REPORT FROM THE COMMISSION TO THE COUNCIL on the situation in the hops sector

1. INTRODUCTION

The "Reform" of the common organisation of the market in hops adopted by the Council in July 1997 granted flat-rate aid to producers (EUR 480 per hectare) for a period of five years from the 1996 harvest up to and including the 2000 harvest. Article 18 [1] of the basic Regulation (Regulation (EEC) No 1696/71 [2]) required the Commission to present an evaluation report to the Council before the end of the five-year period (i.e. before 1 September 2000) accompanied, where appropriate, by proposals for the future. The following report presents the results of this evaluation.

[1] This Article was added to the basic Regulation (Regulation (EEC) No 1696/71) by Council Regulation (EC) No 1554/97 of 22 July 1997 (OJ L 208 , 2.8.1997, p. 1).

[2] OJ L 175, 4.8.1971, p. 1, as last amended by Regulation (EC) No 191/2000 (OJ L 23, 28.1.2000, p. 4).

2. GENERAL OVERVIEW OF THE SECTOR

2.1. Production

2.1.1. European Union

The European Union is the world's largest hops producer, producing 34 600 tonnes of hop cones in 1999. Hops are grown in eight Member States of the Union (Belgium, Germany, Spain, France, Ireland, Austria, Portugal and the United Kingdom), with Germany accounting for 80% of the Community's total area under hops in 1999 (18 300 out of a total 22 700 hectares). The area under hops and hop production are shown in the attached Table 1. 3 556 Community holdings were growing hops in 1999, farming an average 6.38 hectares.

The area under hops in the EU is on the decline, as it is worldwide. This is true of all the Member States with the exception of France, where production is centred mainly on the regional aromatic variety Strisselspalt.

Both the area under hops and hop production fell by around 18% between 1995 and 1999 (Table 2).

This reduction was offset by a sharp increase in levels of alpha acid (the substance in the hop cone used in producing beer), due above all to increased cultivation of varieties rich in alpha acid (super alpha varieties). Production in terms of alpha acid has increased by 6%, despite the 18% reduction in areas under hops and in the production of hop cones. Per hectare production of alpha acid has risen by 37% over the same period. Roughly three-fifths of production is given over to aromatic varieties, with the rest made up of bitter varieties including some super alpha varieties. Between 1995 and 1999, areas under these two groups of varieties declined by 17% each (Table 3); hence there is no relative decline in aromatic varieties in the EU, unlike the rest of the world.

2.1.2. World situation

World production of hop cones was an estimated 93 750 tonnes in 1999 (with 34 600 tonnes, or 37%, from the EU). There are around 58 000 hectares under crops in the world as a whole, with 22 700 hectares in the EU (39%); total areas under hops have fallen by 30% since 1995. The two biggest producers after the EU, the United States and China, saw reductions of 19% and 11% respectively (Table 2). In the United States, where Oregon, Washington and Idaho are the three hop-producing states, the preference is for varieties rich in alpha acid (2/3 bitter varieties and 1/3 aromatic varieties); some varieties produce up to 14% alpha acid. With around 14 000 hectares in 1999, the United States accounts for 42% of world alpha acid production. Irrigation produces yields 40% above those of the EU. The decline in areas under hops (-19%) and in production (-21%) between 1995 and 1999 is on a similar scale to that in the European Union, while production of alpha acid (in tonnes) has also fallen by 8% (against the 6% increase in the EU) due to the devastating disease powdery mildew. As regards China, on the basis of information provided by the hops trade current production is in the order of 12 700 tonnes. [3]

[3] No official statistics are available for China.

2.2. External trade

Traditionally, and increasingly, the EU is a net exporter: 50% of Community hop exports are in the form of powder and pellets. The EU's main trade partner is the United States (Table 4). In 1999, Community exports and imports of hop cones to and from the US were 5 876 tonnes and 5 071 tonnes respectively. EU exports also go to Japan and Russia, while the Czech Republic and Slovenia are major suppliers to the EU at around 2 000 tonnes each.

2.3. The hops market

Hops are sold either on the free market or under forward contracts generally agreed over a three to five year period. In the Community, the percentage of hop production sold under contract fell from 82% in 1995 to 75% in 1999. Contracts still remain the most popular selling method (Table 5).

