It’s Last Call for Cheap Beer
(Bloomberg) -- All this talk of inflation could drive a person to drink. But even that’s getting more expensive.
Beer input costs are soaring across the globe, fueled by withering barley supplies and surging aluminum costs, plus the same labor and transport bottlenecks plaguing every other industry.
As a result, AB InBev, the world’s largest brewer, has recently raised its prices in some markets, including Brazil, Colombia, Mexico, Nigeria and China, Chief Executive Officer Michel Doukeris said by phone this week. Brewer Heineken NV says it’s being “assertive” in raising prices to offset the impact of climbing commodity costs. Sam Adams maker Boston Beer Co. is planning a mid-to-high single-digit price hike in 2022, which will “look reasonable” in the “context of everything else,” said CEO David Burwick.
“There is elevated everything; we don’t believe that’s going to go down much,” Burwick said on a recent earnings call when asked about inflation. Hopefully, he said, the company’s customers, already used to paying a premium for craft beer, will be able to stomach the rising prices. “We’re not going up as much as our costs have.”
Input costs have been rising globally, across industries, fueled by a confluence of events: extreme weather that’s destroying global crops, a labor shortage that’s crippling the transport sector, shipping logjams at many of the world’s biggest ports and a worsening energy crisis in Europe and Asia. But the run-up in commodity costs couldn’t have come at a worse time for the global beer sector, which is just starting to recover from the coronavirus pandemic that shuttered bars, restaurants and sporting venues around the globe.
Across the top 20 alcoholic beverage markets that make up 75% of global consumption, beer showed a recovery in the first half of 2021, with volumes rising 7.5% compared to the same period in 2020, according to Brandy Rand, chief operating officer for the Americas at data-provider IWSR Drinks Market Analysis. Still, compared to the first half of 2019, overall beer volume is still down 5.7%, she said.
“There’s pressure coming from every direction,” said Brett Ireland, the chief executive officer of Bearhill Brewing, who anticipates he will spend as much as 7% more for malt at his four brewpubs in Alberta, Canada. “It’s definitely hitting home for brewers.”
Barley prices are largely to blame for the rising beer costs, after dry weather scorched fields in North America, which typically produces enough barley to account for about 20% of global commercial beer production. The European Union has also cut its barley crop estimate after rain dented the quality of the harvest. Barley output shrunk 34% to the second-smallest harvest since 1968 in Canada, the fifth-largest producer, while American farmers reaped the smallest crop since 1934, just after Prohibition ended.
“This year, they are not going to have enough or quality will be negatively impacted,” Jamie Sherman, Montana State University’s barley breeder, said by phone. Drought reduced the “plumpness” of barley and also raised protein content in the grain—both bad news for the beverage industry. “There’s a competition for good-quality barley,” Sherman said.
Global barley stockpiles are likely to fall to the lowest in nearly 40 years. That’s driven prices in Canada to all-time highs, with feed barley at C$9 a bushel ($7 a bushel) and malt fetching a premium of as much as C$1 above that, according to the Canadian Malting Barley Technical Centre.
“We’re crawling back out then the drought hits,” said Kevin Sich, supply chain director at Rahr Malting Canada Ltd. “Now we’ve got brewers wanting supply and we’re having trouble finding it because the raw products aren’t there.” Malt companies need barley so they can start and then halt the germination process, which changes the starches into sugars used by distillers and brewers.
At the same time, aluminum prices—key for canning the finished product—are also rising. The global aluminum price recently touched the highest in 13 years, while the North American cost to ship the metal rose to a record this year.
The pandemic spurred a shift to dining at-home and with it a demand for packaged beer, tightening the market for can-grade aluminum. The shortage has gotten so bad with plants running at maximum capacity that some can makers and beverage producers are importing cans from Brazil, Saudi Arabia and even from Asia. This is brutally expensive, according to CRU Group, because they’re effectively shipping air. Cans made in Hawaii, which have distinctive ridges on top and are typically only found on the island state, have been popping up in Colorado, said Bart Watson, chief economist at the Boulder, Colorado-based Brewers Association, which represents small and independent craft brewers in the U.S., calling it an example of today’s “weird supply chain.”
“For small brewers, they are going to face a choice: You either need to take on those supply chain costs and get lower margin, which many are going to have a tough time accepting, or find a way to pass those costs on to customers,” said Watson. “There's only so long that brewers can take on those lower margins and stay in business, particularly given how challenging a year it’s been.”
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