Patrick Smith, CEO Of Loftus Ranches joins DIALed IN

Allan Gray

Hello, everybody. Welcome back to the DIALed IN podcast. This is episode number three. I'm Allan Gray, executive Director of DIAL Ventures, a startup studio focused on creating startup companies to help digitize the ag and food system. Today, we're really pleased to have Patrick Smith from Loftus Family Ranches out in the Great Northwest join us. Again, in full disclosure, as I've done many times already with you, these are guests that I've known for quite some time. So, Patrick was a former student in the program that I teach in, and he and I have been working together on a number of different things. We've written two case studies over time. We've had competition that we judged together and maybe on occasion have even tasted some hoppy malted beverages, I think. Would that be fair, Patrick?

Patrick Smith

Yeah, from time to time.

Allan Gray

Patrick, thanks for being here with us today. I'm looking forward to the opportunity to visit with you a little bit, get the rest of the audience to know something about what happens in the great Northwest, which, in some ways, I think might be the best kept secret of what happens in agriculture and food because there's a lot of things happening in the Yakima Valley and all of the great Northwest with respect to everything from apples to hops and everything in between. So, Patrick, why don't we start maybe by just giving us a little bit about your background and the family farm that you were raised on and now are running.

Patrick Smith

Yeah, thanks for having me on, Allan. It's always a pleasure to get to talk to you. I'm CEO of Loftus Ranches here in Yakima, Washington. I'm a fourth generation hop farmer. So, for those of you who are not familiar with the state of Washington, Yakima is in the south central part of the state. We're about 2 hours east of Seattle, and 3 hours west of Spokane. So, kind of right in the middle of the state in the rain shadow of the Cascade Mountains. So, born and raised on the farm here, here in Yakima. My great great great grandfather bought this piece of land that I'm sitting on right now in 1920.Then it was my great grandfather and great grandmother that planted hops directly south of my office here in 1932. So, our family has been growing hops here continuously since 1932. I was born and raised here, started working on the farm as a young child. Basically, being a farmer is all I really ever wanted to do as a kid, and left after high school and went and studied business at the University of Washington.

Spent about five years in the finance industry over therebefore returning home to the farm here in 2009 and entered the MS-MBA at Purdue University program that same year. Here we are 14 years later. And I was promoted to CEO in February of 2020. So, right before the whole world changed and yeah, so kind of three and a half years in running the family farm and yeah, it's a real pleasure and honor, and it's my dream job and so it's a lot of fun. But our primary business is hops, but we also grow apples, pears, peppers, alfalfa, a handful of other crops. We are vertically integrated in hops and apples. So, on the hop side, through partnerships with other farmers in the region, we're vertically integrated from genetics all the way up through actually brewing. My younger siblings opened a craft brewery on the farm April of 2013, so Bale Breaker Brewing turned ten this year. Distributed throughout the Pacific Northwest, but not officially distributed outside Washington, northern Idaho. We are also vertically integrated through partnerships with apple growers in the region, through packing and sales. So, touch a lot of different parts of those value chains, get to see a lot of different stuff than you guys deal with in the Midwest, in the I states there, but it's still farming.

Allan Gray

Great. Patrick so really, this is sort of a family operation when you think about all of the pieces of the puzzle, you're the CEO of the farming operation. Also, another piece we'll get to maybe later, where you're also heavy into Loftus Labs, but it's a family oriented operation. Your father is still involved, your mother is still involved, your siblings are all involved in one way, shape or form. Yeah, I did the math on this, Patrick. It's been that way for 91 years. Are we in the 91st year?

Patrick Smith

We are, yeah. It's been strictly within our family, Loftus Ranches itself. Yeah, 90, 91 years now. Yeah. board is my family that I grew up with. So, my parents, myself, my siblings, and then my dad's cousin is involved on the fruit side of the business. And so, it is truly a family operation. My dad's office is right there and, yeah, he's still involved, and we manage the business really as a team, but the management team reports to me and he plays predominantly an advisory role now, which is fantastic. He came back to the farm in 1974, so almost 50 years ago, and replacing that kind of experience is impossible. So as long as he's willing to come into the office and help out and make contributions, we love having it. And it's a lot of fun to be able to work alongside somebody that I've known and looked up to my entire life. So, yeah, pretty lucky in that way.

Allan Gray

So, Patrick, tell me what we need to know about hops.

