We will remember 2011 as a year of significant change and challenge in the brewing industry. Hampered by incredibly poor weather in barley growing areas, the world crop was small in size, and in many areas barley quality was less than ideal. Planted U.S. acreage was the lowest in many decades, due to both weather and significant market changes.
The big news, still ongoing at the time of this post, is the dismantling of the Canadian Wheat Board (CWB). See the Nov/Dec 2011 issue of The New Brewer for a small sidebar piece on this topic. For decades, Canadian growers had to sell through the CWB, which served as a so-called “single desk” market maker, setting the market price, and acting as sole supplier to buyers. But now, by the end of 2011, or in early 2012, Canadian law will disband the CWB.
The rhetoric surrounding this highly political process, as described in “As Wheat Board shrinks, new grain contracts appear,” has made it difficult to figure out what’s really happening, and more importantly, what this will mean for North American brewers, barley growers and maltsters. This market reform was not about corporate takeovers or political gifts as sometimes described in the news. Nor was it about unshackling supply chain stakeholders from the tyranny of government. Regardless of the motivation, CWB is going away, and that fact will reshape the markets.
It’s hard to read the tea leaves and divine what the future will bring. But you can learn a lot by reading the news, talking with suppliers, and putting on your thinking cap. Here are some possible outcomes to watch for:
It’s not at all clear what price movement will be in the future. In the near-term, the market will likely be characterized by increased price volatility. The long-term outlook on price is unclear at best. Those who assume the price will simply decrease due to a more open market are also assuming the number of growers and other factors will stay constant, which they won’t.
CWB did a great job of fulfilling domestic high quality malting barley needs first, then fulfilling export market (ex: North America) needs. The new market will be characterized by less supply surety for North American maltsters, growers and brewers. Orders will come into the market and be filled in order at the current price. Brewers will be in a position where they’ll question whether price or surety of supply is more important to them. CWB’s demise will however make this question academic.
Maltsters will need to be much more proactive to secure their supply of malting grade barley. They’ll have to engage in custom contracting much more directly, probably much earlier in the annual contracting and planting cycle, and with many more growers. They’ll have to get out earlier, doing selection and committing to ensure supply. They may have to increase their physical presence in the Pacific NW region of the U.S., or in SW Canada, in order to achieve their business goals effectively. So, it’s reasonable to expect the slow migration out of the U.S. Midwest to continue and to hasten.
Brewers from North America will likewise need to be far more active in sourcing their malt from Canada. The more open market will mean brewers from other regions will have more ready access to Canadian barley, and at the same time, their supply will be less secure. This is important for U.S. brewers because Canada exports about half of their malting barley, and supplies 96 percent of the barley imported by U.S. brewers, so represents a huge trade partner. Even as overall U.S. beer production shrinks (at this time, 3 years in a row of 1.5-2 percent barrel basis declines in volume), China is expected to become the world’s largest importer of barley within the next ten years. The ground is shifting under U.S. brewers’ feet.
The number of Canadian barley growers will likely decline over the long term. This trend is already happening in Canada and the U.S. for many reasons—competition from other crops, price—but the demise of CWB will hasten the process to some degree. Growing malting grade barley is risky and takes skill. In Canada, the selection rate on average is about one in three, so there are a lot of crops that don’t make the cut. Growers that make malting grade three years out of four are sophisticated, and have figured out how to produce a very high quality crop in spite of all the vagaries Mother Nature throws at them. The larger producers who can make malting grade will get bigger because they know what they are doing, and therefore their risk exposure is somewhat lower. Growers who don’t make malting grade routinely will likely switch to canola, wheat or other crops.
Supply Chain Management
To the extent that CWB provided certain critical supply chain management functions, growers will also have to rely on other supporting agencies or parties to pick up the slack. CWB coordinated transportation in a way that allowed even very small growers to access elevators and over-the-road or rail transport. CWB provided industry statistical reports that allowed growers to make more educated planting decisions. And CWB operated a sophisticated weather station network (WeatherFarm) that growers could access to make real-time agronomic decisions, such as when to plant, harvest, fertilize or apply pesticides. All of these functions, and many others, will either fall to other organizations, or will cease to exist.
Canadian markets are already creating futures contracts to buy and sell barley, determine market prices, and to hedge for risk management. The Minneapolis Grain Exchange is planning on a 2013 opening for Canadian wheat contracts; can barley be far behind?
The very largest brewing companies often grow and even malt their own barley, creating surety by direct action. Whereas, U.S. craft brewers are in a less secure position as the market changes. Most are too small to contract with maltsters for silo deliveries of malt, and many buy malt from third party dealers, another step removed from maltsters. Even the very largest craft brewers are probably too small to direct contract with growers, although, they are large enough to contract with maltsters.This means that craft brewers will be inherently relying on the ability of maltsters to very rapidly adapt to the landscape of the new marketplace. Maltsters will have to manage a far more complex set of conversations to buy the barley they need, instead of just one. They’ll have to work through many different price scenarios, and figure out how their barley will be transported to them.
This means that craft brewers who purchase malt from dealers will have to clearly communicate their needs as early as possible, so dealers can in turn make their needs known to maltsters. And dealers in turn will have to take an even more concerted, purposeful approach to gauging brewery customer needs by active engaging brewers proactively. Communication will be very important as old rules go away and new ones are created. The craft brewing world is becoming more complicated.