Dmitry Nekrasov’s Philosophy — on the Past, Present and Future of Ukrainian Brewing IndustryA meeting with Dmitry Nekrasov always turns into a training course: “Introduction to brewing business“. We are talking to a clever “playing trainer“ a person that can be called a godfather of the Ukrainian craft. He has a dozen of successful projects to his name. Dmitry told us about craft beer in Ukraine, on market cycles, on specifity of operating in retail and HoReCa, on union of Ukrainian brewers and certainly, how a brewery of his own, First Dnipro Brewery is doing.
The market of import beer in Russia: review and databasesThe market of import beer is rapidly growing and changing. But while in the past years it was growing due to brands variety, in 2019 major and affordable brands from TOP-10 were developing actively. It seems that the fact of a brand origin from far abroad counties, even if it is not well known but has moderate price and good distribution provides for million liters of sales in the territory of Russia. Among distributors AB InBev Efes was far behind, yet the role of Baltika and suppliers of the second row got more important. The boom of German brands was followed by stagnation of import from other traditional regions (and Belarus) instead the supplies from Mexico, Lithuania and Asian countries grew considerably.
Russia: Positions of Brewing CompaniesThe review contains an analysis of interim performance of brewers in the first half of 2019. There are rather dynamic changes behind a modest industry growth. Baltika is again experiencing a stage of volumes and market share slid due to competition with AB InBev Efes. Because of the price competition and presence expansion in the modern trade company #2. has come close to the leading position. At the same time sales of Heineken Russia have continued growing which makes the premium part of the portfolio heavier. The market premiumization trend had been also confirmed by import brands. MBC and Zavod Trekhsosenskiy have been the most successful among federal market players. The market share of independent regional brewers and Ochakovo have continued falling as they are being squeezed out by the market leaders at their competitive fields.
Ukrainian beer market 2019: companies and brandsIn 2019 beer production and market have been still fluctuating about zero point. However, the past season was successful for brewers judging by the sales profitability. The price mix has improved due to rapid general market premiumization, as well as its particular aspect, the growth of import beer sales. By the season end AB InBev Efes improved its positions considerably. It turned out that consumers had not forgot Efes brands that had to leave the market, but started to recover rapidly. Against the stagnating market that meant sales decline of other companies, in the first place Carlsberg Group that most of all beneficiated from Efes exiting the market. PPB turned out to be stable to branding activity of its competitor and Obolon kept the same volumes and at the moment it is the absolute leader of the economy segment. The share growth of independent producers took place thanks to leading craft breweries, that so far do not have a big market weight, but they are rapidly gaining it.
Brewing industry in Kazakhstan 2019During the first half of 2019, the majority of Kazakh brewers made their contribution into positive dynamics. Yet it was companies of the lower division, not the two transnational leaders that raised their production and sales. The shares of draft beer and aluminum can which is rapidly squeezing glass bottle out of the market, have been growing. The price segmentation has remained stable despite the substantial rise of retail prices and fluctuations of brand market shares, while the borders between segments have become blurred. The main events in the industry have been: the announced revision of the beer excise policy, launch of BeerKhan brand in the strong beer segment, and most important – purchasing assets of Shymkentbeer by Arasan.
The trend of complication of Russian beer market is going on and in several directions at the same time. The range has got wider, the import and small segments are growing, namely craft beer, alcohol-free beer and special flavor beer. At the same time, all ex-mega brands and light lagers by Russian brewers are experiencing a decline of their shares. AB InBev Efes, Heineken, MBC and Pivzavod Trekhsosenskiy have exceeded the market, Carlsberg was developing slower than the market and Ochakovo as well as some other mid-sized breweries have been cutting down their volumes. To a big extent brewers’ performance was connected to their ability to reach agreement with networks, sacrifice their margin and enter new markets. Craft brewers are facing a serious danger of producers’ registration introduction – de facto licensing. ...
The Future of Brewing Barley
For several reasons, however, the world has been consuming more barley recently than it has produced. This has resulted in a slight overall decline in worldwide year-ending stocks. The world had barley reserves of roughly 2.9 million MT after the 2001/2001 harvest; it has an estimated 2.1 million MT today. The current reserve would be much lower had it not been for unusually above-average yields in 2003, 2004, 2008, and 2009.
Looking at these numbers logically and strategically, and assuming that today’s key barley production and consumption drivers—whatever they may be—will not change, there will come a day when the world will face a barley deficit. Indeed, many experts have already warned that the global demand for feed and food will eventually outstrip the earth’s ability to supply it. This begs the question: Is the world brewing barley supply under threat long-term, especially considering that barley suitable for beer-making must meet the most stringent quality specifications in terms of such variables as homogeneity, protein content, beta glucan levels, and germination rates? The answer, it must be noted, is not without controversy and is hotly debated by many scientists from various disciplines. In some quarters, these discussions are even derided as mostly political or ideological. This article seeks to look at the long-term future of barley without bias to delineate the pertinent arguments and strategic trend forecasts published by vocal experts, as well as highlight the various analytical “what-if” scenarios that can be derived from their projections.
