The marketing season for crop 2002 was characterized by a definitive oversupply of hops.

In Germany spot hop pools were established, and nearly all spot hops were committed to them. Once the pools were full, the pressure to sell the hops was on, and prices declined throughout the fall. As prices came down, brewer demand began to rise, especially for aroma varieties, which consequently sold out in a surprisingly short time.

The market for 2002 crop bitter hops was weak because of both the adequate quantity harvested and leftover old crop inventory. We described this situation in our 2002 report. As a result, prices for bitter hops reached record low levels, well below the cost of production. Crop 2002 European bitter hops did sell out but there remain excess quantities of USA hops which were converted to products to retain their brewing value. It should be noted that estimating the excess inventory available in grower, merchant and brewer hands is at best an inexact science.

The outcome of the 2003 European crop’s quantity and alpha values was catastrophic due to the extreme heat throughout the summer growing period. The quantity shortfall was up to 50% depending upon the variety, and alphas were correspondingly low. In no case was the long-term average alpha value reached.

Our calculations indicate that the poor 2003 crop will leave the 2004 brewing year at least 1,500 tons of alpha short of its requirements. As the market develops during the coming months, it will be clearer how existing grower, merchant and brewer inventory compensates for this shortfall. As was the case with crop 2002, there could well be a tight aroma market and weak bitter market.

The historically low alpha levels of the 2003 European crop present a special problem because many existing long-term contracts were closed on an alpha basis. Since these contracts were based on long-term averages, and these averages were not reached this year, the hop industry is faced with an enormous potential financial loss.

As a result, we have worked hard to find alternative delivery options for breweries. Possibilities include combining short deliveries with order cancellations, variety/product changes or transfers of the missing quantities to a future crop or crops. To date, many European bitter contracts have been replaced with USA varieties. The 2003 USA crop was average, and the current weakness of the US Dollar makes US products very competitive. As the spot season began, USA prices rose to reflect the short European crop.

The situation for aroma hops is more complicated since all central European growing areas suffered a poor crop this year. Given the extreme swings in aroma hop alpha levels, it is clear that the system of selling aroma hops on an alpha basis must be changed so as to better share the alpha risk between the hop and brewing industries.

A further complication to the overall market situation is that the future supply of US hops is somewhat clouded by some growers’ proposal to re-institute a Federal marketing order for US hops. Growers who might otherwise have exited the hops business prior to crop 2003 stayed in business in the hope of being able to sell their “base allotment” to long-term survivor growers. In a global market, a marketing order that only governs one of several supply sources can not work. In addition, brewers expect their suppliers to operate in free-market systems, and a marketing order provides a framework that is the antithesis of a free market while also adding costs to a business already under tremendous margin pressure. As this report goes to press, the USDA is holding hearings about the proposed marketing order despite the fact that a majority of growers and brewers are against the proposal. We believe that 2004 USA acreage will be reduced more than it was from 2002 -2003.

In past editions of Guidelines for Hop Buying we stressed the importance of forward contracts, and this year is no different. It is clear that supply tightens when crops are below average, but it appears that the oversupply situation of the past few years has led to a false sense of security in the market. For this reason we again stress the importance and value of the forward contract system to the hops market.

We will continue to keep you posted as developments occur.