This article was compiled from input provided by members of the grower owner families of SBG and YCH including Tom Carpenter Jr., Steve Carpenter, Patrick Gasseling, Mike Smith, and Steve Perrault.
When the USDA hop acreage report is released later this summer, readers will notice a significant reduction in acreage in certain varieties, including Simcoe® Brand YCR 14 and Ahtanum® Brand YCR 1. Over the past several years, we have come to expect rapid expansion in the hop industry, but as brewer recipes and volume requirements change, acreage must be adjusted to meet a shifting market. The importance of being good stewards of the supply balance is rooted in the origins of YCH and SBG. We sat down with some of the hop growing families that founded the grower owned supply chain to get their perspectives and understand these roots.
Tom Carpenter Jr., the family patriarch of Carpenter Ranches, a six generation hop farm in Granger, Washington, was dissatisfied with the way that hops were bought and sold in the 1970s. “I just felt that growers needed to understand that for their sweat equity, they weren’t getting paid enough.” The hop supply chain during this time was not designed for transparency or equitability for all stakeholders. “There were essentially three different planets: growers, dealers, and brewers,” recalls Tom’s eldest son, Steve, currently the Chief Supply Chain Officer at YCH. There was a strong conviction amongst growers that the current supply chain model was not doing growers any favors. For revenue to increase to a level that would compensate growers fairly, there had to be conversation between growers, and brewers.
Tom Carpenter Jr., along with several other growers, convinced the hop dealers that they needed an opportunity to meet directly with brewers to explain the cost strains that growers had, and to request an increase in returns for their production. The dealers agreed to arrange a meeting between the growers and brewers, with the caveat that there would be dealer representation at the meeting.
During that first meeting, Tom walked into the office of the brewery purchasing manager at a brewery in the Midwest. The purchasing manager was seated with two stacks of paper; one was brewery purchase contracts, and the other was hop grower production contracts. The disparity between the pricing was too much for the purchasing manager or Tom to ignore. “We were getting $0.55 or
$0.60 per pound for our hops and going broke.” The purchasing manager looked right at the dealer and said, ‘find one brewery contract in here for less than $1.50. You’re the one that should be paying the growers more.’ I just smiled from ear to ear. I got what I was there for,” recalls T. Carpenter Jr. In that moment, it was apparent to Tom that the supply chain needed to change to benefit all stakeholders, and that started with developing relationships between growers and brewers.
In the 1980s, several growers, including Tom Carpenter Jr., began building on the vision to develop sustainable business relationships with brewers. Steve Perrault, President of Perrault Farms in Toppenish, Washington shared, “when we started this, we just wanted to survive, we didn’t want to become rich, we wanted fair, sustainable prices for brewers and growers, which is as true today as it is 25 years ago.” Armed with this vision, two large grower owned handlers emerged, Yakima Chief, Inc (YCI), and Hopunion, LLC, ultimately merging into Yakima Chief-Hopunion in 2014.
These same growers persevered through trial and tribulation over the following 25 years, coming to the brink of failure multiple times. Many brewers and growers have heard stories about the challenges growers faced during that era, but without direct experience, it may be difficult to understand how truly tough it was. There were years when hop farmers could not get into their fields for planting until April because there wasn’t enough money to pay employee wages. Farm owners would delay drawing a salary for extended periods of time, sometimes even up to six months. YCI was nearly bankrupt twice, but with each scare, valuable lessons were learned. “Every time a market would take off, growers would plant on speculation. By the next year however, the market would come right back down,” said Mike Smith of Loftus Ranches.
The imbalance of supply and demand has damaged the industry repeatedly for generations, and continues to reinforce the importance of transparency and communication between growers and brewers. The early to mid-2000s may have been the worst time period of supply imbalance on memory. “For many, many years, brewers received hops well below production costs, forcing several good hop farming families out of the industry,” said S. Perrault. A fourth-generation hop grower at Gasseling Ranches in Wapato, Washington, Patrick Gasseling recalls, “the hop market worsened with each year, as a result of excess supply and poor returns.” By harvest of 2007, a global hop shortage ensued, and the growing industry imploded with little to no money available. The shortage of alpha hops led to a spike in grower returns as high as $100 per pound of alpha. The price spikes, however helpful in getting the growing industry stabilized, proved to be a hindrance to real sustainability throughout the supply chain. While larger breweries may have had a greater capacity to absorb volatility that resulted from inadequate supply and increased hop costs, smaller breweries faced a far greater challenge in their ability to source and pay for them.
