Barley shortages threaten brewers margins in Europe

Barley shortages threaten brewers' margins in Europe

Concern is growing that brewers with high exposure to Western Europe are going to face worse-than-expected cost pressure due to shortages of malting barley. Here, just-drinks looks at what the market observers are saying.

Northern Europe is enduring what is thought to be its worst drought for 100 years. In France, the European Union's largest grain producer, the government has today (10 June) pledged to set up a EUR1bn (US$1.44bn) emergency relief fund to help farmers.

For brewers, particuarly for the likes of Heineken and Carlsberg with large exposure to Western Europe, cost pressures look set to intensify significantly over the next few months. The situation is more severe when one considers that the world grain market is only just recovering from Russia's decision last summer to ban all wheat exports.

"In the last two months, we have seen a sharp rise in the forward price for malting barley from the 2011 harvest in Western Europe," said analysts at Sanford Bernstein this week. "If these prices persist, there is likely to be a much stronger rise in input costs in 2012 than we expect in 2011.

"It is now nearly certain that the brewers will need to be much more aggressive on pricing in 2012 than in 2011 in order to avoid a margin squeeze," said Bernstein, estimating that brewers might need to increase selling prices by between 4% and 5% in Western Europe, just to offset the higher barley costs.

Brewers could find this extremely difficult in a region where beer consumption has consistently fallen for several years and where consumer confidence remains constrained by government austerity measures.

In May, malting barley prices rose above EUR300 (US$430) per metric ton for the first time on the Paris Stock Exchange, according to Bloomberg.

Bernstein said that it believes Heineken will be most exposed to the barley price rises, due to its strong position in Europe. Carlsberg will follow closely behind, the analyst said, but noted that SABMiller and Anheuser-Busch InBev should be less affected, due to their global reach and higher pricing power.

Meanwhile, against the backdrop of unusual weather conditions in Europe, the United Nations (UN) warned this week that high food commodity prices globally show no sign of weakening.

"The general situation for agricultural crops and food commodities is tight, with world prices at stubbornly high levels," said David Hallam, director of the UN Food & Agriculture Organisation's (FAO) Markets and Trade Division.

The FAO said that food commodity prices have soared to levels not seen since 2007 and 2008, when widespread shortages of grain crops also put multinational brewers under significant strain.

Bernstein countered that "as yet, the scale of the potential headwind is not as great as it was in 2007/08; and it is possible that rain in June may alleviate the pressure".

Still, if the forecasts are correct, it could be a rocky ride for brewers in Western Europe over the next 12 months. Longer-term, the fresh concerns only add to evidence that volatility in commodity pricing is here to stay as demand for resources grows.