It was a good Summer for the licensed trade, but the pressure on suppliers to put up prices seems likely to grow over the Autumn into next year, ironically not helped by the Summer’s heatwave.
Such good weather across the Continent also led to drought-like conditions which have affected grain-growing across Europe.
In Germany, it’s estimated that the cost of barley has risen by nearly 40% as one German trader, speaking to Reuters last July, predicted a shortage of around 500,000 tonnes of malting barley there.
German farmers have also stated that their Winter barley crops are likely to have dropped by some 7.3 million tonnes this year. That’s down nearly 20% on last year’s crop.
But how will this affect beer and spirits suppliers and pricing next year?
Taking a somewhat broader view of this, a recent report from Barenberg investment bank suggests that due to a number of increasingly expensive input costs – aluminium (for cans) where costs have risen 8% (following a 20% increase last year) and barley – the increased cost of producing beer will put the pressure on big brewers to put up their prices above the level of inflation.
Barenberg predicts, “After several years of low (or even negative) input cost inflation beer companies will face a more difficult environment in 2019”.
But there are limits. The room they might have to manoeuvre is simply not there. The report points out that beer companies can seldom fully pass on high input cost inflation to consumers, “… at least in the short term, with the result that margins are taking a hit.
“Even in the US and Europe, we believe brewers are unlikely to have the necessary pricing power (given market fragmentation) to pass on the price increases needed to protect margins”.
This inflation has been somewhat less pronounced in the US though, as barley prices there are relatively stable in comparison to Europe, Latin America or Asia.
What’s making matters worse is that barley has to be of a certain quality or it cannot be used for brewing but may only be used for animal feed instead.
So has the Irish barley crop been damaged by the Summer’s heatwave?
“There’s definitely been a huge barley yield reduction this year,” confirms Bobby Miller, Chairman of the Irish Grain Growers Group.
He points out that average yields have shrunk from nearly three tonnes per acre normally to under two this year “… with concessions having to be made on protein levels”.
What’s more, this year’s harvest was already complete by mid-August which has never been the case since the mid-70s (when a significant drought was also experienced).
Obviously adverse weather can impact the quality of what’s produced but many technical issues also play into this.
The year’s difficult barley growth was compounded by the fact that malting barley is only grown in the Spring and that got delayed by the bad weather in the first quarter of the year.
“Barley is usually sown in March or April and sometimes as early February,” Bobby Miller told Drinks Industry Ireland, “This year the majority of the barley crop wasn’t sown until mid-April or May due to the wet Winter, so we went from one extreme to the other.”
The result has been that the price of malted barley here has risen 40% from €165 per tonne to €230 per tonne and as a rule, some 150,000 tonnes of malted barley are estimated to be used in this country by the drinks industry with Diageo buying in around 100,000 tonnes of that.
Most if not all of the industry’s barley requirements can be usually sourced here although this year may be different.
Teagasc’s Tillage & Potato Crop Specialist Shay Phelan agrees that the grain growing industry would have struggled to meet the target that the drinks industry would normally need this year so it’s likely that some grain would have been bought in from outside Ireland.
“We aim for 100% grain from Ireland but unfortunately they would have had to buy in some this year,” he told Drinks Industry Ireland.
“Ireland’s temperate climate is normally ideal for growing what’s considered the best malting barley in the world,” concludes Bobby Miller who went on to stress, “But raw material plays a very insignificant part in the overall cost of beer and spirit production and should not be used as a bargaining tool to raise the price of beers and spirits.
“The current rise in grain prices would hardly cost any more than a quarter of one per cent of the cost to the consumer.”
While Diageo did not respond to queries from Drinks Industry Ireland, Heineken Ireland replied with a brief statement: “Heineken has already faced input cost inflation as reported in our HY 2018 results. As is customary, we will update the market on what to expect for 2019 at the time we publish FY 2018 results.”
The Barenberg report points out that with their higher average gross margins, spirits companies are less sensitive to inflation concerns around ‘Cost Of Goods Sold’ than brewers.
“In brown spirits categories, because of ageing, input cost inflation can take years to hit earnings,” it states.
“The Irish whiskey industry is a major user of Irish barley, purchasing over 90,000 tonnes per annum,” commented the Irish Spirits Association’s William Lavelle while also pointing out that the Irish cream liqueur industry is a major purchaser of Irish milk, purchasing over 250 million litres.
And while it’s true that the harvest is unlikely to have been as good as usual, as can be seen from Germany this is likely to be the case across Europe.
Unlike the demand for barley though, the whiskey industry uses a lot of maize which is not grown here and has to be imported to the tune of some 90,000 to 100,000 tonnes each year.
Despite the industry’s travails with this year’s barley crop, if anything is likely to tip up the cost of beer and spirits next year from the suppliers, it’s not going to be the increased cost of the grain, believe growers like Bobbly Miller.
ABFI has commissioned a research project to quantify the contribution of the Irish drinks industry to the agricultural economy.