WSU School of Economic Sciences Hop Grower Tool
The tool includes a complete report detailing the underlying economic assumptions, an abbreviated summary report for growers, and working spreadsheets that growers can use to input production cost factors and yield data to determine their cost of production.
The Brewers Association Supply Chain Subcommittee believes that a healthy hop market is characterized by:
- Surety of hop supply
- A wide variety of hop varieties, especially aroma varieties
- Fair and sustainable hop prices
Just as brewers won’t produce beer they can’t sell, hop growers won’t invest and produce hops they can’t sell. Past turmoil in the hop market has created a climate of uncertainty for hop growers.
A 2010 Washington State University (WSU) study indicated that “the economic climate for Washington hop producers is in chaos.” Based on this assessment, the WSU School of Economic Sciences created a tool to allow growers to make sound business decisions about which varieties, and whether or not, to plant.
Situation 2 Spreadsheet
Note that Situation 2 Spreadsheet is most illustrative, as it assumes that a hop grower provides the sweat equity investment that most small business owners make, and therefore does not have to capitalize the entire production cost.
The cost of hop production is related to the yield in pounds per acre. Estimated yields can be inserted into the spreadsheet in cell H56 and O56 to see how different varieties pencil out. Typical yield estimates shown below are the middle of the range found in published hop variety information.
Average annual yield by variety can be found on USDA’s annual national hop report, or via the Hop Growers of America Statistical Packet. Production cost figures shown below are the financial cost results in cell O58, rather than the “economic” cost results found in cell H58.
Popular Aroma Varieties
Also includes a few high yielding super alpha varieties
These results are based on certain underlying assumptions detailed in the production cost report that factor into these calculations, and therefore may not reflect the actual production cost of any one variety by any one grower. The Brewers Association cannot vouch for the validity of any of these assumptions.Even so, the results illustrate certain key points:
- Lower yielding hop varieties are more expensive to produce
- The popular aroma variety Citra for example will come at a premium to other varieties, since its yield is relatively lower. This also serves to illustrate the agronomic reality that in poorer crop years with lower yield, the cost per pound will increase.
- Higher yielding hop varieties are less expensive to produce.
- Simcoe for example, may cost relatively less to produce than many varieties, since its yield is relatively higher.
- Bringing acreage into production without a buyer represents significantly more expensive production.
- The one year cost of production of new acreage (that is, acreage that is planted speculatively without a contract) comes at a premium relative to acreage that is planted under contract. When the spot market price for a given variety is below the one-year production cost, a grower can’t recoup his costs, and therefore won’t plant additional uncontracted acreage. Taken to an extreme, when the spot market price for a given variety is significantly below the cost of production, a grower simply won’t produce that variety, or may even remove acreage that is already under production.
- Even very short contracts remove substantial risk and expense from hop production.
- The two year cost of production is much closer to the five-year cost than to the one year cost. A relatively short contract of two years removes significant exposure to higher production costs to the grower.
In this sense, the spot market for hops represents different risks for both growers and brewers. When the spot market price is above contract production price, brewers without contracts risk the unavailability of their preferred varieties to brewers that have contracts in place. The hop market in late 2007 and through 2008 was characterized this way.When the spot market price is below the contract production price, growers risk selling into a market for hops that may not exist. During periods of very low spot market prices, the huge spread between the spot market price (well below the contract price) and the one-year cost of production (well above the contract price) represents an enormous disincentive to produce hops or to plant new acreage, and a huge incentive to remove acreage from production. The hop market through 2009 and into 2010 is characterized this way.When spot market prices are very low, brewers with hop contracts at higher input costs operate relatively less competitively relative to those who operate without hop contracts. Brewers with contracts in place have assigned a value to the premium cost for surety of supply, but that premium can be overwhelmed if the spread between the spot market and their contract price becomes too great. In essence, brewers with contracts subsidize the spot market for brewers without contracts.Protracted periods of low spot market prices relative to contract prices are therefore unsustainable for growers and brewers. A balanced, sustainable hop market is vitally important to both growers and brewers. The hop market is cyclical, and characterized by periods of volatility. The market should be less volatile, and characterized by greater surety of supply, when an increased proportion of total hop production takes place under contract. The market should be more volatile, and characterized by lower surety of supply, when less hop production occurs under contract.
|Hop Variety||Yield (lb/acre)||5 Yr Cost of Production ($/lb)||2 Yr Cost of Production ($/lb)||1 Yr Cost of Production ($/lb)|
|US Northern Brewer||1200||5.50||5.86||6.56|