EU: Malting barley shortage could cost brewers

Malting barley prices in the European Union have already risen over 80% to around EUR220 a ton this season from about EUR120 a metric ton last season, Dow Jones commented on March 12 through CattleNetwork Today.

Marieke de Rijke, analyst with Rabobank, said the higher prices have cut into maltsters' margins after they had already completed contracts with brewers to supply malt at comparatively low prices. But as maltsters negotiate new supply contracts for next season, brewers will also have to pay more, eating into their profits and possibly meaning more expensive beer.

"The market is totally dry of barley at this moment in time," said Heineken NV's chief executive Jean-Francois van Boxmeer when the company released its results recently.

With global weather patterns becoming more volatile, droughts could become more common in future, industry experts say. In addition, the increasing focus on biofuels to curb auto emissions could see competition for cultivable land, including area seeded for malting barley.

Global barley stocks are expected to drop to an eleven-year-low of about 20 million metric tons by the end of June, according to analysts with Strategie Grains in France. And traders and analysts say stocks of higher quality malting barley are even harder to come by.

Barley production was drastically reduced in the 2006-07 growing season after adverse weather hit three of the world's major barley producers, the European Union, Canada and Australia. A severe drought cut Australian output by over 60% to 3.7 million metric tons.

Raw materials account for about 20% of the total costs for Heineken, and of that, barley typically accounts for between 7% and 8% of a brewer's cost base, according to SAB Miller PLC (SAB.JO) spokesman Nigel Fairbrass.

Barley currently accounts for 6% of a beer's sale price, compared to packaging at around 14%, according to analyst Gerard Rijk at ING Barings.

With costs of aluminum, glass and energy also on the rise, Rijk says brewers will need to raise beer prices by 1.5% to 2% in the coming year.

Heineken, the world's fourth largest brewer by volume after InBev SA (INB.BT), Anheuser-Busch Cos Inc. (BUD) and SABMiller PLC (SAB.JO), reported a 59% rise in 2006 net profit to EUR1.21 billion on higher sales and profit from property sales, and despite the lack of malting barley expects a strong performance in 2007.

SABMiller's Fairbrass was similarly sanguine about the short-term outlook. "We are to some degree insulated at the moment from the higher cost of barley thanks to forward buying," he said. However, he declined to comment about next season's pricing.

Demand for quality malting barley in the E.U. now exceeds available domestic supply, according to the U.S. Department of Agricultural Foreign Agricultural Service. The German brewing industry will see a barley deficit of about one million tons this season, it adds.

And China, the world's largest brewer and beer consumer, left without its customary Australian supplies, has been picking up what it can from France.

Heineken's van Boxmeer said this year's shortage is an "exceptional event" and unlikely to occur two years in a row. And Strategie Grains forecasts world barley output could rebound by 10 million tons in the coming season. And Australia's government expects barley output to bounce back to 8.9 million tons. Due to the expected production rebound, prices for next season's crop are already running about EUR70/ton below the value of current supplies.

However, much still depends on weather. Strategie Grains and Rabobank's de Rijke say unless global production increases well past current projections, stocks will not increase sufficiently to return prices to last season's level. Already, wet conditions in France have raised concerns over early spring barley plantings and stalled further sowings.

Producers who were eagerly forward selling the upcoming crop to take advantage of the relatively high prices have stopped doing so. There has even been some anecdotal talk of cooperatives washing out of some contracts with maltsters.

"Producers don't want to sell until they can get the crop in the soil," said a trader.

And even though a back-to-back drought in Australia is unlikely, de Rijke notes that Australia has seen an increasing amount of dry seasons in recent years.

"Prices will be more volatile in the future due to the influence of biofuels," adds de Rijke.

Rising demand for popular biofuels crops such as rapeseed and corn is giving farmers more choices. "It's a structural shift," said de Rijke.

14 March, 2007