Sunshine does not always bring smiles

The UK drinks industry always hopes for a long hot summer to boost sales. But while that wish is being granted so far in the south of Britain this year, it comes with a downside – the cost of malting barley, the key raw ingredient in beer and Scotch, is set to soar.

All brewers and distillers have long-term contracts with malting barley suppliers for most of their requirements, so crop levels have a bearing on only their marginal requirements, but this year the industry could be facing a perfect storm of rising demand and plummeting supply.

At the start of May, the UK’s Home Grown Cereals Authority predicted that “overall malting barley availability is likely to be tight in 2011-12”, and that was before much of the growing area started to suffer a further three weeks – and counting – of drought.

The driest spring in living memory is putting the barley crop under threat with many farmers saying that if they don’t get many days of continuous and steady rain, this summer’s crop will be very poor.

Some are forecasting the weakest harvest in more than 40 years, with a shortfall of up to five million tonnes making it potentially the lowest since the 1960s. Some growers are reportedly talking openly of abandoning the crop because it will be too thin to make harvesting worthwhile.

Additionally, fewer farmers have been growing barley for malting this season because, at the time of sowing, wheat and rapeseed were commanding substantial price premiums over barley.

Nor can maltsters rely on filling the potential supply vacuum by looking overseas. Industry figures suggest that Canadian barley sowings have been some 14% below their five-year average and the national grain authority warned that “tight global supplies….will put Canada’s new crop malting barley in high demand”.

Larger-than-normal crops are expected in Eastern Europe, but they will be delayed by a late start to the sowing season. Australia, the largest exporter, has also been affected by the price-chasing switch to growing wheat.

Western Europe is being hit by the same drought conditions as in eastern Britain and recently on the Paris market barley futures for November delivery rose by 24% in just one month.

The growing conditions in Scotland have been more conducive to barley, despite, ironically, a wet spring, but much of that crop is already earmarked to supply the rapid growth of Scotch on the international market.

The industry is expected to be producing some 500m litres in 2014 on a pure alcohol basis, a massive 42% rise in just 20 years. But Scotland accounts for less than a third of UK barley sowings.

Which leaves brewers and distillers with a dilemma. Do they grit their teeth and absorb as much of the extra raw material cost as possible, putting margins under pressure? Or do they seek to recoup the costs through higher prices? Even a long, hot summer brings its problems to the drinks industry.

Finance on Friday, 27.05.2011