World: Estimates of the low hop supply due to a poor 2006 crop

After this years’ harvest, the situation of the world hop market must be taken very seriously, said Stephan Barth – President of the German Hopunion e.V. at the Press Conference Brau Breviale 2006 in Nuremberg on November 16th, 2006.

He commented: “Serious estimates of the low supply due to a poor 2006 crop; calculate between 700 - 1,300 tons alpha acid or approximately 8.6% - 15.5% of the annual demand. Should this “worst case” scenario prove itself to be completely accurate, the low yield of the hop market would not just limit itself to crop year 2006, but would also establish a worldwide structural under supply in general.

The supply situation of the international brewing industry was considered tight by hop distributors even before the harvest began. It was also published in several industry-related papers. The market for high alpha and bitter hops was viewed very critical, while the market for aroma hops was considered balanced at best.

Central Europe’s very hot summer in June and July however, had a devastating effect particularly on the usually early harvested varieties and a very rainy August lead to very poor crop results. In no other hop-growing area did the harvest results meet earlier estimates. Several factors are responsible:

-Reduced stocks at many international brewers,
-Increased imports of hop products by Chinese hop groups
-Continuous reduction of growing area worldwide by 9,400 hector (= 16% less area) within the past 5 years because of depressed prices.
-Increased shifting of buyers away from forward contracting towards volatile spot markets in order to take advantage of short term price advantages.
-A warehouse fire in the US (a loss of 130 tons of alpha)
-An increase of beer output worldwide during the last 5 years at a volume of 222 mio hl (= 15.6% growth)
-Strong growth in the area of hop products used outside the brewing industry at a quantity of approximately 150 tons of alpha.

These factors created a market that nobody had foreseen in its intensity. Many breweries are now in a very vulnerable position where the combination of size and demand affect them negatively. The current development of the market shows that the demand of the brewing industry is far greater than assumed. Within this tense supply situation, the role of the hop merchant as a middleman between producer and brewing industry has again proven itself to be indispensable. Only by keeping an open and honest dialog between dealer and the brewing industry and by supporting transparency of figures, the problems totally can be reasonably overcome. In the future, it might be an incentive to have a more open discussion regarding the supply situations.

A significant contribution to this critical situation could also have been the second international wave of consolidation of the brewing industry (transatlantic consolidation). For many of the world’s 10 largest breweries (who produce 58% of all beers), the focus was aimed towards the integration of the newly acquired businesses, and cost reductions. Far too little attention seems to have been given to assuring raw material supplies. The long-lasting oversupply situation was simply taken for granted without watching the hop market carefully. Restructuring within the brewing companies was often accompanied by a change in the buying strategies in the area of hops. Often, the focus of a well balanced raw material supply lost importance.

The future task of hop merchants and the brewing industry will be to find a stable balance together as partners, to ensure a sensible, reasonable and long-term economical balance for growers and merchants, allowing them a financially healthy basis. Short-term, super-low prices for the raw material hops are not useful for all involved nor are exorbitantly high prices.

All participants in this market should also keep in mind the changing climatic conditions. Neither the producer, nor the worldwide hop dealers or the brewing industry can permanently live with this risk of unpredictable spot markets, considering this very real danger of climatic changes.

This was a little peek into a possible future. The actual market situation requires stable and reliable supplies for the brewing industry with hops from crop 2006. Therefore, the merchants would like to demonstrate and prove their ability amidst all adversity given the present situation of the market.”

01 December, 2006