For 28 years, one of the most recognizable hot sauces
in America used this ranch to source its peppers. Craig Underwood supplied sriracha's primary ingredient
and helped usher a simple family business into a multi-million dollar international brand. Our production increased, you know, there were several
years, 2 or 3 years when it was increasing by 40 or 50% a year to the point where in 2015 we had
2000 acres of jalapeños and we delivered 100 million
pounds. We were delivering 50 truck and trailer loads every
day for ten weeks. Today, Huy Fong Foods, the most popular maker of
Sriracha, controls a 6.3% share of the entire hot sauce market. That is the third largest of any individual company in
the US. In 2020, the company generated nearly $131 million in
revenue. But the relationship between Underwood ranches and Huy
Fong Foods ended in 2017. And over the past few years, the spicy sauce has been
hard to come by. Prices have skyrocketed as third party sellers are one
of the few places the condiment can still be found. A two pack of 17 ounce bottles is going for as much as
$70 on Amazon. Supply chain and weather related issues can make it
hard to find Sriracha hot sauce this summer. Now, the company says they still don't know when their
supply will bounce back. I visited six different grocery stores in New York City
and I called another ten. Hi. Do you carry Huy Fong sriracha sauce? Oh, no. We're being been out of stock for like two
months already. I even checked local inventories on Instacart and Huy
Fong Sriracha sauce was nowhere to be found. The bottles right in front of me came from the
refrigerators of members of the CNBC digital video team. Sriracha is made of five main ingredients
garlic, vinegar, salt, sugar and red jalapeño chili peppers. And without those peppers, there's no sauce. The company declined CNBC's request for an interview,
but for years, the Sriracha maker has pointed to poor weather conditions affecting the quality of its
peppers and therefore creating a shortage. But the story's a lot more complicated than that. Craig Underwood tells me that if there hadn't been a
legal battle, there would not be a jalapeño shortage for Huy Fong. We would have plenty of Sriracha. Given my past experience with him, I have no reason to
doubt that. CNBC visited Underwood Ranches, the farm who worked
with the Sriracha maker for nearly three decades,to dig into what's really happened to the beloved rooster
bottle hot sauce. On July 24th, 2020, Huy Fong Foods sent an email to
customers that it was experiencing inventory shortages of the chili peppers used in its
products and warned of manufacturing delays. The company currently sources its peppers from farms
in California, New Mexico and Mexico. The fact that other crops are more profitable in
jalapeño production really is very limited in California, close to this processing plant. And even here in New Mexico, where I'm based. We don't grow very many jalapeños. Most of them that are processed are actually procured
from growers in Mexico. This region has been experiencing an extreme drought
for a number of years now. These peppers are typically grown under irrigation and
so when you don't have rainfall and an adequate source of water to irrigate,
you end up with a failed crop. The company released a follow up statement in April of
2022, reiterating its supply shortages. It may be not a hot sauce summer for Sriracha fans. Plus, how climate change could affect the condiments
at your July 4th cookout. Huy Fong said a year ago that they were hopeful the
shortage of 2022 would end in September. But here we are in the summer of 2023 and it's
happening all over again. Craig Underwood says he's been sourcing jalapeno
peppers from Mexico for years and the California drought had no impact on his ability to grow the crop. The area where Craig was growing those peppers had one
of the most stable water supplies in the entire state. We had a production capacity in 2015 for 100 million pounds. Today we would still have that capacity and more. There would be no problem supplying all the peppers
that Huy Fong needed if we were still producing them. In 1975, David Tran began making sauces from peppers
grown by his brother on a farm north of the city formerly known as Saigon, Vietnam. Tran decorated the caps of the sauce jars with a
rooster logo because it was his astrological sign. Just four years later, Tran left for Boston on a ship
named the Huey Fong freighter. Tran founded Huy Fong Foods in Los Angeles' Chinatown,
and then moved operations to a factory in Rosemead. In 2013, the company moved to a new $40
million plant in Irwindale, California. Mandy it's the hottest hot sauce on the market, but
right now it's in hot water. Sriracha maker Huy Fong Foods will be in court this
afternoon, facing off against the city of Irwindale over its new plant. It burns your throat and your eyes a little bit. It's actually penetrating inside the homes. You walk in and you can smell the the chili inside the
homes as well. But that case was dropped the following year in May of
2014. Eventually, Irwindale realized, you know, we don't have
a lot of industry in Irwindale. And here is this huge plant that's doing big business. As the company resumed manufacturing and continued to
amp up production, it needed more of its most important ingredient, peppers. Huy Fong Foods has built its empire, producing only
three sauces. Their chili garlic is a chunky hot sauce full of
garlic flavor, while their most popular sauce, Sriracha, is a smooth paste. Their third offering is called Sambal Oelek, and it
has no flavors added to those pure chili peppers. We couldn't seem to get a hold of that sauce anywhere. In 1988, Craig Underwood wrote a letter to David Tran. And I said, you know, would you like us to grow some
jalapeno peppers? And he wrote back and said, yes. So we we grew 50 acres for him that year. As Sriracha became so popular. David Tran wanted more and more peppers. So Craig started clearing out all kinds of other crops
