From Just in Time to Just in Case: Contingency Plans for the Beer Industry

For barley growers in western Europe, a lot has changed since the start of the year, but prices have stayed remarkably stable. There is strong demand from the feed industry, but for beverages in general (and beer in particular), demand is weak as the rise in retail consumption can’t offset the disappearance of the on-trade business. Farmers we spoke to are afraid that overall demand will weaken and that inventories will build up. While this is the most likely scenario, other (less favorable) outcomes are also possible. In the Northern Hemisphere, spring barley is currently being planted, and harvest won’t occur until autumn. For maltsters and brewers, two worst-case scenarios would be:
- Insufficient barley is produced to fulfil demand from the feed and beverage industries, or
- Sufficient barley is grown but does not end up in the right location

Most of the global barley production is used as animal feed (around 75%), but some barley ends up as malt in the beer and whiskey industries. It is possible to use malting barley as feed, but the use of feed barley for malting leads to quality issues with beer and whiskey. Barley grows best in temperate climates outside the tropics. The largest producers of barley are the EU (40% of volume, mainly in France 7.9%, Germany 6.8%, Spain 6.5%, and the UK 4.8%), Russia (12%), Canada (6%), and Australia (6%), but these can vary, due to significant volatility in yields.

Barley yields have been steadily improving since the end of the Second World War. But even with these improvements, annual harvests in France and Canada have fallen short of expectations by more than 15% in one out of ten years. In Australia, this has happened even more often. Shortfalls have been as large as 48% (Australia, 2007). Despite the current weak demand from the beer and whiskey industries, there could be unexpected shortages of malting barley if the 2020 barley yields disappoint, especially if this coincides with issues of quality.

There are mitigations for unforeseen shortfalls in yield. Firstly, within the value chain, existing inventories are able to absorb short-term tightness of supply. Last year, IGC reported a rise in barley inventory from 24m to 27m metric tons, or close to 20% of annual production. With winter barley just harvested in Europe, and overall demand from the malt industry weak over the summer, it is unlikely that inventory levels will come down any time soon. If they do, the malting industry could respond in the near term by using more marginal-quality barley that would normally be used for animal feed and then incentivizing farmers to expand acreage the next season to help rebuild inventories.

It might also be possible for maltsters and brewers to source malting barley from further afield. Yields of individual countries are fairly uncorrelated. The annual average global yield has never fallen short of forecasts by more than 13% during the past 60 years, and it fell short by over 10% on only three occasions (see Figure 1).

Current just-in-time supply chains for malting barley are highly efficient but take for granted that international logistics are not interrupted – an unsafe assumption in the current context.

For the beer value chain, which uses over 90% of the global malt production, the real risks are less about total global inventories and more about the enormous geographical imbalances between supply and demand. As described above, most malting barley is grown in the EU, Canada, and Australia, and most malt capacity is still mainly situated near the barley fields. Beer production, however, is concentrated in five countries that make up 50% of global volume but are generally not self-sufficient in malting barley. China, Brazil, and Mexico are large importers of barley and malt. The United States grows most of its own malting barley, but they too have a small deficit. Of the major brewing countries, only Germany grows more malting barley than its malt and beer industry needs.

Currently, most farming, malting, and brewing operations are coping with the situation. But as non-essential industries are being closed and truck drivers are increasingly in short supply, trade flows could be interrupted, and containers might not reach the destination where they can be used for barley, malt, or beer flows. Cross-border logistics especially could come under pressure if the crisis deepens.

For brewers situated in countries that are net importers of malt and barley, it would be wise to ignore the current weakness in beer demand and keep sufficient inventories of malt and malting barley, just in case. It may also be worthwhile to update some protocols from the 2008 commodity crisis and revisit scenarios for malt inclusion rates and brand prioritization, in case of supply shortages.

At the moment, there are few indications that supply problems will impact the beer industry during the Covid-19 crisis. Demand is not putting a strain on raw materials, and in the event of a very poor barley harvest, inventories are high. However, logistical risks appear to be on the rise for importing countries, and contingency plans for all eventualities are desirable during these unprecedented times.