2007: The Hidden Fulcrum Year?
A few years ago, brewers started to feel the beginnings of a problem in brewing barley supplies, mostly in the form of steadily rising malt prices. There are many underlying causes, mostly unrelated to the brewing industry, and they seem to have been in the making for decades. A June 6, 2011 New York Times online blog summarized these as follows: “Factors like population growth, improved diets in developing countries, and biofuel production … [are] already colliding with factors that limit the expansion of the food supply, including climate change, competition for scarce water, and a shortage of land that can be converted for farming.” Add to these trends such oft-quoted factors as the depletion of oil reserves and the resulting rise in fuel costs; the progressive and irreversible depletion of many aquifers; global severe soil erosion; the limits of further raising land productivity in agriculturally advanced countries through new technologies; as well as the politically-induced dislocation of resources and logistics in many of the world’s trouble spots … and the picture of the future appears grim, indeed. Such observations have even caused French agriculture minister Bruno Le Maire, at a meeting of G20 farm ministers in Paris on June 21, 2011, to warn of a “century of hunger” ahead of us. Several presenters at the World Barley Malt & Beer Conference in Prague, Czech Republic, in March 2011 were equally pessimistic when they asked the question if brewing barley is “becoming a marginalized crop in the EU, Canada, and Australia.”
The global tipping point in grain supplies, according to many analysts such as Lester R. Brown, president of the Earth Policy Institute in Washington D.C., seems to have been reached—perhaps unnoticed by all but the experts—in 2007, when “farmers began having difficulty keeping up with the growth in global demand for grain.” (World on the Edge: How to Prevent Environmental and Economic Collapse; W. W. Norton Company, 2011.) In fact, world grain prices have doubled since 2007, and they are almost certain to continue to rise substantially with no end in sight, according to Brown. Though this research is about grain in general, not about brewing barley in particular, given the interchangeability in the global diet of one food item for another, the markets for all components of human and livestock alimentation, including those for brewing barley, are interrelated. Thus, if mankind is indeed headed for a structural grain deficit with a severe, long-term, trend-driven (rather than event-driven) world grain crisis, with food commodity prices likely to go up in the long run, brewing barley will be inseparably caught up in it. This conclusion, if it comes to pass, should be nothing short of alarming for every player in the brew industry, because the progressive globalization of all commodity markets makes it impossible for any brewery, from the smallest to the largest, to shelter its operations against the fallout from such a crisis.
World population increases combined with a rise in the standard of living in emerging economies are often given the top ranks on the list of causes for the doubling of global grain prices since 2007. The human population has grown at an accelerated pace from less than two billion at the beginning of the 20th century to nearly seven billion today. It almost doubled in just the last four decades; and it may reach almost 10 billion by the middle of the 21st century (Table 2). However, world food output, according to a June 2011 report by the Paris-based Organization for Economic Cooperation and Development, is currently projected to rise by only 70 percent by 2050—or 1.7 percent per year—but it would have to rise by 1.75 percent per year just to keep up with the projected population growth, not counting increased demand from socio-economic changes. This seems like a small percentage discrepancy, but it is a huge deficit in real terms; and it is, of course, cumulative in terms of world ending stocks.
In 2010, for instance, the world produced 2.18 billion MT of grain, but consumed 2.24 billion MT, a deficit of 60 million MT, which was made up by drawing down stocks—a process that cannot continue indefinitely. Brown calculated that the world's farmers must feed more than 215,000 new people at the dinner table each night—or about 80 million additional people each year. For perspective, this is just a tad less than the size of the population of Germany. Some three billion people, meanwhile, are also trying to move up the food chain, consuming more grain-intensive meat, milk, and eggs. As a result, according to Brown, world grain consumption, which grew by about 20 million MT per year about a decade ago, now needs to grow much faster, but it is not.
The problem of feeding a growing world population, while leaving enough good barley for beer-making, is further aggravated by conscious political decisions, especially by such agricultural powerhouses as the United States and the European Union, to divert their agricultural production into biofuels. This does not mean that barley itself is widely used for biofuels, but in most barley regions of the world, barley is only one of many crops a farmer can plant; and because brewing barley is one of the more difficult and riskier crops to grow—especially if the vagaries of the weather are brought into the equation—barley suitable for malting and brewing may not always be the most attractive crop choice on the farm level, from a purely business perspective. Depending on market factors, switching a field from brewing barley to other crops such as corn for ethanol production or rapeseed for the production of canola oil-based bio-diesel—the alternative depends largely on local soil and climate conditions—may make a lot of sense.