Patrick Smith

Yeah, it's kind of a funny little industry that has pretty broad reach, right. So, depending on who you ask, beer is if you're leaving water aside, like the world's third most popular beverage, maybe behind coffee and tea, beer would be next. Coca Cola falls somewhere behind all the beer in the world. And hops essentially have really one main use, and that's as a flavoring ingredient in beer. So historically, if you rewind 800 plus years, hops were used as a preservative in beer. And so, there's antimicrobial properties of the hop that helped the early beer brewing days preserve their fermented grain beverages. Of course, the beverage has evolved significantly since then. And now you have some of the most popular beer styles in the United States and in other countries being really hop driven, as opposed to just kind of a preservative really being a primary differentiator of the beer. And so today, now, hops provides everything from bitterness to offset the sweetness that comes from the malt. And that's true for everything from your light lager son up. Without hops, they would be this kind of sweet and not all-that enjoyable product.

And so, bitterness from the hops helps offset that sweetness. Or in something like an IPA, it's also contributing a wide range of flavors and aromas to the beer. And so, the valley here in the central part of Washington State, is the world's leading hop producing region. In this little maybe 50 miles stretch of River Valley on the east side of Washington State, we produce right around three quarters of the U.S. hop production. And that constitutes, depending on the year and the yields worldwide, somewhere in the neighborhood of 30% of all the world's hop production. The United States is the world's leading hop producer. Virtually all the hops in the United States are grown here in Pacific Northwest. A little bit of production in Michigan and kind of around the Great Lake States, but I think it's somewhere over 98% of the U.S. Crop comes out of Washington. Oregon, Idaho, Germany would be the second leading hop producers. And those two countries together produce right around three quarters of all the hops in the world. And so, we're exporting to every continent that makes beer, which is all the continents, I guess, with the exception of Antarctica.

Nobody's opened a brewery there yet, but with the pace at which breweries are opening, yeah, I expect to see one in Antarctica before long. But yeah, so it's a tiny little industry in some ways. There's only about65 to 70 families that grow hops in the Northwest on about just over 60,000acres. So, comparing that to the major commodity crops, 60,000 acres probably seems like this cute little side project. But it's a big industry here and it's really kind of a driver of our regional economy.

Allan Gray

That's great. That's great background on hops. That's helpful to us and why is it grown only in the Yakima Valley, practically? I know a little bit about this. There's sort of a parallel where you have got to be at a certain sort of parallel on the Earth, and then they need a certain kind of climate, it seems like, to really get it to grow.

Patrick Smith

Yeah, exactly. So, hops are what's called photoperiodic, and so their growth cycle and their transition from vegetative growth to reproductive growth occurs based on the ratio of daylight hours to night that the plant experiences. Hops are the perennial branch of the cannabis family, and so cannabis experiences a similar phenomenon. Anybody that might be familiar with cannabis production grow lights and things like that, hops are essentially the same thing. We don't use artificial lighting, but we use the sun, of course. And so, there's a pretty narrow band of latitude, as you alluded to where the vast majority of the world's hop production occurs in the northern hemisphere. And so that tends to be from about 44 degrees north to 50,51 degrees north. And Yakima Valley is kind of smack dab in the middle of that, right around 46, 47 degrees north here throughout the valley. And so, hops and the varieties that we grow then are adapted for that kind of day night ratio during the main growing season. So, you could pull out a globe and say, well, yeah, there's a lot of land in the world in that band. Why Yakima? Some of it is then some additional kind of nuance of Yakima, and some of it's just the industries tend to consolidate around geographies.

And so, being in the rain shadow of the cascades, we are a desert. And so, we have among the longest growing seasons in that latitude band in the world, as measured by kind of frost-free days. Big temperature differences, hot days, cool nights in the summer, which is really good for plant growth, plant health, low natural precipitation during the growing season. So, less pressure from fungal diseases is kind of the primary driver of hops in the United States. It started in the northeast, migrated as population migrated west, migrated into Great Lake states, then ultimately ended up herein the Northwest. And what they found out 100 and whatever years ago is that this climate is way easier to grow hops than trying to do it in the Midwest or northeast, where you've got humidity and 20 inches of rain during the growing season. We get during the kind of main part of the growing season, we might get an inch of rain, but our proximity to the cascade mountains and the snow that accumulates there in the winter provides ample irrigation water for us during the growing season because hops are a water intensive crop to some extent.

And so that kind of geographic feature for us of being able to take the snow from the previous winter and irrigate our crops with it herein a desert is great. It allows us to actually settle and farm this part of the world, which otherwise would be sagebrush, right?