Community contract prices and spot prices for aromatic and bitter varieties were very close in 1991 (Table 5). Since then, large gaps have opened up to give contract prices a net lead, particularly for aromatic varieties. In 1999, prices moved closer together once more, but the results of the 2000 harvest are needed to confirm this trend.

Contract prices remained fairly stable between 1995 and 1999 (approximately EUR 195/Zentner [4]), while prices on the open market, after falling by 50% in 1996 and 1997, climbed back to their 1995 level in 1999 (approximately EUR 155/Zentner). The surplus production from the mid-1990s has now been absorbed by the market.

[4] 1 Zentner = 50 kg.

It should be noted that production price trends do not reflect the extremely large increase in terms of alpha acid content (+37% between 1995 and 1999). Breweries now have the advantage of paying the same price for hops which are much richer in alpha acid. Conversion to new varieties has not been rewarded by the market and has not, therefore, brought producers the desired benefits.

2.4. Conversion to new varieties

Traditional brewers, who had a certain constancy in their buying policy, are starting to disappear as breweries merge to create huge international concerns. These have extremely changeable buying policies which depend on consumer taste, and thus take decisions in the very short term.

In order to meet changing demand, hops producers have to make extremely expensive investments in replacing equipment and in planting. Since hops only enter into full production in the third year, any change in variety involves a major loss over two years. Nor can it be certain that this new variety will still be in demand at that point.

Thus, even allowing for better collaboration between the brewing industry, dealers and producers, the latter do not have enough flexibility to meet the changing needs of the former in the very short term. Hop production will always involve a certain element of imponderability. Marketing under forward contracts thus remains the best option for producers.

Table 3 gives an overview of the conversions to new varieties between 1995 and 1999, for aromatic varieties, bitter varieties and other varieties. In the first two groups, conversions are targeted at a very small number of varieties.

2.5. Improving quality

The conversion to new varieties has been attended by constant attention to product quality. For instance, larger producers are endeavouring to encourage producers to improve the quality of hops and thus consolidate their market position.

Even before the reform of the common organisation of the market in hops in July 1997, a new marketing concept which incorporated, among others, neutral quality checks and administration of a quality pool, had been implemented independently. To finance the use of this concept, buyers pay a fixed amount out of the price agreed with the producer to the producer group.

Based on the quality analysis which the group has carried out by an independent body, some of this amount is paid back to the producer under a bonus/penalty system (parameters have been laid down on the basis of moisture content, percentage of leaves, stalks, waste, percentage of leaves covering the cones and alpha acid levels, etc.).

2.6. Production costs and returns

Hop production involves extremely high costs. Substantial investments are needed to set up and maintain hop farms (posts, cables, etc.) and in equipment for crop growing, harvesting and treating hops. Hops are also extremely labour-intensive - producers estimate an average 310 man-hours per hectare. Finally, costs specific to growing hops, such as for purchasing fertiliser, plant health products and energy costs, are significantly higher than for other crops.

Analysis of returns and production costs is based on the farm accountancy data collected by the FADN on the region most representative of Community production.

According to these figures, production costs in Germany (Bavaria [5]) were EUR 4 490 per hectare in the 1998 harvest (Table 6).

[5] These figures have been calculated on the basis of farm accountancy data collected by the FADN on around twenty hop farms in Bavaria.

As regards returns, Germany (Bavaria) saw returns in the order of EUR 5 163 per hectare in 1998. It should however be noted that costs and returns can vary widely between Member States.

Generally speaking, based on the annual declarations by the producer Member States, returns had fallen by 4% in 1999 [6] compared to 1995.

[6] These figures are communicated in current prices and in national currency; exchange-rate fluctuations may also impact on changes in prices.

3. THE COMMON ORGANISATION OF THE MARKET IN HOPS

3.1. Specific arrangements

A common organisation of the market in hops was established in 1971 by Regulation (EEC) No 1696/71.