Table 1 shows that the world use of grain for fuel has more than doubled between 2006 and today, with the United States the world leader. Borrowing from Brown’s research again, the United States harvested nearly 400 million MT of grain in 2010, of which some 126 million MT (31.5 percent) went into ethanol (up from 16 million MT in 2000). Considering that most beers can be made with roughly 20 to 25 kg of malt (or 25 to 30 kg of grain) per U.S. barrel, depending on style and system extract efficiency, the entire annual U.S. beer production of roughly 200 million barrels can be made with merely 4.1 (2010 figure) to 4.9 (1997 figure) billion pounds (roughly 2 million MT) of malt, according to the Beer Institute 2011 Brewers Almanac! Brown, however, argues that the “massive capacity to convert grain into fuel means that the price of grain [and, by extension, that of brewing barley] is now tied to the price of oil.” Therefore, he writes, “if oil goes to $150 per barrel or more, the price of grain will follow it upward as it becomes ever more profitable to convert grain into oil substitutes. And it's not just a U.S. phenomenon: Brazil, which distills ethanol from sugar cane, ranks second in ethanol production after the United States, while the European Union's goal of getting 10 percent of its transport energy from renewables, mostly biofuels, by 2020 is also diverting land from food crops.”
The Weather: Randomness or Long-Term Trend?
As if the population- and biofuel-driven stresses on the world grain markets weren’t enough, global weather incidents have also been aggravating an already stressed situation—and there is some debate as to whether these incidents are just chance occurrences or, in fact, the effects of a long-term global warming trend. Regardless of whether or not you “believe” in man-made global warming, the undeniable fact remains that virtually every year of the past quarter century was hotter than prior years since 1880 (Table 3). According to data published by the U.S. Intergovernmental Panel on Climate Change (IPCC) as well as the NASA Earth Observatory, the average global surface temperature has increased by approximately 0.3 to 0.6 °C (0.5 to 1.0 °F) over the last century, and may increase by an additional 1.1 to 6.4 °C (2.0 to 11.5 °F)—depending on which computer model you trust—by the end of the 21st century. To put these figures in the context of global grain supplies, Brown cites crop ecologists who argue that, as a rule of thumb, for every 1 °C (roughly 2 °F) rise in temperature above the growing season optimum, farmers can expect a 10-percent decline in grain yields. (See “The New Geopolitics of Food” in Foreign Policy, May/June 2011, as well as “Why World Food Prices May Keep Climbing.” )The effects of the earth’s heating trend, according to many climatologists, leads to an erratic pattern of deeper droughts, more intense flooding, and more ferocious storms—all with their inevitably negative effects on agricultural yields across the globe.
Brewing Barley Futures under Speculative Pressure
In the face of all these pressures on world grain supplies from population, climate, weather, and biofuels, there is another cause for worry about barley pricing: The growing attention that futures market speculators are paying to agro-commodities. Headlines such as “Get Ready for the Agricultural Boom” on the Investopedia® investment advice website are not uncommon. Usually, prices for agro-commodities are strongly influenced by leading indicators in other futures markets such as oil and gold. In times of uncertainty, however, agro-commodity futures are considered a safe haven for investment, because the demand for agricultural products is more predictable and relatively inelastic. While in most markets, futures prices are a function of both supply and demand, in agro-commodities, they are mostly a matter of supply only, because the world needs to eat! This opens up the danger that fast-buck speculators drive up agricultural commodity prices beyond levels related just to the world’s real future demand for food stuffs. According to a bloomberg.com report of June 22, 2011, after the droughts and floods from Australia to Canada to Europe, the key global grain price benchmark, corn futures trading in Chicago, advanced by 82 percent compared to the previous 12 months ... and where corn prices go, barley prices usually follow.
The Farmer’s Choice
Global food distribution has always been uneven, with some regions enjoying a bounty of culinary riches while others are barely able to feed their populations. However, for much of human history, starting with the Sumerians, the aggregate global food supply has largely been one of surpluses—importantly with enough top-quality grain available for beer-making. To be sure, there have always been short-term—mostly weather-, epidemic-, or war-related—impasses in the world’s agricultural production, and these have affected the industries that build on that production. However, especially in recent history, there have been plenty of carry-over stocks at the end of each harvest year, generally provided by such food-surplus countries as the United States and Canada, to cushion much of the impact of natural or man-made calamities on food supplies around the globe. The three main factors of unchecked population growth, the rise of the biofuel sector, and global warming, however, many experts argue, have now pushed world agriculture to the limits of what it can produce in terms of food stuffs of all kinds and thus shifted the global food balance perhaps permanently from surpluses to shortages.
While there appears to be general pessimism about the prospects of changing global population and climate trends in the relevant future, some optimists hope for a political and technological reversal in the use of crops for fuel. They point to many emerging alternative energy technologies, including wind, solar, tidal, hydrogen, and—perhaps most important for the pressure on crops from transportation fuels—the infant research into non-oil, non-crop-based synthetic fuels. However, until these alternatives are adopted on a massive scale, the current major drivers of the global grain supply seem to lead the world in the direction of a seller’s market, in which it will be only the farmer’s choice what to grow.
For the brewing industry, this would ultimately come down to the question of how much it will be willing to pay for an acre!
Horst Dornbusch is a consultant in the international brewing industry, the associate editor of The Oxford Companion to Beer (Oxford University Press, 2011), and a frequent contributor to brewing industry journals in Europe and America, including The New Brewer.
23 Янв. 2012