Barley an issue: Fears over escalating beer prices overblown

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Prices escalating overnight. Shelves bare of their usual rows of bottles. Eyeing the cost of barley like the price of gas.

Relax, beer drinkers—the beermageddon is not to be.

Poor weather conditions hampered last year’s barley crop. Far less of the grain was available in the sort of quality required for beer brewing and in turn, barley—a crucial ingredient in beer—might cost a third more in this upcoming harvest than it did last year. Brewers are as tired of the recession as anyone else, and a major price hike in a critical cost is an understandable concern for them.

But for beer buyers?

“There won’t be an across-the-board increase in the price of beer,” Andre Fortin, Director of Public Affairs for the Brewers Association of Canada, explained. “You won’t walk into The Beer Store or in your retailer and see that everything’s gone up. It’s more of a brand-by-brand, beer-by-beer (decision). Brewers are going to have to make decisions down the road at various times to see how their pricing model works.”

Brewers have long-term, individually-negotiated agreements with suppliers, Fortin said, so even when the price of barley goes up, many big brewers won’t see a difference in their barley prices for a while. “It’s not like gas where one day you see oil go up and the next day you can expect the price at the pumps to be higher,” he said.

That’s not to say brewers aren’t eyeing—and talking about—the price of barley. Everyone involved in barley is, right down to the farmers.

“There are people in the trade who I would think would say this year is the worst they’ve seen,” said Lorelle Selinger, Manager of Barley Marketing and Sales for the Canadian Wheat Board. “We have seen bad quality crops in years like 2002-03, weather-related bad quality, but it just seemed that this year it was just a little bit of everything.

“It wasn’t just frost, it wasn’t just extra moisture. It was a combination of everything—everything bad that you can imagine to hit at once.”

The two major global malting barley exporters, Canada and Australia, both saw wet, unfavourable harvests in 2010-11, Selinger said. “For us to get a bad crop is one thing, for countries like Australia to have a bad crop is another, but for both to hit in the same year does make things a lot tighter than most,” she said.
That tightness is what separates barley from other crops hurt by poor weather last year, and from commodities in general, which are on the rise. Malting Industry Association of Canada President Phil de Kemp doesn’t hesitate when he calls last year’s malting barley crop “probably one of the worst on record.”

“Traditionally the Canadian Wheat Board…has about 2.2 million metric tonnes of barley on an average year that will be available,” de Kemp said. “We’ll buy about half of that both for making malt for domestic brewers and the remainder is offshore brewers whether it’s the United States, Japan, Korea, what have you.

“Because it was so wet last year and a lot of that barley started to sprout on us…the actual amount of barley the wheat board had this year was probably close to 900,000 tonnes total. For everybody. And since we buy 1.1 million tonnes, well, obviously we can’t even buy that because that quality wasn’t there.”

It’s simple supply and demand. Grown by farmers and germinated by the maltsters in de Kemp’s association to make malted barley, the foundation of most beers, barley is in short supply at the moment. Forward contracting prices are up, but more concerning is the lack of supply. Brewers will pay to get the malt they need, and some have had to supplement that with adjuncts because so little is on the market. “There’s no question the amount of inventory and supply is going to be very, very tight right up until harvest this year,” de Kemp said. “And everyone’s going to have to manage their stocks as best they can, so we’re all having to cross our fingers that we’re going to have half-decent spring planting, good summer weather and hopefully good fall weather, and obviously right now for parts of the Prairies, it looks like we’re going to have a pretty wet spring.”

And a wet spring could spell a double-dip barley price hike. While Selinger said this year’s barley increase isn’t too bad looking back even “over the past five years,” if there isn’t a half-decent crop coming this harvest, “we’re going to be into as many difficulties if not more next year at this time,” according to de Kemp.

Fair enough, but if Selinger is right and this increase isn’t particularly unusual, why all the beer buzz?

A spokeswoman for the Molson Coors Brewing Co., one of Canada’s two major brewers, said because of the brewery’s size, “we don’t expect that in the short term it will have an impact.” A smaller brewery might not have prices locked in as well as Molson Coors, and might not have the wherewithal to absorb the barley increase without passing the cost along.

So how much might a brewer spend on barley on a per-bottle basis? “Generally speaking, there’s three or four or five cents of malt in a bottle of beer,” de Kemp said. Assuming a barley price increase of 10 per cent or more, “that may add a penny” to the amount of barley in a bottle of beer, he estimated.

At that point it would be up to the brewer to make price changes as they see fit, but assuming that entire price increase was passed onto the consumer, the price of a case of 24 bottles of beer would be up by less than a quarter. Not exactly the end-of-the-world barley price scenario Big Rock Brewery CFO Dwayne Dubois brought to mind when he told Reuters to “drink up now, is my advice” in March.

There are other commodities beer fans might be better off watching—namely oil. Gasoline prices haven’t just skyrocketed the past few months, they’re also the main driver of inflation in Canada in the early part of 2011. Beer is a heavy product carried across provinces, across the country, and even across the globe. If anything is likely to make brewers jack up the price of beer, it may be the cost of transportation.

Labour is another major cost in producing beer, and one that could increase depending on the path inflation takes.

“Obviously there are quite a number of people who work in a brewery, and they make up the majority of the costs,” Fortin said. “Cost of utilities such as power and overhead costs for a plant is a major cost. We’re lucky in Canada that our brewers get to use very good water, but that also comes at a cost to the brewer, and then there are other ingredients such as hops and any other ingredients a brewer might want to put into its beer to make it unique. “So those are all costs to be taken into account, and before it gets to a consumer there is retail costs, transportation costs and taxes, and, more than likely, deposit.”

Taxes

It’s almost a wonder why anyone asks how much the price of barley is going up at all. More than half of the retail price of a bottle or can of beer—51 per cent—is taxes, according to the association. For all the talk of what the farmers, the maltsters or the brewers might be making on a barley price increase, most of what a consumer spends on a bottle of beer goes to the government.

For all the frustration brewers are facing with last year’s tight barley crop, there is one industry in Canada that will benefit from the incoming price hike. “The only silver lining in it is it’s certainly going to be good for farmers,” de Kemp said.

“When a farmer’s going to decide in the spring what he’s going to grow, if he’s got 1,000 acres, he’s going to take a look at what his return on investment’s going to be on a per-acre basis, so he’s going to look at canola, he’s going to look at wheat, he’ll look at peas, he’ll look at lentils, and he’ll look at barley, and he determines what his input costs are to produce each, and he’ll take a look at what his forward contracting prices could be, to see if he can lock in something ahead of time.”

So Canadian beer drinkers might lose, but Canadian farmers will definitely win. And as for beer-drinking farmers?

“I don’t think you’re going to see much of a sticker shock,” de Kemp said. “But for beer drinkers or beer aficionados saying, ‘What? The price of beer is going up?’ Again, most of it is in the price of taxes…we’re talking pennies a bottle, but when you start adding up how many bottles they make, it does make up a significant percentage of (brewers’) costings when they’re producing beer.”

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