Global Malting Barley Report

1
Global Malting Barley Report

• Analysis of 2007 Barley Harvest and the
  Implications on Malt Availability, Quality and
  Costs to the US Craft Brewing Industry

Ian L Ward Brewers Supply Group October 2007
2
Topics to be discussed

• The Global Nature of the Malt Industry
• Harvests 2007
• North America
• Europe
• Australia
• Outlooks
• Demands on Grains
• Malting Capacity Supply Demand
• Impact to the industry

3
Global Barley Production Malt Exports
The global barley production in 2006/7 was
134.378 MMT (USDA Estimate)
Global Malt Trade in 2006/7 was 4.58 MMT
Source RM International USDA
4
The Prelude- 2006 Crop
Major Shortages of Malt Quality Barley in Europe
and Australia
Source Euromalt
Photograph Ian Waldie/Getty Images

• Europe
• Poor Year Cold early, hot dry Summer, Wet
  harvest gave rise to pre-sprout damage
• 1 Million Metric Tons of Malting Quality Barley
  Short

• Australia
• Drought conditions
• Disastrous harvest
• In place of a typical 9 MMT only 4 MMT harvested

5

North American Harvest 2006
Barley Harvest MMT 2005 2006
USA 4.41 3.81
Canada 10.84 10.00

• Global reduction in barley harvest in 2006
• Poor harvests in Europe Australia has motivated
  Far Eastern brewers to favor North American
  Malsters perceived to be a more reliable supply.
• Poor harvest volume in 2006 leaves no carry-over
  stocks into 2007

6
Evolution of Barley Pricing 2006
Source Emalt
7
Harvest 2007 Headlines

• Barley harvest in Northern Hemisphere completed
• US Production 4.86 MMT 18 Higher than in 2006,
  overall quality variable at best
• US 6 row production excellent but 2 row
  production average yield and variable quality
• EU harvested a small crop of variable quality
  with no carry-over stocks from 2006
• Canadian crop of greater volume than in 2006 but
  higher protein and low plumps
• Australian output is expected to be poor again
  this year estimated at 5 MMT

8
Western USA Barley Yields

• United States Overall
• Production estimated at 212 million bushels (4.42
  MMT)
• 18 higher than 2006
• The last three years of production on an annual
  crop basis have been lower than any year from
  1936 to 2004
• North Dakota
• Production estimated at 77.8 million bushels
  (1.62 MMT)
• 60 higher than 2006
• Acreage and yield increases from 2006
• Montana
• Production estimated at 31.7 million bushels
  (0.66 MMT)
• 2 higher than 2006
• Acreage higher but yield lower compared with 2006
• Yield at 44 bu/acre average vs. 48 bu/acre
  average last 15 years
• Harvested acreage has been less than 1 million
  acres each of last 8 years
• Before 2000 harvested acreage had not been less
  than 1 million since 1953
• Idaho
• Production estimated at 44.0 million bushels
  (0.92 MMT)
• 3 higher than 2006
• Acreage higher but yield lower compared with 2006

9
Western USA - Quality

• Quality
• Six/row areas
• Overall quality is good
• Nice sizing with DON in some areas but should not
  be a big issue
• Sprout damage in some areas due to wet conditions
  at harvest affecting malting quality
• Appearance much darker than last year
• Proteins on the low side
• Two/row areas
• Variable quality crop
• Dry-land areas for the most part are low plump
  and high protein due to less than ideal growing
  conditions
• As low as 50 plump and 15 protein is moving as
  malting barley for blending
• High plump and low protein material on the open
  market is hard to come by and is trading at a
  hearty premium
• The general feeling is that there is very little
  open market high quality barley available from
  the 2007 crop

10
Western Canada - Barley Yields

• Total Barley production estimated at 11.822 MMT
  vs 10.004 MMT in 2006 (18 higher)
• Planting and harvests delayed due to wet and cold
  weather

11
Western Canada Quality
Barley Crop Quality by Geographic Region

• Southern Excessive protein and extremely low
  sizing.
• Central Moderate protein with acceptable
  sizing.
• Discolored and some pre-sprout damage.
• Northern Low protein, good sizing, stained,
  sprouted.
• Overall No surplus of malting quality barley in
  Canada.