that he'd been growing to make room for jalapenos. I covered agriculture for CNBC. I knew Craig for years. He was doing all kinds of things out there as he was
trying to grow more and more peppers. It was even named Bon Appetit's ingredient of the year
in 2009. We were sourcing the seed, we were trialing the
varieties, we were growing the crop, building the equipment, harvesting it. We had we had to provide or secure all the
transportation to get the peppers to the plant. We were scheduling it. Those are all processes that normally a processor
would do. We did those for Huy Fong. By 2013, the hot sauce maker's annual revenue reached
$85 million. But within a few years, the relationship between Huy
Fong and Underwood ranches began to fall apart. At the end of 2016, we were pretty sure we had an
agreement going forward because we were always planning three years ahead. We were securing land, hiring people, building
equipment. But court documents show that in 2016, the Sriracha
maker made an agreement with Underwood Ranches to purchase 1700 acres worth of peppers for $13,000 per
acre. Well, then, according to Craig, David Tran reneged on
that deal. So he had all these peppers and no one all of a sudden
to sell them to. Tran breached multiple financial agreements, including
failure to pay in advance of $18 million. He began the formation of a new company called
Chilico. Its goal was to source peppers for Huy Fong from
different farmers. If there's a good year for jalapenos, if we don't have
diseases, if we don't lose fields to weather related conditions, then we may have an
overabundance. So I believe that that's what was going on when the
they decided to look for other supplies that were cheaper than what they were purchasing from Underwood
Farms. And I guess they had hoped that that would continue,
but it doesn't. The jury found that Huy Fong never intended to buy
Underwood's 2017 crop supply. What was a wonderful relationship between this business
built by this immigrant and this agricultural family that had been for
generations? Growing food in Southern California turned into a
horrible, ugly legal fight. The Sriracha maker decided to terminate its
relationship with Underwood Ranches long before the end of the 2016 harvest and even flew a drone over
Underwood's crops to share his methodology with other growers. It was an espionage operation concealed as just gathering more information for Huy Fong. The company wrote in an Instagram post on March 28th,
2019 that Underwood ranches, who had made high profits with its relationship with Huy Fong,
decided to stop growing chili peppers for Huy Fong without any warning. In the end, Craig Underwood won a $23 million judgment
from a jury that was in Ventura County in his backyard. But he also had to pay David Tran back the 1.5 million
that Huy Fong says they overpaid. It was a much bigger win for Underwood
Farms. It was a much bigger loss for Huy Fong Foods. David Tran appealed and Craig even won on appeal. Since the verdict, Underwood ranches started growing a
number of crops besides peppers. We didn't have much to grow on that land, but in the
intervening years we've taken on a lot of contracts. We're growing... this year we're growing almost a
thousand acres of canary tomatoes. With nearly 30 years of industry knowledge, it was only
natural for Underwood Ranches to begin making its own... yup, you guessed it, Sriracha. So this is the first Sriracha that we developed. This was actually the first sauce as well. This is made with the same exact peppers that we grew
for Huy Fong for 28 years. Sriracha isn't a trademark, so Huy Fong can't prevent
competitors from creating a similar chili pepper sauce. You call it Sriracha, but it needs to taste like
Sriracha. Basically, the base of Sriracha is you've got your
vinegar, you've got your garlic, you've got your jalapeño notes to it. And like Underwood Ranches, there are a variety of
other brands that sell Sriracha sauces in stock at most grocery stores. Hot sauce is, after all, a $2.6 billion industry and
has grown at an average rate of 2.5% over the past five years. Most interesting is whenever there's a story on either
the Internet or on, let's say, Reddit, our computers basically break down from all
the orders coming online. People understanding the relationship of what we had
and that we were the original grower. Since Underwood Ranches has diversified its crop
production while simultaneously producing its own hot sauce, it has needed to purchase peppers from external
sources to keep up with supply needs. We've been getting jalapeno peppers out of Mexico for
many years. We've had no problem getting peppers. Jalapenos are a tricky crop to grow, so it really
requires some knowhow about the best way to establish your stands. So if you have someone who's inexperienced, who's
trying to grow jalapenos or other types of peppers for the first time, they absolutely could have crop
failure when when their neighbors are doing great. The relationship between Underwood and Tran may be
irreparable, but consumer demand for Sriracha is only getting bigger. Domestic hot sauce industry revenue is
expected to continue growing at an average rate of 1.5%, reaching $2.8 billion in 2028. The tough thing is that there really isn't a short term
solution here. Companies and agribusinesses are going to have to
rethink how they source their products. These new grower relations that the processors have
established come through for them. I do think that they'll be able to do a full pack of
the Sriracha sauce this year. And so hopefully this this will be the last year of
the Sriracha shortage. While the Sriracha shortage out of Huy Fong Foods
clearly stems from a complex web of supply related issues, consumers are seeing agricultural shocks in
the food industry on a more regular basis. As a society, we really have to start investing in
science, research and technology to help mitigate the effects of climate
change on our food supply.
