When it comes to the main ingredients in brewing, an argument could be made that any of the four—water, barley, hops or yeast—is the key ingredient needed to make beer. However, hops were a relatively late addition to the brewing process, yeast wasn’t identified until about 150 years ago, and water is pretty much taken for granted (historically speaking). This leaves us with barley as the key ingredient and malting barley the key commodity by which beer is made for mass consumption.
With more than 19,000 breweries worldwide, barley is not only the closest thing that beer has to a “terroir,” but its status as a commodity means that many market forces depend on the availability of malt in the brewery both in the United States and across a worldwide marketplace.
Economics vs. Politics
Because grains are speculative ventures on the commodity futures market, the value of barley can fluctuate greatly year-to-year. As prices go up and down, a farmer’s desire to cash in on a specific crop can alter what is grown and, subsequently, the price of the crop. These ups and downs in the market mean that barley has to compete against corn, wheat, soybeans and—somewhat interestingly—itself, since feed barley generally is not used for malting but is also a cash crop.
According to the National Agricultural Statistics Service of the United States Department of Agriculture (USDA), barley prices have dropped rather dramatically in recent years: almost a 14 percent drop from 2015 to 2016 for all barley sold in the United States. However, prices for malting barley have remained relatively high–almost double that of feed barley in 2016 ($5.32/bushel v. $2.76/bushel). This means that farmers have an economic incentive to grow more malting barley than feed barley, as the per acre valuation goes up with every acre harvested. However, while malting barley prices do well when compared to feed barley or corn ($3.21/bushel in 2016), they pale in comparison to current soybean prices ($9.93/bushel). Thus, there is a limited monetary incentive for additional barley to be planted.
At present, malting barley production-to-consumption ratios are pretty much at capacity, with an estimated worldwide production 22.5 million metric tons in 2015 and an estimated worldwide capacity in 2016 of 25.8 million metric tons. And while beer consumption is experiencing negative growth (down about one percent globally every year since the 2008 recession), the need for malting barley continues to grow owing to several key market factors.
Ciska Van Den Berg, an analyst with Rabobank Grains and Oilseeds, told Beverage Master Magazine: “Malting barley needs are expected to grow by 14 percent [by 2021]. The main drivers for this increase are the growing global population, the ‘premiumisation’ [sic] of the beer market in emerging markets, [and]… the growth of craft beers, which require four to seven times more malt than ordinary beers.”
This is due to all-grain brewing methods that eschew adjuncts popular in mass-produced lager beers popular in developing countries.
At this growth rate, available malting capacity will max out in less than five years unless major changes are made to the industry. Thus, incentives are needed to get farmers to plant more malting barley as opposed to other crops that might be more profitable or easier to grow. In addition, more malting facilities will need to come online to address this increased production.
This, primarily, is where politics get involved. Aside from excise taxes on imports, a myriad of laws can affect the supply chain, from state municipalities on through global trade agreements. Add to this that barley is an international crop, and what happens geopolitically can greatly impact how much barley is grown, harvested, and shipped to malting houses. For example, the sanctions against Russia have impacted that country’s ability to compete on the open market; the combined annual malt output of Russia and Ukraine (legally separate countries but politically Ukraine is strongly influenced by Russia’s sanctions) is estimated to be the same output of Germany. These geopolitical struggles affect the larger supply chain and create uncertainty in global markets. China is also greatly affecting price valuations. Their malt production capability is a fraction of its need and to address the shortage, they are developing farming in Africa while paying a premium to buy up more than 50 percent of available barley in Australia.
Additionally, the need for malting barley becomes a moral issue when the world food shortage is examined. Doug Egan, president of Cargill Malt, the largest maltster headquartered in the US and the third largest in the world, says his company is well aware of the challenge the future will present regarding population density and a need to address trade issues, not only in terms of beer, but also in terms of food security.
“If we have to double food production by roughly 2050 and we already have a billion people a day that are not getting sufficient enough calories to live, then I think the whole question about food security is the more senior… priority than trade benefitting [open markets],” Egan noted at a panel in 2015.
However, where there is a demand for barley—whether for brews or nourishment—there will be continued legislation and speculation in the marketplace. Much of this is focused on the local economy, and those with strong governments (whether the EU in light of Brexit or the individual states and provinces in North America) will be first in line on the receiving end of a limited grain supply.
In the US, individual states are creating incentives for “farm breweries” that require significant proportions of the raw materials sourced to make beer come from the home state. New York is working to encourage and protect barley farms at both the state and national level: Senate Minority Leader and NY State Senator Chuck Schumer recently introduced federal legislation to offer malting barley crop insurance to protect farmers from loss due to weather and blight. The state’s 2012 farm brewing law will eventually require all beer made from farm breweries to source 90 percent of ingredients from the state, requiring incentives to make sure farms can meet growing demand. Due to this, locally-sourced ingredients become a priority and limit exports or imports as part of a free marketplace.
Vertical Integration
The idea that a state like New York, which recently crossed the 300 brewery threshold, can integrate farmers with maltsters with breweries is part of a larger global trend towards vertical integration.
The World Barley, Malt, and Beer Conference took place in March in Vienna, Austria. The title of the 2017 conference was, “The Supply Chain at a Crossroads,” and included topics on industry consolidation, among others.
Egan explained at the conference: “A supply chain from barley seed to beer that can be sustainable as we go forward is [key] to compete against wheat, soybean, and corn. The entire supply chain has to compete as one with a profitable and fit-to-grow farming partner, seed company, maltster, and beer company.”
At present, more than one-third of the world’s malt production is produced by the top three maltsters – Soufflet, Malteurpo, and Cargill – and roughly the same percentage of the world’s beer production is produced by the newly formed AB InBev-SABMiller conglomerate. Just as Cargill speaks of supply chain integration, the world’s largest brewer is swiftly buying up entities in that supply chain. In addition to home brew supply companies like Northern Brewer, AB InBev is also making exclusive agreements with farmers worldwide. Most recently, they received exclusive rights to South African hops farms, usurping long-standing agreements between South African farmers and US craft breweries.
Both hops and malt are often ordered years out, and new breweries must have contracts in place for ingredients if they want to be successful. Many specialty malts that once could be reordered with perhaps a one week delay, now may take several months to get back in stock, limiting smaller brewers that cannot leverage their market share to buy up ingredients on an international scale.
In the short term, it may be that vertical integration will separate successful brewers from those that cannot compete. Given that the market seems to be splintering along lines of global competition or hyper locavorism, it may be mid-level brewers who want to scale up that are caught in the throes of a market where demand is in increasingly overwhelming supply.