With barley acreage down and brewing competition rising, brewers can significantly improve their input costs with a multiple origin sourcing contract  

Malting barley supplies in the US are tight this year. According to Farm & Ranch Guide in August 2011 for the U.S., there has been a “2 percent cut in barley acreage in 2011 and again is a record low level.”¹ Along with reduced barley acreages, yields have been impeded by inclement weather and world supplies have been impacted by import/export bans.   Fortunately, malting barley is grown in many regions of the world thus ensuring that brewers can find malting barley supplies. By pursuing a flexible global malting barley sourcing model with Cargill, brewers can potentially find significant savings and efficiencies.

Cargill’s global asset footprint is a huge benefit for our brewing customers. With malting barley operations in North America, Argentina and Europe, Cargill can offer brewers product from multiple origins.

Pricing of malting barley

Malting barley is a specialty crop with limited production and extreme sensitivity around product quality. Beer brands are tied closely to distinctive malt flavors. The price of malt depends largely upon three components: barley cost, utility and transportation costs, and malt house gross margin. From a farmers’ perspective, if barley prices continue to fall, it will create reluctance to plant malting barley. If prices rise, it puts stress on brewers to find cost management measures for their raw materials. Striking a balance is key to success so both brewers and farmers can sustain their momentum and grow.

In low-volume markets, like malted barley, liquidity risk is a major issue. There usually isn’t a concern that malted barley assets will become worthless, but rather that one party may not find another party interested in trading the asset.  Barley prices are high partly because farmers are devoting less acreage to the grain in favor of more lucrative crops, especially corn. Barley has also become more expensive because now that more corn is being sold to a greater diversity of industries, there is less corn available to be fed to animals. That is leading to greater demand for other feed grains, including barley, for livestock.

Brewers who lock into annual malt contracts are usually fortunate.  These contracts allow them to focus on their gross margins, budgets and planning for the future. However, these locked-in contracts are typically based on assets from a single geography, loaded with uncertainties.  Brewing executives are concerned with ingredient input cost uncertainties as they use a variety of grains in beer production, including rice, barley, wheat and corn. Prices for all grains have risen. Many manufacturers have begun to routinely defer issuing earnings guidance as a result of variables in input costs. Contracts might be locked-in at great rates but if there is a drought or quality issues, the buyer is stuck with a contract for inferior assets or assets with no utility. 

Sourcing malt with Cargill

Cargill’s global asset footprint is a huge benefit for our brewing customers. With malting barley operations in North America, Argentina and Europe, Cargill can offer brewers product from multiple origins. Instead of locking into a single origin contract, if appropriate, brewers can sign “competitive” or multiple origin contracts that allow flexibility to adjust to commodity market fluctuations. Cargill’s global growth provides our brewing customers with opportunities that come from an integrated global supply chain with efficiencies that other ingredient suppliers cannot provide.    

According to Gustavo Strasser, Marketing & Commercial Malt manager, “Multiple origin malting barley sourcing provides competitive advantages for several of our brewing customers because it drives improved input costs that are not available to their competitors.  It can really improve profit margins.”

Brewers are in need of innovations in sourcing and commercial models as industry consolidation and market pressure from microbreweries increase. With a multiple origin sourcing model, brewers can now deliver the right nutrient-to-yeast despite the input origins. Now, brewers can price future barley at the most convenient time. One of our customers who implemented this new sourcing model has shown a 35% savings over the market. 

¹http://www.farmandranchguide.com/news/markets/maltsters-very-concerned-about-shrinking-supplies-of-barley/article_bd75146a-bcaf-11e0-9219-001cc4c002e0.html