Allan Gray

I've seen some of the sage brush in the places that don't have the water. So, I want to shift gears a little bit toward this concept around innovation. I know some history around your farming operation, your family's history. Not just the farming operation. Your family's history overall has been sort of embracing innovation, whether it's about your grandfather building harvesters inside of barns to harvest stuff. You've shown me those. Really, I think you and some partners, you, your father, and some partners really began to see an opportunity, even in hops, to say, this has all been about the bitterness levels, but maybe there's a way to do something with flavor profiles. You started doing innovations in that space. You and your partners own the patent for many different of the top maybe seven of the top 15hops in the country, in the world, maybe. You all own the trademarks on, is that correct?

Patrick Smith

Yeah. That's pretty close, of the most popular varieties in the craft brewing industry. For example, Simcoe, Citra, Mosaic all came out of breeding efforts that are part of our ecosystem. Additionally, Equinox, Loral, Alice, a handful of others have come out of that program. And so, yeah, ops are dioecious plants. So, the male and female plants are actually separate organisms. And so, we cross them. The male pollen fertilizes the female cone, which is actually the product that brewers use, is essentially the female reproductive organ of the plant. So, in a commercial production sense, we don't want pollination, we don't want fertilization, we don't want male plants anywhere near the fields that we're harvesting for brewing use. But from a breeding and variety development perspective, it's a relatively simple process, but then it becomes more complicated as time goes on. And so, you just take a male plant and a female plant and put them next to each other, and you get seed. You plant the seed, and you start evaluating it. And hopefully over some period of time, usually about ten years, you'll decide that there might be commercial viability here.

So, we'll start each year, we do a series of crosses, and we'll germinate in the neighborhood of 50,000 seeds. Each one of those seeds is a genetic individual. Nice thing about sexual reproduction in the plant world, the animal world, whatever you want to refer to, is huge genetic diversity, right? Look at humans, look at cattle, look at anything that reproduces sexually, and you have a massive amount of genetic diversity that presents a lot of opportunity for evaluation. About 45% of the seeds that we germinate will be male. And so, unless they are truly exceptional, they're gone. And the nover a period of time, we, through agronomic and brewing trials, hope to find out of that 50,000, maybe one or two that have a home in beer somewhere. So, it's kind of a huge game of hop variety survivor, but it has produced some varieties that really have played a significant role in driving new and interesting flavor and beer globally. And so that's been fun to see. We started breeding hops in the early 1990s, and it really wasn't until about 2008 or nine that you could say that we had any kind of commercial success whatsoever.

There's some old saying about an overnight success that took decades, and that's essentially what Simcoe was. You could look at it now and say, wow, what a success story. And it's like, well, we worked on that variety for like 15 years before a couple of brewers, primarily Russian River Brewing in Santa Rosa, California, decided, hey, this produces some pretty interesting character in beer. We're going to run with this. It's an example of some innovation and forward thinking. I was a child, so I can't personally take any credit for it. But that we've done over the years.

Allan Gray

From the standpoint of so it is sort of a culture of Loftus Family ranches, but also interestingly, a bit of a culture for your region. You’ve got a number of partners. You don't do this by yourself. That's ten years of let's see if something works. You didn't do it by yourself. You're vertically integrated, I think, into apple packing. You're vertically integrated into marketing of hops. All of this is with partnerships. Tell me a little bit about sort of the community of innovation and partnership. How does that come along? Do you help foster that?

Patrick Smith

Yeah, I'm glad you asked about it because yeah, certainly this is not a Loftus Ranches thing. Specifically. our breeding is done at Yakima Chief Ranches. That's a partnership between us, some local families, and then the Yakima Chief Ranches is partnered up with John Haass in Hop Breeding Company. And then our path to market for all these varieties is Yakima Chief Hops, which is a partnership between 15 hop-growing families in Washington and Oregon. About half of that company's production comes from its ownership, and the balance comes from other independent growers in the region. And so that idea of independence, right? You see it in farmers all over, right? It's not only hops, it's everywhere. Farmers are an independent bunch. They are a creative problem-solving group. Anybody that's still farming, I don't care what profit is, anybody that is still farming today, you have won. However long you have been farming, you've won because there have been a lot of farmers in your industry that have gone out of business. There's been a ton of reasons why you could have or maybe should have gone out of business, but you haven't because you're independent, because you are thinking and problem solving.

