Published in Food/Agribusiness
Michigan ranks fourth nationally for hops with 810 acres planted last year, up 25 percent from the previous year. Michigan ranks fourth nationally for hops with 810 acres planted last year, up 25 percent from the previous year. MIBIZ FILE PHOTO

Scale Matters: Michigan hop growers face overcapacity challenges, stiff competition

BY Sunday, May 27, 2018 09:14am

With an oversupply of many hop varieties in the marketplace, growers might look to curb their growth until demand increases.

That’s according to Michigan Hop Alliance co-founder Brian Tennis, who says growers who fail to react to market trends could pay the price and “go out of business.”

The Omena-based Michigan Hop Alliance plants 50 acres and a dozen varieties of hops, but Tennis said he’s concerned about smaller hop farmers who are growing one to two varieties of hops on a couple of acres of land.

“There’s never been more hops in the pipeline (than) right now in history,” Tennis said. “Even though we’re sitting on a lot of product, we’re in a good spot because we’re still under 100 acres. I think the guys who’ve got one or two acres, they’re really struggling because they’ve only got one or two varieties. … We’re seeing a lot of small guys going out of business, to be perfectly honest with you.”

According to a study from the Hop Growers of America, U.S. farmers have increased hop acreage by nearly 80 percent since 2012. Michigan ranked fourth nationally with 810 acres of hops planted last year, a year-over-year increase of nearly 25 percent. However, the state still trails well behind the Pacific Northwest, where the vast majority of hops are grown.

With global hop production on the rise, industry experts say it’s a blessing and a curse for growers.

“The challenges I’ve heard from growers is having the right variety in the ground,” said Dr. Rob Sirrine, an educator at the Michigan State University Extension and an expert on Michigan hops. “If you have Cascade hops, it’s going to be tough to sell them. … There are still Cascade hops from the year before that folks are trying to offload. A lot of that will depend on the varieties you have in the ground.”

According to Sirrine, Michigan growers are “inherently” at a disadvantage because the Pacific Northwest region has locked down many of the in-demand proprietary hop varieties that carry better margins.

“They have a lot of growers in that region to plant Mosaic, Amarillo or Simcoe. All of the hops the brewers want, we can’t really grow here,” Sirrine told MiBiz. “That being said, the Michigan Chinook hop is completely different than the Chinook hops in the Pacific Northwest — a completely different flavor profile. I think that’s one of the things we are trying to focus on is how to differentiate ourselves from other growing regions.”

Sirrine admits it’s going to be difficult for growers with a 5-acre farm “to make ends meet,” yet he’s optimistic about larger growers adjusting to brewers’ demands.

That’s a strategy Tennis has used to develop the business at Michigan Hop Alliance, which focuses on many lesser-known hop varieties. Currently, Michigan Hop Alliance has 70 different accounts in Michigan and another 800 accounts outside of the state.

“We’re stuck in that spot where we have to get bigger in order to compete and we need that economy of scale,” Tennis said. “A couple years ago, you’d have one or two acres and you could actually make some money. Now, it’s much more difficult.”

GROWING UP

Despite the challenges, Michigan Hop Alliance continues to find success, having also built a business as an independent hops importer and merchant. The company’s growth also has been fueled by a majority investment from Streetcar Management Partners LLC, a Commerce Township-based private equity firm.

According to Tennis, sales for Michigan Hop Alliance have exploded so far this year, with the company selling as much in a week as “we used to do in an entire year.” As a result, the company is building a new 20,000-square-foot distribution facility in Livonia that’s set to open at the end of the month.

Other Michigan-based hops growers have taken the acquisition route to growth. Greenville-based West Michigan Hopyards LLC expanded from a 19-acre farm into a 33-acre operation after buying Hopyards of Kent Co. LLC last October, as MiBiz reported at the time.

Since then, the company’s customer portfolio has more than doubled, said co-founder Bryan Posthumus.

West Michigan Hopyards now sells hops to roughly 50 breweries throughout the country, Posthumus said, noting that the company added more than two dozen clients in the last year.

Like Tennis, Posthumus warns that growers should be cautious with what they plant next.

“The growers that only have an acre to four acres in the ground, they’re really, really going to struggle because it’s a big ordeal for them to rip out all of the plants they put in and put in new varieties,” Posthumus said. “Whereas for us, we’re a little bit more flexible.”

Already, West Michigan Hopyards is reevaluating the acreage it has dedicated to commodity hops like Cascade, Centennial and Chinook that have stoked the largest concerns regarding overcapacity. Posthumus said the company hopes to add more varieties that fulfill demand from West Michigan brewers, who are requesting “really unique, really citrusy” hop profiles prevalent in many IPAs and especially in the trending New England IPAs.

“I don’t know how long term of a trend that’s going to be, but that’s certainly what they’re looking for right now,” Posthumus said.

OFFERING VARIETY

The U.S. was the largest single global producer of hops for the third straight year in 2017 with 40 percent of the acreage and 42 percent of the total hop production. Within the U.S., hop growers remain concentrated within the Pacific Northwest, where more than 95.5 percent of the acreage was planted, according to the Hop Growers of America report.

For Michigan-based growers to compete, they need to focus on innovation rather than on price, industry experts said.

“The feedback that we have from brewers … (is) we’re still a very immature industry here in Michigan, and we’re still trying to figure out what’s going to do well here, what will actually sell here, and what will separate us from the other hop-growing regions in the world,” Tennis said.

Tennis cautions people interested in getting into the hops industry to do their research before investing the time and money needed to get operational. Because of the intense competition and oversupply of many varieties of hops, growers need to do their homework if they’re going to be successful.

In the last couple of years, a handful of Michigan growers have exited the industry or gone out of business because they didn’t react fast enough to the changing dynamics, sources told MiBiz.

“The supply-and-demand curve was met and then people still kept going out and planting, just on a whim that there’s a lot of money to be made in the hop industry,” Tennis said. “People who didn’t do their research and jumped into it and just planted what they felt like planting are now … stuck with it.”

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