A subject close to all brewers hearts, malted barley, is the subject of Simon Jacksons first comment piece for just-drinks

A subject close to all brewers' hearts, malted barley, is the subject of Simon Jackson's first comment piece for just-drinks

As we continue to up our commentary on the drinks industry, this week sees the first in a quarterly feature in which Simon Jackson, executive director of the Institute of Brewing & Distilling, gives us his view on the issues facing the brewers amongst us. Here, Jackson considers the pricing of raw materials, and asks what we have learned from the fluctuating fortunes of malted barley.

It’s an interesting observation that malted barley, the key raw material for beer production, is often referred to as a commodity when all those within the sector would recognise malt as being rather more than that. But, whatever we think, the price and availability of malt is intrinsically linked to the global commodity markets for grain, and it is because of this that brewers and distillers are keeping more than an eagle eye on what is happening in the markets.

The supply and price for cereals always ebbs and flows in line with the normal variations in climate and demand. After a bubble in 2007, which alerted brewers to what the future might look like, there was some respite, but the subject returned to the table with a vengeance in 2010.

The simple matter is that demand for cereals came close to outstripping supply last year, and this forced prices up to near record levels. Price is one thing but actually resourcing sufficient for your forecast production really rattles cages and tests the nerve of procurement departments.

So, what happened in 2007? And, were lessons learned or was the repeat in 2010 a fait accompli?

Cereal markets operate at global levels and prices are linked to availability at a composite level based on crop yields from the major producing countries. During 2010, the market prices responded to poor yields from Eastern Europe and difficulties in a number of other producing areas, and sourcing and pricing plans were challenged. But, beneath the problems with Eastern Europe and elsewhere are other factors which are altering the long-term balance of the markets; these are the ones that should be attracting most attention. After all, ‘one off’ crop failures are factored into world safety stocks and should be managed by that system.

The overall stock situation is determined by a number of changes at the production and demand level. The world needs more grain – there are more mouths to feed and the quality of diet is improving. With a significant increase in the percentage of protein in the diets of developing countries, that protein has to be produced by feeding more livestock with more cereal. Add to that the demand for cereal from the bioethanol sector and we have the ‘bubble’ – but, perhaps it is no longer a bubble, and now is the time to plan for these fundamental structural changes in the market.

As an aside, it is interesting to note that the supply of rice did not experience the same systemic problems during 2010 - it is certainly less vulnerable to the bioethanol ‘effect’, but perhaps the less industrialised farming practices mean that the risk of crop failure is ‘better spread’.

At the International Brewing Convention (IBC) held in the UK in 2007, there were well-structured arguments from the supply side for brewers (and others) to lay out new ways of working with maltsters, merchants and farmers. Lay down medium- to long-term agreements with farmers and they will react accordingly, was the call. The key word supporting these proposals was ‘sustainability’- encouraging farmers to plan for sustainable and growing production of cereals to meet the long-term demand and not to play the spot market. Quite a challenge, really, when at that time those farmers that had stock were able to take full advantage of the spot market as end purchasers had not fixed sufficient contracts. Also, not much of an incentive, then, to enter into new, longer-term agreements with the very people that had sold at the top.

Then, last year, at IBC 2010, all the talk was of the latest ‘crisis’ and the lack of incentive for farmers to sow the right crops for the brewing industry. With wheat prices setting the pace and providing a relatively high and predictable yield, why bother with the ‘messy’ business of growing lower yielding and more tightly-specified malting barley?

This is not a crisis - the world has shown itself to be more than capable of producing more grain –  the ‘green revolution’ – but, now is the time for more rigour in medium- to long-term planning across the whole supply chain to ensure that the sustainability of cereal production - and for brewers and distillers, the right type of cereal - is assured.

This will mean that all parts of the supply chain will need to accommodate new models and new ways of working so that the markets work to the long-term sustainable benefit of all those in the supply chain, from farmer through to consumer.