Forward Hop Contracts
One of the things that people outside of the beer industry often overlook is the ingredient supply chain. Procuring raw ingredients to produce beer isn’t a sexy part of the business, but it’s obviously necessary and important for the continued operation of a brewery. Forethought and planning is required for every ingredient that ends up in a beer, but hops demand the bulk of the attention.
Hops are the female flowers of the Humulus lupulus plant. While traditionally used mostly as a bittering agent and a preservative, hops have more recently been utilized for their aroma qualities. You can thank hops for all of those great citrus or pine aromas you’re getting from that IPA in your hand! As an agricultural product, hops are subject to the whims of Mother Nature. Harvests have been stable in recent years, but there is always the chance that a shortage could occur. One such event occurred in 2008 and it caused major issues for craft beer production in the US.
As a result of the unpredictability of harvests and the ever-changing tastes of consumers, forecasting both the availability of certain hop varieties and the level of consumer interest is an extremely challenging exercise. Due to the high level of demand for hops, though, breweries routinely forecast their needs and enter into forward contracts for as many as five to seven years. An additional benefit of forward contracting is that hop farmers receive valuable signals about the direction of the market and adjust their acreage accordingly.
We are no different here at The Virginia Beer Company. Many startup breweries have a tough time purchasing certain high-demand varieties through the spot market. We didn’t want to be caught in that position after years of testing recipes, so we entered into our first hop contracts for the 2014 harvest. We recently completed all of our contracting through the 2017 harvest! As I mentioned, forecasting our actual needs is challenging. Increasing production more quickly than anticipated and running out of hops would be a good problem to have, but it would still be a problem. If we’ve done our research and planning correctly (and nature cooperates…) we will be able to brew our recipes through 2018 without worrying about shortages!
Here are the key stats related to our hop contracts:
- 4: Hop wholesalers with whom we have contracted.
- 5: Countries where our hops will be grown (England, Australia, Germany, New Zealand, & the U.S.)
- 6.35: The lowest priced variety of hops per pound, in dollars (2014 U.S. Columbus).
- 11.66: The average price of all contracted hops per pound, in dollars.
- 16: Unique varieties of hops that we will be purchasing.
- 20.30: The highest priced variety of hops per pound, in dollars (2016 U.S. Sorachi Ace).