Top Benefits & Best Practices for Hop Contracts

Hop Contracts are becoming increasingly important as the number of breweries entering the market recently surpassed the 7,400 mark. Buckling down on the business was heavily emphasized across the board in seminars at the recent 2019 Craft Brewers Conference in Denver.

Properly handling hop contracts was suggested as one of many measures breweries can take to improve the business in today’s increasingly competitive environment. Yet, according to the Brewers Association’s latest 2018 Hop Survey, only 63% of the breweries surveyed have hop contracts setup with their supplier.

BA Supply Chain Expert Chris Swersey believes the lack of existing hop contracts is due to the fact that 80% of today’s breweries weren’t even around to experience the hop shortage of ‘07-‘08.

Hop Contracts at an all-time low, signaling the industry is unprepared for the future

Courtesy: Chris Swersey, Brewers Association (’18 Annual Hop Survey)

A major fire in 2006 destroyed 4% of the U.S. crop at the time, causing a massive shortage. Luckily, some of the larger breweries at the time stepped up to help, while a select few got greedy, started hoarding and contributed to the “panic in the streets” that industry veterans like Dick Cantwell remember all too well.

“The future may not repeat itself, but it will definitely rhyme.” Said Cantwell at a 2019 Craft Brewers Conference session.

Hops may be easy to come by right now, but experts like Swersey claim many breweries just aren’t prepared for the unforeseen circumstances:

“Many of you (breweries) are exposed to supply chain risk and aren’t even aware of it…. You don’t want to be one of the people without hop contracts. Can you afford to buy 100% of your crops on the spot market and be exposed to risk?”

The Benefits of Hop Contracts

“At a time when nobody needs hops, it’s usually a great time to start thinking about contracting to get a good rate locked in before something shifts in the market,” says Zak Schroerlucke of Crosby Hop Farm.

“When all of a sudden there’s a decrease in supply, we’ll see prices skyrocket, and if you’re stuck on the spot market, you’re paying a higher price for what you’re looking for.”

For Phil Bates of Night Shift Brewing in MA, planning accurately and bringing that information to the table can provide significant savings:

“When we were re-evaluating our hop contracts for 2019, I was able to use MRP (Material Requirements Planning) instead of hand jamming manually, going through Excel and figuring out how many hops go into each case of beer, each year, each keg, I was able to use MRP to plan out and basically show our entire hop requirement for 2019 for all these key hops. Having that information when we went into the contract negotiations wound up saving us a significant sum of money…almost six figures.”

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Best practice for hop contracts is to enter a minimum 12-month contract for your most utilized hops, (3-5 years is standard), and save spot purchases for one-off R&D batches, small canning runs, or fresh hop batches.

Read more: Purchasing Hops: Contracting vs Spot

By accurately planning hop contracts, you can do your part to support the industry by:

  • Sending the right signals to hop farmers about demand
  • Projecting the varieties & expansion needs for farms to support you
  • Preventing shortages, overages (limit false demand) & variety discontinuation
  • Creating more stability in the hops market

Lack of accuracy in your hop forecasts leads to taking more than what’s needed and the prevalence of sub-selling hops:

“We see a large increase in sub-selling.” More brewers are advertising hops for sale or trade in the Brewers Association’s Forum, at Pro Brewer, and at Lupulin Exchange. These platforms help the market maintain a level of equilibrium it might not have had in the past, but they are not a substitute for realistic forecasting and contracting. “If the hops industry is going to keep up with the craft-beer industry,” Smith told brewers at CBC, “we don’t have a choice but to work together.”

Source: Beer and Brewing- Forward Contracting Hops

Best practices for hop contracts & working with your supplier

Here are some details to include in your forecasts to help estimate your hop needs as accurately as possible:

  • Track contract details (Contract ID, Vendor, hop type, quantity)
  • Track orders against contracts
  • Track what’s been used & what’s remaining
  • Execute your hop needs for half or more of your hop needs
  • Fulfill your contract commitments!

You could manage these contracts on paper, spreadsheets, or web apps, but you’d still be left manually entering data into multiple systems. You need more than a spreadsheet to manage dates, cost, and remaining inventory on every contract as hops are contracted, brought into inventory, consumed in production, used for contract work, or even kept in storage.

Conclusion

Real-time costing is invaluable when a decision needs to be made about cutting an under-performing brand, or budgeting for rare hops in preparation for next year’s small batch releases. Learn how OBeer can automate the planning process, create and monitor hop contracts.

Hop contracts are a vital piece of planning for the future. Register for the next weekly demo where we’ll show you how a “Single Source of the Truth” can empower your brewery to make the best business decisions in an increasingly competitive market.