Lessons in hop broker’s struggles: HPA
The financial struggles of an American hop broker should act as a cautionary tale for both brewers and hop suppliers in Australia, according to Owen Johnston of Hop Products Australia (HPA).
Yakima, Washington’s 47 Hops LLC this week filed for Chapter 11 bankruptcy protection, a voluntary provision that buys corporations time to restructure their debts and obligations.
47 Hops president Douglas MacKinnon put the blame for his company’s woes squarely on its customers for failing to adapt their buying in response to the slowing growth of the craft beer sector.
“Unfortunately, during the past several years, brewers fuelled by optimism contracted for more hops than they now need due to that slower rate of growth… Payments for some contracted hops are one year behind schedule,” he wrote in a recentblog post.
Blaming customers ‘unusual’
However, Johnston of Hop Products Australia told Brews News that suppliers must bear some of the responsibility for ensuring that their customers’ forward contracting is realistic.
“I find it unusual that blame is placed on the customers,” he said.
“There are indicators in all businesses such as this, like inventory age, call-off rates and aged receivables, that the business needs to be actively working on.
“Here at HPA, as our customers would know, we take contract completion and ‘paying the bills’ very seriously, as it can quickly become a burden a business can’t carry, as we are seeing here with 47 Hops,” said Johnston.
He said HPA’s typical contract completion terms stipulate that it will carry the stock for the first six months of its availability after harvest, until November 30.
“Then, the customer is agreeing contractually to being responsible for carrying the cost of that stock for the second six months,” he said.
“All of our customers are well and truly aware of that and we do enforce it. We do start picking up the phone in November start investigating the situation, saying, ‘your completion date’s coming up – here’s your stock on hand, here’s your contractual obligation to take it and pay for it, how would you like to progress?”
Johnston said this approach ensures brewers are realistic and responsible about the amount of hops they require to fuel their growth.
“It is hard to predict sometimes. It’s pretty chaotic when a beer drops out of favour or a new beer comes on trend,” he acknowledged.
“But what we don’t want out there is everyone saying, ‘I’ll take a million kilos of every one of your hops, just in case one of my beers goes well, and contracting for it’.
“It’s incumbent upon brewer and hop grower or trader to conduct themselves in good faith and in a responsible manner, to the best of their knowledge at the time that they’re undertaking negotiations.
“We don’t need hype and hot air in the supply side, because someone’s carrying the can,” said Johnston.
He said HPA asks customers plenty of questions prior to agreeing on a new contract, if they are forecasting a dramatic increase in their hop requirements.
“We are very respectful about moderating people’s bullishness, but it is part of the conversation that you have to have with your customers,” he said.
“We investigate things like, have there been recipe changes? Have they added more distribution on? Are they exporting? Have they been buying hops from someone else that we don’t know about?”
Johnston said it is beholden on all hop suppliers to exercise this caution so as to avoid over-stocking the Australian market.
“At some point the industry might have a correction, and we don’t all want to be holding way too much stock. That’s when we get serious risk of boom and bust cycles,” he said.
“If all of us just believe the higher rates of growth that the breweries are projecting and stock up for it, then if they miss their growth target, we’re the ones holding the inventory. There must be a balance. ”