As More Brewers Buy on Spot, Brewers Association Suggests Contracting for Hops

A growing number of U.S. craft breweries are not locking in long-term hops contracts and that leaves those companies vulnerable as supply tightens, according to industry trade group the Brewers Association (BA), which surveyed 250 members to gain insight into how beer makers are managing one of the industry’s most important raw materials.

Speaking during today’s Power Hour webinar, BA supply chain specialist Chris Swersey said U.S. craft brewery owners need to lock in hop contracts or they risk missing out on accessing popular varieties.

Over the last two years, the number of breweries contracting for hops has declined significantly, according to the BA’s annual “Hop Survey.” In fact, just 63 percent of BA-defined craft breweries contracted for hops in 2018, down from 89 percent in 2017 and 96.6 percent in 2014.

Many of those companies make fewer than 2,500 barrels a year, the organization said, and have enjoyed somewhat easier access to a variety of hops at a time when supply outpaced demand. In 2018, just 45 percent of companies making fewer than 2,500 barrels per year contracted for hops, down from 71 percent in 2017 and 89 percent in 2016.

“This is a huge alarm bell for me and our industry,” Swersey said. “We really need to turn that around.”

According to Swersey, 75 percent of the craft breweries in operation today weren’t around during the 2007 and 2008 hop shortages. He said the BA has a duty to educate those breweries on the need to contract and how to do it “responsibly and accurately.”

In recent years, newer companies had less of an incentive to contract for hops because the marketplace was oversupplied, and many varieties could be purchased on the spot market, Swersey said.

“The market is tightening now and those days are coming to an end,” he said.

Over the last two years, the excess inventory of hops has been reduced due to “slow planting and growing exports,” Swersey said.

“All in all, that’s a good thing for the health of our industry,” he added.

As U.S. hop production remains “static” over the next two years and craft volume growth hovers in the low single-digits, Swersey said those trends should be “a huge warning sign” for the thousands of breweries not currently contracting for hops.

“Hops are about to become increasingly scarce and the size of our inventories is once again about to be right-sized relative to demand,” he said.

Nevertheless, a record 57,468 acres of hops were planted last year, according to Swersey. The number of acres dedicated to hop-growing in the Pacific Northwest (Washington, Oregon and Idaho) increased nearly 2 percent, to 1,046 acres, while acreages outside of the region declined 1.7 percent, which he attributed to declines in Michigan.

Total hop production in the U.S. increased about 1 percent, to 108.4 million pounds, while production outside of the Pacific Northwest declined about 20 percent.

“There are some tough times for growers outside of the sort of three legacy growing states,” he said.

Nonetheless, Pacific Northwest yields decreased about 1 percent, due to unfavorable weather, Swersey added.

The number of hop varieties used by U.S. craft breweries also continued to rise, as companies used 154 varieties in 2018.

“This just speaks to a huge palette, a hugely diverse range of flavors and aromas that are available for brewers to experiment with and for drinkers to enjoy,” he said. “This has been a large driver of craft beer volume growth.”

U.S. hop varieties accounted for about 85 percent of the total pounds of hops purchased, showing that craft breweries are loyal to U.S. varieties, Swersey said.

Cascade and Centennial hops remained the most popular varieties in 2017, however, Citra supplanted Chinook as the third most-used variety.

“I think there’s a really good chance we’re going to see Citra replace Centennial as the No. 2 variety in another year or two,” Swersey said, pointing to an increase in Citra acreages.

Meanwhile, about 10 percent of the survey’s respondents said they had trouble acquiring Galaxy hops from Australia, while 7 percent struggled to secure Nelson Sauvin hops from New Zealand.

“The shortfalls in general are very small,” Swersey said. “This speaks to a market that is very well-matched all in all between the supply of individual varieties and what brewers want.”