The world malt market
October 01, 1997
by Teresa Acklin
Global trade in malt, malting barley projected to expand as beer consumption continues to advance.
By David Wilkes
The health of the world's malting industry is dependent on a secure supply of its raw material and the success of its principal consumer, the brewing industry. Brewing consumes 94% of the world's production of malt and as such, is the maltster's principal customer.
World beer production has increased from a mere 130 million hectoliters in 1920 to reach a staggering 1.25 billion hl in l995. This has been achieved through a combination of world population growth and an increase in per capita consumption.
More specifically, over the period 1985 to 1995, world production of beer increased by an average of 2.4% a year. Likewise, total demand for malt used by the brewing industry rose from 10.5 million tonnes to 13.5 million tonnes over the same period. That is a year-to-year increase of approximately 300,000 tonnes.
World beer production is forecast to continue growing by an amount comparable to that achieved in the past 10 years. This will result in a global production figure of some 1.54 billion hl by 2004. Not surprisingly, the effect of this will be to raise the demand for malt to 16.7 million tonnes, which is equivalent to an annual increase of 360,000 tonnes.
However, the predicted increase in world beer production will not be equally distributed between all regions of the world. Exceptional rates of growth are expected in the developing regions of Africa, South and Central America and Asia. On the other hand, consumption in Europe and Oceania will stagnate or even decline.
As might be expected, those regions that have rapidly expanding populations and relatively low per capita consumption levels show the greatest potential for increased beer consumption. World per capita consumption amounted to some 21.9 liters in 1995, which is expected to rise to 23.2 liters in 2004 as the global popularity of beer increases.
Consumption of beer in Europe, North America and Oceania is stagnant or in decline because of the impact of competitor products and issues such as health and concern about driving under the influence of alcohol. Conversely, one of the fastest growth rates in per capita consumption is in South America, where the level is expected to increase from 49 liters to 70 liters by 2004. Although beer production will rise rapidly in Asia over the next seven years, per capita consumption is expected to increase by a mere 5.5 liters.Beer and Malt
As malt usage is closely linked to beer production, it follows that the demand for malt will increase substantially in those regions showing the highest growth rates for beer. When considering regional growth rates, however, it is important to take account of the individual annual levels of production so as not to over- or underestimate their significance.
Of the estimated 1.25 billion hl of beer produced in 1995, some 34% was brewed in Europe alone, with a further 25% being accounted for by North and Central America. Of the remainder, 23% was produced in Asia, 12% in South America, 4% in Africa and a mere 2% in Oceania (Chart 1).
Of all beer producing countries of the world, the United States is by far the most important, producing some 234 million hl in 1995, or 19% of the world's total production. The United States is followed in importance by China, which in the same year produced 155 million hl.
Many of the regions and countries showing the most impressive growth rates are those that are either unable or unwilling to produce their own malt and as a consequence, are required to import a significant quantity of raw material. Before looking at world trade in malt, however, it is appropriate take note of those countries that are significant producers of malt and the influence that barley availability has had on the development of the industry.
Europe is by far the largest regional barley producer, accounting for some 65% of total world output (Chart 2). Europe has many natural advantages in terms of climate, soil type and tradition. Rather surprisingly, a country like Australia, which plays an active part in the world malting barley market, is a relatively small producer with a crop amounting to a mere 3.9% of total global production.
The most important malt producing countries of the world are those that have local access to ample supplies of quality malting barley. Indeed, malt is only produced in about one-third of all countries that brew beer. Of the estimated 19.5 million tonne world malt capacity, 51% is within Europe, 21% in North America, 16% in Asia, 6% in South America and 4% in Australia (Chart 3).
But malting industries have developed even when malting barley is either in short supply or completely unavailable locally. The most obvious example is that of China, which annually imports substantial quantities of malting barley, principally from Australia.
Similarly, several South American countries source their raw material from external origins each year. It is also not unusual for barley producing countries to occasionally augment domestic supplies when quality problems arise. The United States and South Africa have both recently done this (Chart 4).
Malt production is relatively concentrated, with 66% of the world's malt being produced by 10 countries alone, the largest of which is the United States. Despite this dominant position, some 94% of U.S. output is utilized in the domestic market, and its participation in world trade is minimal.Industry Concentration
It is not surprising that the world's largest malting companies are situated in the major malt producing countries of the world. Over the past few years the concentration that has occurred in the world's brewing industry has been mirrored within the malting industry. Not only has there been a move towards increased company size in terms of annual production, but a number of companies have also actively made multi-continent acquisitions.
The largest single player in the international malt market is U.S.-based ConAgra, following its relatively recent acquisition of Canada Malt. This group now has malting activities in all the major malt producing regions of the world. The second and third largest malting companies, Cargill and Malteurop, while being multi-continent producers, do not have the same scale or scope of operation.
The effect that brewing industry concentration has had on the malting industry is readily illustrated when we compare some of the major malt producing countries of the world. When ranked in terms of average level of malt production per malting company, we can see that both the United States and Canada are highly concentrated with a relatively small number of very large companies (Chart 5).
In the United States, the malting picture reflects the country's brewing industry, where 92% of total beer output is produced by five players only. Conversely Germany, and to a lesser extent the Czech Republic, support a much higher number of malting companies in relation to total annual production. In their cases, this again reflects their own brewing industries, which are relatively fragmented and have yet to undergo any degree of rationalization.