Expected Malt Quality from 2007 Crop

1. Protein up both total and soluble
2. Sizing down
3. Extracts reduced
4. Dark in Appearance
5. May see an increase in ß-glucan if germination
   weakens over the season

12
Crop 2007 Seeding Conditions

• Excessive rain in Fall 2006 delayed seeding by
  3-4 weeks in Central AB and Northwest
  Saskatchewan
• Conditions good in all other areas.

13
Crop 2007 Growing Conditions
Excessive moisture delays seeding maturity in
Central and Northern Alberta.
Normal moisture pattern in West Central
Saskatchewan
14
Crop 2007 Growing Conditions
Temperatures well above average in all areas
during July.
Extremely dry during July in Southern
Saskatchewan Alberta.
15
Crop 2007 Varieties and Trends
16
Canadian Wheat Board

• Canadian government attempted change through
  regulation on August 1, 2007
• Judge rules that changes must be made in
  Parliament
• Government continues to attempt changes to CWB
  monopoly
• Appealing judges ruling that denied changes
• Earliest change would be August 1, 2008
• Remains single desk seller of barley for export
  and human consumption
• Continues to price pool poor price discovery
  for farmers
• Feed prices approaching indicated returns for
  malting barley

17
Europe Barley Yields and Quality

• Climate related poor yields observed in Europe
  for 2nd year running 56.301 MMT vs. 56.382 in
  2006
• Highly unusual weather in Northern Europe dashed
  hopes of a recovery in barley stocks
• Poor output in Northern Europe, better than
  expected in Scandinavia
• Low yields and grower withholding of barley
  propelled barley pricing to record highs
• Lower bushel weights reported
• Higher proteins and lower plumps expected
• Last 2 weeks have seen markets calm and retreat a
  little
• Crop 2008 futures of 280 per MT is expected to
  attract seeding

18
Europe Growing Conditions 2007

• Europe has had the driest and warmest April in
  living memory
• A dip in the Jet stream known as a Rossby Wave
  brought Icelandic conditions to Northern Europe
  all Summer.
• In contrast Southern Europe had very hot and dry
  conditions
• July saw the worst flooding in 60 years in the UK

April
May
June
1.8 2.2 2.6  3.0  3.4  3.8  4.2  4.6 5.0 very
wet                               very dry
July
August
September
Source European Union Directorate General JRC
19
Evolution of Barley Pricing 2007
Source Emalt
20
EU Supply Demand Matrix 2007
In 1000s MT Malting Capacity Barley Malt Production Barley Demand Supply Supply Variance
Country Malting Capacity Barley Malt Production Barley Demand Winter Spring Variance
Benelux 1074 1080 1350 - 170 -1180
France 1260 1200 1500 1500 1250 1250
Germany 1990 1850 2300 60 1240 -1000
Ireland 128 130 160 - 200 40
U.K. 1473 1450 1800 600 1400 200
Denmark 277 280 350 - 1050 700
Poland 305 320 400 - 150 -250
Czech Rep 515 500 625 - 550 -75
Slovakia 266 240 300 - 300
Spain 442 442 550 - 660 110

Other 1058 1041 1310 - 1180 -130
(Finland, Lithuania, Sweden, Austria, Romania, Bulgaria, Hungary, Greece, Italy, Portugal) (Finland, Lithuania, Sweden, Austria, Romania, Bulgaria, Hungary, Greece, Italy, Portugal) (Finland, Lithuania, Sweden, Austria, Romania, Bulgaria, Hungary, Greece, Italy, Portugal) (Finland, Lithuania, Sweden, Austria, Romania, Bulgaria, Hungary, Greece, Italy, Portugal) (Finland, Lithuania, Sweden, Austria, Romania, Bulgaria, Hungary, Greece, Italy, Portugal) (Finland, Lithuania, Sweden, Austria, Romania, Bulgaria, Hungary, Greece, Italy, Portugal) (Finland, Lithuania, Sweden, Austria, Romania, Bulgaria, Hungary, Greece, Italy, Portugal)
Total 8788 8533 10645 2160 8150 -335
Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply
Source H M Gauger
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EU Supply Demand Matrix 2006
In 1000 tons Estimated Malt Production Barley Demand Supplies Supplies Supplies To Spec. Variance
Country Estimated Malt Production Barley Demand Winter Spring Spring To Spec. Variance
Country Estimated Malt Production Barley Demand Correct specification Tolerated specification To Spec. Variance
Benelux 1020 1275 - 125 50 -1150
France 1200 1500 1300 1650 200 1450
Germany 1650 2060 100 1000 400 -960
Ireland 120 150 - 150 - -
U.K. 1350 1690 900 1050 200 260
Denmark 260 325 - 675 100 350
Poland 220 275 - 50 50 -225
Czech Rep 400 500 - 200 100 -300
Slovakia 200 250 - 250 75 -
Spain 430 540 - 470 - -70

