Carlsberg facing higher barley costs

Carlsberg has warned that it will be forced to raise beer prices in most of its markets due to higher-than-expected barley costs.

The spectre of rising input costs helped to drag down Carlsberg's share price by around 5% today (9 November), despite the brewer reporting an increase in sales and profits for the third quarter of 2010.

Carlsberg's CEO, Jørgen Buhl Rasmussen, said: "While we see signs of market recovery in the important Eastern Europe region, market conditions remain challenging in several Northern & Western European markets and looking forward, we will be impacted by rising input costs and will therefore have to increase sales prices."

Higher-than-expected barley prices following Russia's grain shortage are driving up Carlsberg's input costs, the brewer's management team told analysts on a results conference call. "Barley prices came up quite a lot on those marginal volumes that were not covered [by hedging]," the group said.

Carlsberg said that it is facing higher malt prices for at least the next nine months. It said that increases will be worst in Eastern Europe, which accounts for 52% of the brewer's earnings before interest and tax, courtesy of the firm's leading position on Russia's beer market via its Baltika Breweries subsidiary.

"They face significant pressure on input costs in 2011 and will need to take meaningful price increases," said analyst group Sanford C Bernstein.

Carlsberg declined to put a percentage on potential beer price rises in key markets.

An improving Russian beer market could help the brewer to offset barley costs. After suffering from the Government's decision to triple excise tax on beer in January 2010, Russia is clawing back ground, according to Carlsberg.

"The market will return to growth next year," the president of Baltika Breweries, Anton Artemiev, told analysts. He added that "consumer sentiment is strong". Carlsberg has not changed its forecast that Russia's beer market will expand by 3-5% annually on average over the medium-term. The market is expected to decline in mid-single-digits in 2010, which is better than originally expected in the aftermath of the tax hike.

Carlsberg today reiterated its guidance of a 40% rise in net profits for 2010.