We've had to kind of innovate and solve our own issues because big equipment manufacturers don't make hop-specific harvesting equipment. I can't go buy a John Deere hop harvester. You walk into a hop picker in the Pacific Northwest, and it looks like a Rube Goldberg contraption, but it does. It's like belts and chains and stuff all over the place, and it's obnoxiously loud, but it effectively is like a combine harvester that's had the wheels taken off and just kind of exploded into a building, essentially. And we're separating the product, in our case, hops, from the biomass, like a combine separates the grain from the waste biomass, depending on the crop. But we've just kind of had to innovate and do some of that stuff ourselves and find ways to get our product to all the corners of the world. From this kind of upper left corner of the United States, we're trying to export hops to Brazil, New Zealand, Vietnam, all over Europe, Africa. And so, we've had to solve those challenges ourselves in this industry.

And I don't know, it's kind of, I guess, really part of the culture of hop growers.

Allan Gray

Necessity is the mother of invention kind of approach, right? Just out of necessity for no other reason.

Patrick Smith

Yes, absolutely. And so, for us in the Yakima Chief world, we graded some of our independence as hop growers to get together and work together, you know, and industries are cyclical, and hops are no different. And so, after experiencing some rough times, we're stronger together than we are on our own, but we still exhibit that independence just kind of as a group now of, you know, 15 of the 70 or so hop growers in the United States.

Allan Gray

And Patrick, farming is hard. It's always been hard. Lots of things you can't control, but in full disclosure to our audiences, it's been successful. Your ability to create partnerships as a group, your ability to think about innovation, to create these new varieties in some ways not by yourself, but in a lot of ways, you are right there in this craft brewing boom, helping create the flavors. In a lot of ways, the Yakima Valley is the mother of the invention of the new craft brewing industry, and it's been pretty successful. Is that fair to say?

Patrick Smith

Yeah, hop production in the United States has essentially doubled in the last decade, and Yak Valley has gotten its share or more of that growth. It is a success story. I wish I could take credit for the hop industry of driving that and, oh, we were so smart, but the truth is that it's a combination of factors and arguably the most important factor was the changing consumer preferences in their beer. And so, we responded to a shift in consumer preferences, and we did it quickly enough and well enough that we were able to kind of capture virtually all of that demand increase within the existing industry. While there have been a few new farms that have started up in the last decade, the vast majority of the increase in production has come from industry participants that were there 10-15 years ago, and 40 years ago and 80years ago. And so, yeah, it's a success story, but it's also right place, right time. It's like the idea of surviving in your industry and just being still in business when something changes. And now, what was a really hard, difficult business is still hard, difficult business, but the rewards are a little bit better as well.

So that's all right.

Allan Gray

Luck is always a big factor. I always think about luck in base ball, right? So, you're lucky to hit a baseball because you're lucky to hit it 30% of the time, but if you don't swing, you don't hit it ever. And so, taking the swings is a big part of that innovation process. You're a bit humble. You are smart enough to know when to take some swings and see if you can get a hit and you've got a couple.

Patrick Smith

That's great. Yeah, taking risks, but also being mindful of what's the existential risk, what's the risk that will prevent me from being around for when the tide starts coming? In business generally, whether you're in agriculture or anything else, is a game of risk management and knowing when to swing and what pitches to let go. You swing at everything in the dirt, you're not going to get a hit either. So, there's a balance there, certainly. But you're absolutely right that if you're not missing every once in a while, you're probably not swinging enough. But don't swing at strike three in the dirt.

Allan Gray

That's fair. I think that's fair. Patrick we're running up against time just a little bit, but I want to ask you about the future of Loftus Labs or of Loftus Ranches and where you're going. What do you see as the next swing that needs to be taken? We see a positive future here? We see at tough future? Tell me a bit about what you see in the future.

Patrick Smith

Yeah, I think generally the hop industry, I would say the next five years are probably not going to be as good as the last ten. Just some kind of industry maturation. Little bit of changing now, consumer preferences, shifting away from beer in some spots. And so, for us, always kind of looking at what's next, and while hops are our primary business, they're not our only business. And so, as you know, one of the things that we've embarked on is using some of the capabilities that we've built in data and analytics to help other participants in the agriculture industry. Generally. Not just hops and apples, but other crops, other parts of the country get the most out of their data, whatever they have access to, to help them make better decisions and improve their businesses. And so that's been an exciting project as well. How do we help farmers and other agribusinesses really get better, make better decisions?