Other 1165 950 570 150 -380
(Finland, Lithuania, Sweden, Austria, Hungary, Greece, Italy, Portugal) (Finland, Lithuania, Sweden, Austria, Hungary, Greece, Italy, Portugal) (Finland, Lithuania, Sweden, Austria, Hungary, Greece, Italy, Portugal) (Finland, Lithuania, Sweden, Austria, Hungary, Greece, Italy, Portugal) (Finland, Lithuania, Sweden, Austria, Hungary, Greece, Italy, Portugal) (Finland, Lithuania, Sweden, Austria, Hungary, Greece, Italy, Portugal) (Finland, Lithuania, Sweden, Austria, Hungary, Greece, Italy, Portugal)
Total 8015 9515 2300 6190 1325 -1025
Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply Note EU will export up to 200,000 MT to third countries. It is likely that out of spec. barley will have to be used to ensure supply
22
Australia

• Harvest Underway
• Although drought conditions were relieved
  somewhat with early rains these conditions did
  not continue throughout the growing season
• Optimistic outlooks of yields of 9 MMT have been
  reduced to 5 MMT
• Too early to assess malting quality and selection
  rates but yields are only expected to cover
  domestic requirement and exports to high value
  markets

23
Future Demands on Global Acreage

• Biofuels Ethanol Bio-Diesel
• Government programs in EU and USA continue to
  promote growth.
• Wheat Milling Oils for food
• Improving economies increases demand
• Feed Grains
• Increasing demand for meat adds to growth in
  demand for feed grains

24
Effect of Bio-fuel Production

• As production of bio-fuels goes up year end
  stocks have gone down, when viewing these charts
  consider also population increase since 1976!
• Malting Barley has a new competitor for acreage.
• In a free market, fiscal return will have to
  promote cultivation

25
Barley Markets - Ending Stocks
26
Crop 2007 Crops and Trends
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Global Changes in Malt Capacity
Malt Investment/Divestments (2003-2006) Malt Investment/Divestments (2003-2006) Malt Investment/Divestments (2003-2006) Malt Investment/Divestments (2003-2006)
(mt) Capacity Increase Capacity Decrease Net
E.U. 490,000 970,000 (480,000)
East Europe 1,040,000 - 1,040,000
North America 420,000 570,000 (150,000)
South America 230,000 - 230,000
Australia 100,000 40,000 60,000
China 500,000 100,000 400,000
2,780,000 1,680,000 1,100,000

• Beer Production 197 mil hl
• Malt demand 2.2 mil mt
• Capacity investment shortfall 1.1mil mt

Source MaltEurop March 2007 Presentation
28
Global Growth in Malt Demand
Source MaltEurop March 2007 Presentation
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Conclusions

• Cost of Malt up sharply from previous years
• Poor global barley yields for 2 consecutive
  harvests has resulted in barley shortage
• Poor return for growers has resulted in a flight
  from malting barley in favor of alternative crops
• Poor return to malsters has led to lack of
  investment in malt plants

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Outlook

• Price corrections are necessary and long overdue
  to safeguard supply
• Bio-fuel crops are in their infancy the potential
  to reduce acreage further is huge
• Climate change has the potential to produce more
  poor harvests.

• Barley prices have eased somewhat in the last
  couple of weeks. Recent price corrections may be
  sufficient
• Conversion of plant wastes using new technology
  to fuel may take pressure off seed crops
• 2008 may produce a good harvest in Europe
  alleviating ending stocks issue

Closer co-operation between brewers, malsters and
growers is essential to provide fair value along
the entire supply chain in order to safeguard the
raw materials essential for brewing.