A Bitter Bankruptcy in Yakima: Are Brewers to Blame?

Beer makers aren’t the only ones feeling the effects of a craft beer slowdown. Yakima, Washington-based hop broker 47 Hops LLC has filed for Chapter 11 bankruptcy protection, the company said last week.

In a blog post published to the company’s website, president Douglas MacKinnon said 47 Hops — which purchases hops from growers and resells them to brewers — would continue to operate while restructuring to “become more nimble and responsive to the market.” He also assured brewery owners that the hop supply for companies contracting with 47 Hops is “secure.”’

Calls placed to 47 Hops and its attorneys were not returned as of press time.

According to documents filed on August 11 with the U.S. Bankruptcy Court of Eastern Washington, 47 Hops reported liabilities of more than $7.4 million with the total amount of unsecured claims exceeding $2.9 million. The company also reported assets of more than $4.3 million.

At the heart of the issue is the need for brewers and suppliers to strike a harmonious balance — through forecasting and contracting — so that both hop shortages and hop surpluses are avoided. If growers dedicate too few acres to a specific type of hop, brewers run the risk of not being able to provide a consistent product to consumers. Conversely, if growers plant too many hops, and growth slows, suppliers are stuck with an oversupply.

It’s a situation that MacKinnon had attempted to address in multiple blog posts this year.

In his most recent entry, MacKinnon speculated that “brewers, fueled by optimism, contracted for more hops than they now need,” while blaming declining demand for his hop supply on slowing craft sales.

He laid it out like this:

In an effort to meet demand that was forecasted by hundreds of U.S. craft brewers, 47 Hops negotiated purchase agreements with various growers. Those purchase agreements would have covered brewers’ contracts, many of which were written with growth in mind. But “late brewer payments” indicate (to MacKinnon) that “a good portion of those hops are simply not necessary in today’s market,” he wrote.

47 Hops attempted to renegotiate contracts with growers, MacKinnon said, but some were unwilling or unable to do so “to the extent necessary to match the declining needs of the market.”

To make matters worse, several 47 Hops’ brewery clients delayed payment and delivery of their hops during the last year, MacKinnon wrote.

“Payments for some contracted hops are one year behind schedule,” MacKinnon wrote. “Some brewers have stopped responding to calls and emails altogether.”

According to the bankruptcy filing, 47 Hops is currently storing more than $4.7 million in prepaid inventory for customers and more than $363,000 for third parties.

The surplus of purchased aroma hops, the accumulation of debt and the uncertainty of when his brewery clients would pay became “unsustainable without drastic action,” MacKinnon wrote.

“We decided, therefore, to proactively deal with the problem rather than wait until the situation caused irreparable harm to the company and left us with no options,” he wrote.

Bankruptcy documents indicate that 47 Hops’ unsecured creditors included, among others: Yakima-based Columbia State Bank, which is owed $2.3 million; Moxee, Wash.-based Roy Farms, which is owed more $600,700; and San Diego-headquartered Stone Brewing Co., which is due $52,360.

A review of the documents showed that 47 Hops had contracts with at least 200 breweries of varying sizes, among them Coronado Brewing, Deschutes, Funky Buddha, Lord Hobo, Melvin Brewing, Modern Times, Revolver and Uinta.

“We want to work together with our brewery customers to find a solution that works for everybody,” MacKinnon wrote in last week’s post. “We believe we can bring currently contracted volumes in line with actual brewery demand.”

47 Hops also reported making sizeable payments to hop suppliers prior to the filing, including more than $981,000 to Wyckoff Farms, more than $202,000 to CLS Farms, more than $210,000 to Cornerstone Ranches and more than $180,000 to Obendorf Hop.

Also of note, court documents revealed that 47 Hops has two pending breach of contract lawsuits against Figueroa Mountain Brewing and Hops Canada.

In the filing, 47 Hops reported year-to-date gross revenue in excess of $5.6 million, and gross revenues of more than $10.6 million in 2016 (up from more than $7.1 million in 2015).

The business is a 50-50 partnership between MacKinnon and his wife, Anastasia. According to the filing, Douglas MacKinnon’s salary was $250,000, and Anastasia’s salary was $175,000.

In several blog entries posted to the 47 Hops website earlier this year, MacKinnon hinted at possible trouble ahead, expressing concern with growing hop inventories, rising hop prices and slowing growth within the craft beer segment.

In a March post titled “The Crisis That Can Destroy the Hop Industry,” MacKinnon, citing a USDA Hop Stock Report, noted a shift from brewers holding inventory to growers and merchants, who he claims now “hold 200 percent more inventory than brewers.”

“The total inventory held by growers and merchants today represents $600 million dollars,” he wrote. “That represents a 722% increase in the value of stocks growers and merchants finance over the past 10 years alone.”

MacKinnon added that many craft brewers were requiring an additional year before issuing payment, despite prices not covering holding the stocks.

“The current risk/reward ratio is not high enough for the hop industry to also act as banker,” he wrote, noting that the USDA estimated the hop industry to be worth about $500 million while the Brewers Association estimated the craft beer industry to be worth more than $22 billion.

“The natural question that arises in my mind is … why is the industry worth $500 million financing the industry that generates over 40 times more revenue?” he asked. “Something has to change or this will come to a bad end.”

One month later, in a “State of the Hop Industry” post, MacKinnon wrote that craft brewers’ failed goal of attaining 20 percent market share of the U.S. beer market by 2020 resulted in a “fully contracted oversupply” of hops.

“Despite the slowdown, growers still expect to be paid on time,” he wrote at the time. “Many brewers do not take this into consideration, or simply don’t care.”

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