To understand how important hops are to American craft beer, travel back to 1975 when Anchor Steam Brewing -- at the time the country's only craft brewery -- introduced Liberty Ale, right around the same time Miller Lite was introduced. This was the first time Cascade hops were used in an American commercial beer. As Tom Acitelli, author of "The Audacity of Hops," noted in The Wall Street Journal, Liberty Ale had four times the hop levels found in Miller Lite.
Flash-forward almost 40 years, and hoppy IPA beers are the most popular craft beers in America, while sales of light beer is in decline. With craft beer sales growing by double-digits every year for the past five years and total market share approaching 10%, the demand for hops is intense -- 7% of American craft beer is currently using 52% of the overall domestic hops supply, according to Esquire. In classic market style, brewers are seeing prices rise and supplies pressured. According to stats from the Hops Growers of America, as reported by BusinessWeek, hop prices from 2012-2013 increased 13%, to $3.59 a pound. Acitelli cites sources that predict prices for some popular brands of hops could rise to more than $10 a pound by the end of 2014.
Craft brewers develop tactics to deal with shortages
Craft brewers can get a bit twitchy when the discussion turns to a possible hops shortage.
"Our brokers started warning us two years ago that prices were creeping up and supplies were going to be tighter," said Zach Baitinger, brewing materials buyer and planner at New Belgium. To counter this threat, many breweries contract their hops in advance. While this can mean a year or two for smaller craft breweries, Baitinger said New Belgium is contracted through 2019 and he is currently working on 2020.
Danny Wilson, head brewer at Palisade Brewing on the Western Slope of Colorado, said he learned his lesson in the hops shortage of 2008.
"I'm a bit over-contracted now – I'm four years out," he said. "Palisade Brewing is big enough where we get priority from our suppliers. It's the small brewer who is trying to spot-buy 44 pounds [of hops] who is going to be affected."
Acitelli, considering the worst-case scenario, speculates that craft brewers who produce fewer than 15,000 barrels annually could be at risk of going out of business due to the current trend in hops pricing and supply.
However, both Baitinger and Wilson stressed that good brewers will adapt to the supply of ingredients that are available and adjust their recipes. Such flexibility is part of the essence of craft beer. Blending popular hops, such as Cascade, Citra, and Galaxy with less-preferred varieties -- called second-tier hops in the trade -- is one past strategy for dealing with a hops shortage. Other recent developments include session beers that are lower in alcohol and other styles that call for fewer hops. Craft beer customers have not only liked such trends, but also expect craft brewers to experiment.
"You just can't drink IPAs pint after pint after pint, and people are catching on to the fact that they can have a flavorful, hoppy beer with less alcohol," said Vic Kralj of the Bistro in Hayward, Calif., in a 2012 trade article about the newer craft beer styles.
Hop farmers increasing production
So, if brewers are able to adjust recipes and their customers don't object, that leaves hops growers at the front end of the supply chain. As noted, most of their production is already under contract, so the new prices mostly come into play in the spot market.
Not that hops farmers can't use the money. Hops start-up costs are high, and it takes up to five years to get full production from a hops plant. Plants must be grown on a trellis up to 20 feet high and are subject to weather damage -- especially wind -- and disease. Most of the U.S. hops production is in Washington, Oregon, and Idaho. But other states, such as California and Colorado, are growing their yields. Kegan Reilly, who owns the Thirsty Toad Hops Farm on the Western Slope of Colorado, plans to double his five-acre production this year.
"When we started three years ago, there were only 150 acres in production in all of Colorado," he said. "Every hop farmer I know is expanding acreage."
But as hundreds of new breweries continue to open every year in America, the demand appears ready to keep pace with expanded production. Some brewers, such as Rusty Beaver Brewing in Caroline County, Va., are growing their own hops. On the other end of the production spectrum, a spokesman for MillerCoors (NASDAQOTH:SBMRY), which brews small-batch labels Blue Moon and Colorado Native, said "with respect to ingredient sourcing for our brands, including hops, we don't foresee any issues."
This response is not surprising, given that MillerCoors (2), along with Anheuser-Busch (1) and Heineken (3) are the three largest brewers in the world with hundreds of brands. They all make the same recipes year after year and contract long-term for the exact same hops.
The biggest impact may be in the next year or two, as current contracts expire. But past trends indicate craft beer brewers are, by their very nature, market makers. The odds are they will find the sweet spot in selling into a market that, for now, seems to have an endless demand for their product.
John Mitchell has no known investment or interest in any of the organizations mentioned in this article. He writes frequently about craft beer for a wide range of sites and publications, including The Brewer's Association. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.