As the late 2000s ushered in a new level of growth in the craft beer market, it became clear that the opportunity for long term health and transparency through the grower-brewer connection was a possibility. A willingness to learn from the past adversity, and shifts in supply and demand was necessary for the success of a transparent supply chain. Both SBG and YCH are participants in this supply chain and continually strive to create sustainable value for all stakeholders.
Steve Carpenter has a unique perspective on this supply chain through his former life as a hop grower, where he was instrumental in the creation of SBG and YCH, and in his current role at YCH. Steve shared, “it is the growers’ responsibility to know what the brewers need.” This supply chain is a system that is focused on creating value for growers and brewers; excess supply creates waste in the system, compounds inventory and impacts quality. As brewers’ tweak recipes affecting volume needs, grower responsiveness for balancing acreage accordingly is imperative. It enables brewers to get the volumes they need while reducing excess of what isn’t needed. Steve went on to say, “acreage balancing creates transparency, which didn’t exist before this supply chain.”
“Balancing supply and demand, is in the best interest of everybody,” says M. Smith, “to the degree that prices fall below the cost of production, that is what leads to volatility.” Volatility in this sense is not simply referring to supply and price, but quality as well. As prices drop, growers cannot afford to invest in the level of quality that brewers deserve. Hop growers live in a competitive world, but still have to have the financial stability to invest in innovations and facilities to meet brewer expectations. Growers don’t want another industry implosion, where the acreage stays the same or keeps increasing, while brewers gain by capitalizing on lower markets. Under this scenario, it’s the growers that lose. When re-investments into farms and growing decline, quality declines, farms go bankrupt, and eventually prices spike. By stabilizing acreage and pricing, growers have capital to invest in the industry, new varieties, infrastructure, and increased quality assurance practices.
Craft brewers are advocating for advancements in food safety standards, novel hop varieties, improved consistency, updated facilities, and increased volume. These are possible with sustainable grower returns. As recent as four years ago, hops were grown below the cost of production (Figure 1). Today, however, through the SBG/YCH model, growers are able to cover the cost of production and receive a fair profit, with money remaining to invest with confidence for their future. “We take pride in providing a strong return to grower, but that must translate into investments in quality. This has to happen to get the SBG grown and YCH processed hops into the best beers in the world. If we don’t invest in quality, we are simply not holding up our end of the bargain,” stated S. Carpenter.
In referring to the importance of learning from the past with a look to the future, both M. Smith and S. Perrault emphasized that, “there is no room for greed in any part of the supply chain, we have to be fair and think about sustainability and legacy.” Figure 2 illustrates the importance of being fair and transparent. Using the same data from Figure 1, with the reinvestment costs removed it becomes clear how growers could take advantage of current industry returns by not investing in quality.
It is to be noted that outside of the addition of a few acres of some advanced experimental varieties, there will be a net reduction in acreage of the brands managed under SBG’s FOOTPRINTS® program. Growers may not be happy about removing acreage, or changing to a different variety, but, “it points to how much stronger you are collectively than you are individually,” explained M. Smith. This means that sometimes you have to give something up in the spirit of cooperation as a group; it allows you to participate in an improved business model, with a fair supply chain. P. Gasseling added, “I want my kids to have the same opportunity as I had; removing acreage and balancing supply and demand increases confidence that I can do that.”
In 2018, the cooperative transparent relationships between growers and brewers that T. Carpenter Jr. envisioned in the 1970s exist and are driving the ability to balance acreage with returns that allow growers to reinvest in relationships with the brewing community. After nearly 30 years of work, transparency and communication have helped establish a “new normal” in the supply chain.
Posted April 01, 2018