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.