How do we help those decision makers, whatever decision it is that they're making that day how do we help them make a better decision? And so, we've assembled a really great team of 20 now that are solving challenges from labor issues in orchards to optimizing apple packing lines, to irrigation and hop drying problems. Really just working with the prime decision makers at farms and agribusinesses on how to kind of use the data in their world and kind of begin to build a culture of curiosity and continuous improvement in their businesses through the lens of getting more out of the data that they have. I think one of the challenges that we all face now in this modern world is more data than we know what to do with, but a general feeling of I'm not getting all the value out of this that I could. And that's the gap that we're trying to close.

Allan Gray

Yeah, it's interesting, to me, it connects to the concept. Hey, listen, the next five years of the hops industry may not be as good as the last ten. What we’ve got to do is get better at what we currently do, get more efficient, more effective. I happen to know through your early pieces forays you're describing what was really focused on the farm itself. How do we get the data in the farm itself to do a better job of making decisions to help us be more efficient? Now, you're taking that to other companies as well and helping them think through what their data looks like. I always say it's like a pyramid, right? Data and information is sort of the bottom of that pyramid. You got to have the data and the information, but really, it's just data and information. Unless you can turn that into knowledge, which there's some of that data and information that can be turned into knowledge, some of it can't. And then from there you turn that into insights and from insights that turn into implications. And sort of in a pyramid, I think of and where I believe we are in sort of the evolution in general across the digital framework of agriculture is we're moving data and information toward knowledge.

We've done a fair amount of that in the Midwest with our yield maps and things like that, but, boy, we're still a ways away. Still looking for the things you're looking for in Loftus Labs, which is OK, what are some insights that we can really get from this and say, hey, here's some things that need to be changed, or we could change? Or if we pulled this lever, we could get this output from it. Those are the sort of things that I see happening. And those are the things you're focused on, correct?

Patrick Smith

Yeah, absolutely. How do you drive your business strategy forward through better use of the data and information that you have? So, we started trying to build that capability at Loftus Ranches because we saw that our growth trajectory from an acreage standpoint was kind of flattening out. And so, in our business, like in most farms, the economic engine is some profitability metric per acre. That's why I don't care if you're a hop grower or a corn grower in Indiana. Profit per acre is really kind of the economic engine there. And so, for us, it was, how do we get more yield, better quality, whatever it is, or drive our cost of production lower per acre? If the acres aren't going up, the profit per acre needs to go up because our labor costs are going up, our fertilizer costs are going up, our fuel costs are going up, all these costs are going up. So, if we don't make any changes and our acre age stays the same, our margins are going to be eroded. And so, some of the questions that we started asking were things like, what variety should we plant on this field? Based on the soil profile of this field, what varieties would tend to do better there than others? That's stuff that I think you guys in the Midwest have done a lot of. But in hops, we had no idea we were just taking a variety planting in the field and seeing what happened. We've started doingthings like that here as well as this is a labor intensive crop. Our biggest cost by far is labor. And so, driving real time labor insights closer to thepoint of decision making. The managers out in the field, where are the people?What are they doing? Not yesterday, not what did they did last week? What arethey doing now? And is that the right thing for that group of 45 people to bedoing today, or should we take some of them and go over here? But if you don'tknow how many people you have where they are or what they're doing, it's reallyhard to decide what's the thing that they should be doing. And so, some of itis just putting the information in the right person's hands at the right time.

Allan Gray

Patrick, it's amazing. You were born into a farming family. You've done farming all your life. You've been educated outside the farm in some areas, but when you come back, you go back to farming, and now you're farming data, just like you're farming hops and you're farming apples. That's pretty amazing. Always the farmer, I suppose, even at heart. So, Patrick, let me ask you one last question as we wrap up here. What's today? Your favorite beer?

Patrick Smith

Well, I'm irredeemably biased because my siblings are running the brewery just around the corner here. My favorite beer is our most recent release at Bale Breaker that's Daybreak Pale Ale. It features mosaic hops really heavily in the kind of late hopping and dry hop. So, a lot of the flavor and aroma is driven by mosaic, which is one of my favorite hop varieties, both as a farmer and as a beer drinker. It's just an incredibly well done beer. So, yeah, kudos to my brother, my brother in law, my sister, and the whole team at Bale Breaker for Daybreak, because it's really good.

Allan Gray

I got to take note of that Daybreak. You know this about me, Patrick. I've talked to you about mosaic since the day I very first tasted it at a brewery in Dallas that focused on that particular hop. And I told you, you hit a home run with that mosaic because that is a really good beer. Patrick, thank you for taking the time to be with us today. It's been great to visit with you, learn about hops and about the innovations that happen out in the great Northwest. Thank you so much.

Patrick Smith

Thank you, Allan. It's been a pleasure. And, yeah, come back out and see us.

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