Written by: Corey Janoff
This post was originally published on our previous blog website on September 27, 2017 and has since not been revised and/or updated.
The topic for this post stems from a conversation I had with my dad recently. My parents were in Yakima, WA a couple of weeks ago to go wine tasting for their 33rd wedding anniversary. For those unfamiliar with Washington wines, Yakima is one of the more prominent regions for wine production in the state. They’re known for their full-bodied reds and their good yet reasonably priced blends.
Washington State is also the largest producer of apples in the country. Over 50% of the nation’s apples come from Washington. During their stay in Yakima, my parents also visited some apple orchards. This is where my dad learned that apple farmers are ripping out their apple trees to plant hops – one of the key ingredients in beer. As a result, my dad is considering investing in a hop farm.
About 85% of the nation’s hops are produced in Oregon and Washington, thanks to the ideal growing conditions for the plant. There is currently a hop shortage in America. There aren’t enough hops to meet the demand of brewers. With new craft breweries popping up every day, it is no surprise that the price of hops has risen significantly in recent years.
You can see the reflection in beer prices. A few years ago, a typical six-pack of craft beer would cost me somewhere from $6.00 to $9.00 at local grocery stores. Today, those same six-packs cost about $8.00 to $12.00. That’s a 33% increase for those keeping track.
Why My Dad Wants to Invest in a Hop Farm
The obvious reason is he thinks he can profit from doing so. There is some good logic behind his thinking. Living in a suburb of Portland, in the Willamette valley, he is in a good area to grow hops. Hop plants start producing fruit (if that’s what you call it) within a year, as opposed to multiple years for wine grapes or apple trees to start yielding fruit. People have been drinking beer for thousands of years and there is no sign of that slowing down. Beer is also fairly recession-proof – when the economy stinks, people often drink more!
Risks Involved
As with any investment or business venture, there are risks. With a hop farm, the big risk is competition. There are massive hop farms out there with strong distribution channels, so it’s not like my dad is going to buy an acre of land, start growing hops and push the big guys out of the way. Also, the barriers to entry are minimal. Anyone can buy land, plant some plants, get a commercial license, and start selling the fruit. If too many sellers come to the market, prices will drop, making it less profitable.
The biggest risk of all is my dad knows absolutely nothing about growing hops. And neither do I, so I won’t be of much assistance.
Like any successful business, farming takes a lot of work. The soil needs proper nutrients. The plants need to be adequately watered and fertilized. Pests and diseases could affect the crops and wipe out your year’s production. You have to find the right people to help you. I’m sure there are other important factors, too.
Distribution could be challenging. How will he find people to buy his hops? He will either have to beat competitors on price (unlikely at a small-scale), or quality. Quality could mean the best hops on the planet, and/or dependable and reliable service. If a brewery wants to brew a new batch of beer every week, they will need their delivery of hops on time (since hops are harvested in the late summer/early fall, I imagine most breweries probably buy in bulk and store the hops for their anticipated production over the course of the year. After they have been picked, most hops are dried, vacuum packed and stored, so breweries could purchase more throughout the year as needed). Some breweries probably already have direct partnerships with hop farms to purchase directly from the source.
It’s not going to be easy. If it was, everyone would do it.
Some Things to Consider Before Investing
I like to reference a classic book on investing and growing wealth: The Richest Man in Babylon, by George Samuel Clason. One of the lessons in this book is to only invest in areas you have expertise in. If you don’t have expertise in a particular area, invest with someone who does have expertise in that area.
I told my dad, since you and I know nothing about hop production and distribution, find someone who does and partner up with them. That’s the only way this investment has a chance to be successful.
I would give that same advice to everyone that is thinking of making an unconventional investment. That advice is appropriate even for conventional investments. Only invest if you have an understanding of what you are investing in, or working with someone who does.
You shouldn’t blindly throw money at something you have no experience in and expect it to turn out profitable. Just because there are numerous TV shows about people flipping houses, doesn’t mean you can start flipping houses and be successful at it.
Those people have their own TV show for a reason – they are really damn good at what they do (or they are good actors). They likely have connections with contractors to have work done at below-market costs. With their connections, they can get their materials at wholesale cost, rather than retail. It’s also TV, so it may not even be real.
Every week a client or prospect will ask me about my thoughts on some random investment opportunity. Should I invest in Bitcoins? I was presented an opportunity to invest in an oil drilling company that estimates a 20% annual return on investment over the next five years – should I do it? My cousin wants to open a car wash and is looking for investors…
Most of the time, I know nothing about the space or the topic, so I wouldn’t be qualified to give advice on the matter anyways. Also, if you are presented with an investment opportunity with expected returns that are considerably greater than you could reasonably expect elsewhere, it is probably a load of crap. If the returns are really that much better, you wouldn’t be presented with the opportunity in the first place. The person soliciting the investment would have kept it a secret and invested by themselves. If they didn’t have enough money to buy the whole investment themselves, they would take a loan from a bank. You wouldn’t even hear about it.
So proceed cautiously with the alternative investment ideas. Do your homework. Speak to multiple people with experience in the space. And most importantly, don’t invest your life savings. Be diversified, so if this one investment fails, it doesn’t ruin you.
Disclosures:
This should not be considered a recommendation for any particular investment. Any examples are hypothetical and for illustrative purposes only. An investment could result in losses, including the total loss of principal.
