers 75% (Avg 63%) September 1, 2017 USDA Hop Stock report: Brewers 35% of Hops (Avg 43%) Dealers/Growers 65% (Avg 56%)
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Be Proactive, Be Smart Work with your Suppliers, we are all in this together
Why Contract? Provides vital information to Dealers/Growers to determine future requirements. Growers are quick to follow the money! Other crops (blueberries, hazelnuts, etc- less labor cost) Alpha market Replace poor yielding varieties with improved $/acre Dealers are focused on risks Pay up front for all hops (November and March) Will quickly scale back on commitments Pursue export opportunities Focus on Proprietary varieties
Hop Contracting 101: Forecasting Your sales forecast will be the basis of your hop contracting plans Forecasts are always wrong! Update the forecast regularly and realistically Monitor industry wide trends using available resources, ie BA, AC Nielsen, BI, etc
HOP CONTRACTING 101: Calculating Need Convert your recipe hop needs to lbs of AA for bittering and lbs of hops for late/dry hopping. Determine the hop needs per variety per recipe and compile variety and format (pellet, cone, extract) requirements. Adjust with a contingency factor, consider that hops will take time to be pelleted Consider that import hops will not arrive until the Jan. or Feb. after harvest. This is your Hop Need for the brewing year (approximately the calendar year proceeding harvest).
Basic specifications Hop Contracting 101: Quality Parameters USDA Bale marking codes with farm and lot numbers % allowable Leaf and Stem Aroma quality, condition and contaminants USDA allowable chemicals used in accordance to label % AA,H.S.I, Pounds of hops per lot Bale and Storage requirements % allowable moisture, target gross weight, density Pelleting specifications Die size and process temperature range Pellet density, Pellet % AA, Carton Labeling requirements
Hop Contracting 101: Price and Terms Utilize a few different suppliers (but not too many) perhaps a combination of farmers and dealers. Try to rationalize the number of varieties used. Send out RFP letters to the suppliers, include your quality specifications and terms. Allow for course corrections: Contract ahead for 100% the upcoming harvest, 75% the next year and 50% the year after. Top up at each approaching harvest. Tally up the $ commitments for each year and keep an eye on your COGS, Gross Margin and Cash Flow.
Big Mountain Hops, LLC We can help you with long or short hop positions! Contact: Rob Wittershein Rwittershein@deschutesbrewer y.com 541-385-8606
Thanks for your attention! kockert@deschutesbrewery.com