Beer and the Russia-Ukraine Conflict

Initial Impact on Barley and Malt Supply is Limited

Although the Black Sea Region (BSR) is a major producer of barley, very few maltsters in the rest of the world depend on its crop, as the barley produced and exported from the region is mainly feed barley. Russia produces around 13% of global barley and Ukraine 5% (2020/21 crop). Together, these countries account for 30% of global barley exports, a significant amount.

Most BSR barley flows find their way to countries without a strong beer culture. In 2019/20, 64% of Russian barley was exported to the Middle East and 9% to North Africa. In the past crop season, Ukraine benefitted from the trade war between Australia and China, sending almost a million metric tons of barley (18% of its exports) to China. Another 54% of its barley exports go to the Middle East, 17% to North Africa and 10% to the EU. Although some maltsters in China might use Ukrainian barley, malt plants in the rest of the world are mostly sourcing from other regions.

As a result of these developments, there is still uncertainty about what farmers outside the BRS will be growing this spring. The spread between malting barley and feed barley has turned negative (in France) and the price of wheat has skyrocketed. As sowing of spring barley in the northern hemisphere occurs between March and April, the recent price movements have probably come too late for farmers to change their seedings, but a battle for acres could erupt later in the year when winter grains are planted.

Malting barley prices in western Europe are currently 50% above levels seen a year ago. This will have a major impact on maltsters, for whom barley inputs make up 65% of costs. For brewers, the impact is less severe as barley accounts for only 5% of costs. But there is a risk that protectionism could derail the entire value chain (e.g. if western Europe were to stop exporting malting barley/grains to countries outside the EU) and brewers might not get the right quantity or quality of malt. The development of alternative origins (possibly using new barley varieties), the strengthening of supplier relationships and a clear ingredient strategy per brand will be beneficial in the long run.

Energy Price Will Push up Costs for Malting, Packaging and Logistics

Energy costs have also risen because of the conflict. Prices of oil and natural gas have almost doubled over the past 12 months. There are many points in the value chain where higher energy costs will impact the cost of beer.

Energy is used to turn barley into malt, but we estimate that this accounts for just 1% of the cost price of beer. The energy used in the brewing process represents 3% of costs. But the largest impact is seen in the cost of packaging materials (~25%), which have a major energy component. We estimate that the total cost price of beer has risen by 15% as a result of rising energy costs.

The discussion about the possibility of beverage companies introducing returnable packaging has resurfaced in recent years as part of broader discussions about sustainability. We wonder if, in light of rising fuel prices, the idea might be starting to gain momentum. Of course, this is not a short-term solution, as the prerequisite of establishing an infrastructure would take time.

Another area where energy costs could have a significant indirect impact is logistics. While some craft brewers may sell their beer only locally, other beer must travel long distances to reach consumers. Although sea freight is much more energy efficient than road transport, some brewers might be tempted to follow AB InBev’s example to brew Stella Artois near its US consumers. While localizing production can save on fuel costs, the diseconomies of scale of a smaller location could offset these benefits. If brewers want to keep brewing centralized, it might be worth considering separation of brewing and bottling activities. It is possible to ship beer in bulk, but the benefits depend on re-routing and location of the alternative bottling facility.

Besides the Impact on Supply, There Could Be a Massive Impact on Demand

With food and fuel costs rising strongly, a global recession is likely. Inflation will increase and it is uncertain whether wages will keep pace. Consumers who see their grocery, utility and transportation bills rising faster than their income will be forced to make difficult choices in their drinking behavior – either trading down in quality, or start consuming less. If we look at the consequences of the 2008 financial crisis in Portugal (where the effects were most severe), there was a shift from on-trade to off-trade consumption. We expect price increases in on- and offtrade to be roughly equal in absolute terms, with on-trade more exposed to wage inflation and off-trade more to energy costs.

The other observation in Portugal concerned changes in the product mix. Some economy and mainstream drinkers stopped buying beer altogether, while premium beer buyers traded down. Super premium was the worst performing category and mainstream declined the least. Although many brewers have focused on international brands and the premium end of their product offering in recent years, a broad portfolio of products and channels is desirable to offset current risks.