A slight rise in this years harvest wont help brewers as barley prices stay high

A slight rise in this year's harvest won't help brewers as barley prices stay high

European brewers are likely to need extra price increases in 2012 to cover high malting barley costs, but face a challenge to do so amid weak economic conditions.

Barley production across the European Union is likely to remain subdued in the 2011/12 season, according to data from Euromalt. The total harvest is forecast to hit 54.6m tonnes, albeit up 3% on the previous season but down by 12% on 2009/10 and by 16.6% on the bumper crop of 2008/09.

Trade body Brewers of Europe has predicted that supplies will remain tight for brewers in the region over the short-term. Malting barley used by brewers accounts for around a fifth of annual barley production in Europe.

All brewers will likely have to raise beer prices further in order to offset higher barley costs, according to analyst group Sanford Bernstein. Heineken and Carlsberg are the most exposed of the multinational brewers, because of their relative scale in Europe, it said.

In a note last month, Bernstein said that malt prices were between 20% and 25% above levels in the previous year. "It is highly likely that the brewers will need to be more aggressive on pricing in Western Europe in 2012 than in 2011 in order to avoid a margin squeeze," it said. "Our best estimate today is that brewers would need an approximately 3% to 4% increase in selling prices in Western Europe to offset the pressure from barley prices alone, plus something extra to reflect higher energy costs plus labour inflation."

Beer price rises, meanwhile, will have to be achieved within a depressed economic environment. According to the Organisation for Economic Co-operation and Development (OECD), unemployment has affected key beer consumers - those aged between 18 and 24 years - disproportionately in its member countries.

"Unemployment remains stubbornly high in the OECD area with the latest economic forecasts suggesting job creation will remain anaemic in the near term," the Paris-based policy body said last month. Data published by the OECD today (11 October) shows that unemployment in the eurozone area has hovered at around 10% since November last year.

In addition, several European countries face sluggish economic growth and potentially prohibitive debt levels, on top of the obvious turmoil in Greece. National debt to GDP is above 80% and rising in the UK, France and Germany, and already more than 100% in Italy, according to European Commission figures.

In short, there is little room for manoeuvre. The situation increasingly bears similarities to the Great Depression of the 1930s and the prolonged stagnation endured by Japan in the 1990s.

Within this context, European beer markets are struggling. Brewers of Europe figures show that, between 2008 and the end of 2010, per capita beer consumption fell in every EU member state except Estonia. Consumption had been ebbing in many western markets for several years prior to the global financial crisis. But, consumer confidence has been hit by Government austerity measures, including duty tax rises, which have exacerbated the situation in the region and, in particular, reversed some gains in Eastern Europe.

At least, as far as barley is concerned, Sanford Bernstein believes brewers should get some margin relief in 2013, when crop levels are expected to straighten out. 

That said, this week the Food & Agriculture Organisation has released a report predicting that food commodity prices will remain high - and volatile - for the forseeable future. While malting barley is not a food commodity, its pricing is closely linked to price fluctuations on most grains.

With pressure at both the consumer and supply ends of the chain, European brewers' sourcing strategies will continue to be under strong scrutiny in the year ahead.