The essential aspects of the basic Regulation are as follows:

-Aid for hop production (per hectare aid): Up to and including the 1995 harvest, Community aid was fixed annually taking into account changes in returns and production costs, and was differentiated by group of varieties. It fluctuated between ECU 377 per hectare in 1986 and ECU 517 per hectare in 1994, falling back to ECU 444 per hectare in 1995 (expressed in budget ecus). In 1996 the Council changed aid levels to a flat-rate EUR 480 per hectare/year for a period of five years up to and including the 2000 harvest;

-Recognition and promotion of producer groups: It is important to underline the role played by producer groups, which has been increasingly strengthened through successive reforms of the common market organisation and is crucial in the process of restoring balance in the hop sector. There are currently 19 producer groups in the EU (Table 1). These groups therefore play a key role in determining producer incomes, first by concentrating members' supply - which partly counterbalances the effect of mergers in the trade and brewing sector - and second through the possibility of withholding up to 20% of Community assistance to their members. This amount allows producer groups to implement measures to help their members convert to new varieties, achieve technical progress and market their products;

-Marketing of hops via a certification procedure and a forward contract system: Community legislation lays down minimum quality standards for marketing hop cones and hop extracts (Commission Regulation (EEC) No 890/78 of 28 April 1978 laying down detailed rules for the certification of hops [7]). This has been described in point 2.5;

[7] OJ L 117, 29.4.1978, p. 43, as last amended by Regulation (EC) No 1021/95, 5.5.1995 (OJ L 103, 6.5.1995, p. 20).

-Trade with third countries.

3.2. Special temporary measures for hops

To ensure a better balance between production and demand, on 25 May 1998 the Council adopted Regulation (EC) No 1098/98 introducing special temporary measures for hops. [8] The aim of these measures is to curb production by reducing the area cultivated in the Community.

[8] OJ L 157, 30.5.1998, p. 7.

These measures form part of the raft of measures under the common organisation of the market in hops and may be implemented by producer groups in addition to the other special measures described in Article (7)(1)(b) of Regulation (EEC) No 1696/71 (technical aid for converting to other varieties, improving the product and marketing).

The special measures are in force over a period of five years, starting with the 1998 harvest and involve:

-temporary resting,

-permanent grubbing-up.

Compensation of EUR 480 per hectare is paid to producers for areas put into temporary rest or grubbed up. Producer groups may decide if this amount should be increased by withholding an amount (not more than 20%) from the aid paid to producers for areas harvested. Both measures are optional for Member States, producer groups and individual producers.

The special measures were applied by four Member States in 1998, and a fifth joined them in 1999 (Table 7). The other Member States, France, Ireland and Spain, have not applied these measures, France due a lack of interest shown by producers, Ireland because the only remaining producer is continuing production, and Spain because the Government fears that hop production will all but disappear if it authorises the application of these measures. A total 1 577 hectares has been grubbed up, while 771 hectares was reported as rested in 1999; this figures varies because producers may decide each year whether to continue resting production or to replant the land.

It should be reported that the reductions in areas planted in 1998 and 1999 (4 064 hectares) are larger than the areas grubbed in application of the special measures (temporary resting and/or permanent grubbing-up). Some producers actually grub up outside the scope of these special measures to avoid the constraints involved.

3.3. Budget

Budget expenditure under the common organisation of the market in hops has developed as follows:

1997 EUR 13.0 million 1998 EUR 12.8 million 1999 EUR 12.6 million 2000 EUR 12.4 million PDB 2001 EUR 12.0 million

4. CONCLUSION

The measures resulting from the July 1997 reform have been applied against a background of a reduction in areas under hops and in hop production in the Community and the world as a whole.

They have provided effective support for producers and producer groups in a period in which it has been necessary to try to restore market balance while taking into account the need for improved product quality and conversion to new varieties as a result of changing demand in the brewing sector.

It should be noted that this search for a balance on the market in hops continues to require constant efforts on the part of producers.

The special measures, which can only be fully assessed at the end of the five-year period in 2002, appear at this stage to be perfectly integrated into the range of measures under the common organisation of the market in hops.

In view of the above, the Commission believes it appropriate to prolong the current provisions of Regulation (EEC) No 1696/71 for a further two years (2001 and 2002), until the end of the period of application of the special measures.

Before 31 December 2002, the Commission will present to the Council a report on the functioning of the common organisation of the market in hops, on the application of the special measures and on the impact of the applicant countries joining the European Union. This report will be accompanied, where appropriate, by proposals for the reform of the common organisation of the market in hops.

ANNEX I

Hops: technical description

1. Description of the product

a) In botanical terms, the hop (Humulus lupulus) belongs to the same family as hemp, the Cannabinaceae, and to the order Urticales. It is a dioecious plant, that is, each plant bears only male or female flowers. Only the female plant forms the fruit, known as the cone, which contains lupulin, a yellow substance easily detectable when the ripe cone is crushed between the fingers. The root system stays active for many years (usually some 20) and the above-ground part of the plant is cut down at harvest each year. It is a climber which can attain a height of seven metres and therefore needs a supporting structure (poles, wire, trellis). Dwarf varieties which reach a scant 2.5 metres in height have also been developed in recent years. Hops require certain soils and climatic conditions, so they are generally grown between the 35th and 55th parallels in the northern and southern hemispheres.

b) Fresh hops rapidly lose their quality through oxidation; they may lose up to 30% of their bitterness within six months of harvest. This is why they are immediately dried after harvest and packaged (i.e. compressed and baled) or processed into pellets or hop extract. The latter product is finding increasing favour with brewers because its low volume makes it easier to store and handle and its quality is very stable.

2. Hop varieties

In current Community legislation (Commission Regulation (EEC) No 1517/77 of 6 July 1977 [9]) hop varieties are classified in three groups according to their commercial uses: aromatic hops (with a low alpha acid content), bitter hops (with a high or very high alpha acid content), and others, including experimental varieties, which account for only 0.22% of Community land under hops. There are currently 23 aromatic and 18 bitter varieties in the Annex to the above Regulation, which is updated every time new varieties are produced on a commercial basis in the EU. The new varieties are the product of several years of research and selection. More than 12 years may be needed to develop a new variety; the three years needed for large-scale production and harvest brings the total to 15. Selection is aimed at yield per hectare (which determines the producer's revenue) and improved disease resistance (which helps increase yield and reduce production costs). In that connection producers are increasingly using virus-free plants in new plantations and are taking account of agri-technical aspects (for example, they can stagger the harvest by using early and late varieties which mature at different times), good growth qualities (ability to climb and be trained) and content of aromatic and bitter substances.

[9] OJ L 169, 7 July 1977, p. 13. Regulation last amended by Regulation (EC) No 1159/98 (OJ L 160, 4.6.1998, p. 18).

3. Use

Hops are used mainly for the production of beer but also in the manufacture of cosmetic (soap and shampoo), therapeutic (soothing infusions) and domestic products (pillow fillings). The use of hops in beer is related to alpha acid consumption (a bitter constituent of lupulin) and hopping rate (grams of alpha acid needed per hectolitre of beer). Of course, the characteristics of the various varieties are also very important for the production of beers of specific tastes and aromas.

Although the hop is important for the bitterness, flavour and keeping qualities of beer, only very small quantities of between 80 and 200 grams per hectolitre of beer are needed, depending on the alpha acid content of the hop (up to 14% for super alpha varieties) and the hopping rate. As a result of technological progress hopping rate is diminishing from year to year; in 2000 it is 5,5 g alpha acid/hl. However, given an estimated world beer production in 2000 of 1 337 million hectolitres, some 7 354 tonnes of alpha acid are needed. Beer consumption has seen a slight year-on-year increase, especially in Asia and Latin America. However, beer-drinkers' taste is tending towards less bitter beers for which a smaller quantity of hops is needed. It is interesting to note that hops account for 0.3% of the cost of producing beer (excluding taxes) (source: HOPS USA, April 2000).

ANNEX II

Table 1 Hop-growing Member States and regions (1999)

Table 2 Table - Hop farms in the EC and in the world - production trends 1995-99.

Table 3 Hops: changes in varieties 1995-99

Table 4 External trade in hops and hop products with specific third countries in 1995 and 1999

Table 5 Hop production and average contract and non-contract prices from 1991 to 1999

Table 6 Changes in returns and production costs in Bavaria

Table 7 Special temporary measures and reduction in areas

>TABLE POSITION>

>TABLE POSITION>

>TABLE POSITION>

>TABLE POSITION>

>TABLE POSITION>

>TABLE POSITION>

>TABLE POSITION>

>REFERENCE TO A GRAPHIC>

>REFERENCE TO A GRAPHIC>

>TABLE POSITION>

>TABLE POSITION>