The continuing globalization of brewing will undoubtedly have consequences for the malting industry with a further rationalization of players being inevitable. This tendency to consolidate is also influenced by internal and external perceptions about the attractiveness of the industry itself.
Periodically the supply of and demand for malt gets out of balance with the inevitable consequences for profitability. Currently, demand as a percentage of capacity is estimated at 76%, which translates into what could be described as a “soft” market for malt.Trade Flows
Clearly, malt must flow from the major producers to those countries that show a deficit of production over consumption. In those regions of the world where beer production is increasing substantially, domestic malting activity is generally inadequate to satisfy the additional demand. Conversely, those regions having ample supplies of malting barley, such as Europe and Oceania, have a malting capacity far in excess of local requirements, making supplies available for export.
Although there are approximately 30 countries worldwide that are involved in exporting malt, 75% of world trade is accounted for by just seven countries (Chart 6). In terms of both volume and market penetration, France is by far the most important, exporting over 1 million tonnes to nearly 90 countries in 1995.
Some of France's success can be attributed to the fact that it supplies both two-row and lower quality six-row malts; the latter is particularly attractive to developing countries with limited hard currency to finance imports.
Over the past 10 years, an increasing number of both countries and companies have actively pursued the export market for malt. As a consequence, the market shares of some of the traditional exporters have diminished.
In 1985, the top seven exporters between them had a cumulative market share of 84%. By 1995 however, their share had fallen to 75%, and it is likely that this trend will continue.
Of all the regions that export malt, the European Union is by far the most significant. Of the 4.48 million tonnes of malt that were traded internationally in 1995, the European Union was responsible for exporting some 2.87 million tonnes to 135 countries. This figure, however, includes internal trade within the E.U., which itself amounted to 1.15 million tonnes.
Canada is the largest exporter of malt outside Europe, but it is highly dependent on sales to Asia. Indeed, in 1995 this region accounted for 70% of all exports and, more significantly, half of all Canadian shipments of malt went to Japan.
Since 1985, however, the Canadians have consciously targeted South America, and this region now accounts for a greater proportion of Canadian business. Indeed in the past two seasons, a substantial volume of business has been taken from the E.U., effectively underwritten by the Canadian Wheat Board.
Australia is even more dependent on sales to Asia, which accounted for some 90% of its total sales in 1995. In recent years, Australia, failing to put the necessary efforts into barley breeding programs early enough, has battled with indifferent malt quality. This adversely affected their sales to quality markets, of which Japan is one of the most important.
The effect of increasing beer production around the world, particularly the growth experienced in non-malt producing countries, is reflected in the total volume of malt traded worldwide. This has increased from 2.56 million tonnes in 1985 to reach 4.48 million tonnes in 1995.
Of the individual countries that import malt, the single largest and most important for the maltster is Japan. Malt imports have grown throughout the last 20 years, reflecting developments in the Japanese beer market, to reach 763,000 tonnes in 1995 (Chart 7).
Other major malt importers include Brazil, Germany, the Philippines, the Netherlands and Venezuela. Leaving aside E.U. countries, it is apparent that most major importers are those that are also anticipating substantial rates of beer growth in the future and have little or no malting industries of their own.
The region showing one of the largest rates of growth with regard to malt imports is Asia. While the situation has been dominated by Japan, the expectation is that rapidly expanding beer markets in countries like Vietnam and Thailand will continue to push up regional import volumes.
Although China is the second largest beer producing country in the world, the quantity of malt it imports is insignificant. With an import tariff on malt of 34% against 3% for barley, it is hardly surprising that their preference is to import barley and convert this to malt locally. This is certainly one trade barrier that needs to be addressed as part of China's desire to be a full participant in the World Trade Organization.
South America is also a key malt importing region, despite the fact that countries such as Brazil, Peru, Chile, Colombia and Argentina produce malt locally. With the exception of Argentina, however, most are reliant on imports of malting barley, primarily from outside the region. The growth in imports in this region has been less smooth than that experienced in Asia, as demand for malt has fluctuated in line with the economic fortunes of each country.Policy Effects
The dynamics of world malt trade are not only driven by supply and demand but are influenced by political interventions and agricultural policy in some of the key malt producing regions of the world.
In the E.U., maltsters rely on the availability of the malt restitution, or refund, to allow them to compete with third country competitors on an equal basis. The refund effectively compensates maltsters for the higher prices of raw material in the E.U. as a consequence of the Common Agricultural Policy.
It is a popular misconception that maltsters are receiving a subsidy when they export outside the E.U. This is certainly not the case, it is the farmer that receives the subsidy and the exporter that gets a compensation payment. It is somewhat perverse that the Commission has transposed the description of these payments, purposefully or not.
While in theory the malt refund is easy to understand and calculate, in practice it is open to manipulation and abuse. The malt refund is derived by taking awarded feed barley restitutions and adjusting for the true E.U. malting barley premium over that prevailing in the world market. This immediately can lead to problems.
First, the value of barley restitutions can be affected by traders who have taken forward positions in feed or malting barley and therefore may not reflect the real market. Secondly, it is difficult to accurately assess the price of malting barley that third country competitors have access to especially when monopolistic grain boards are involved.
The E.U. malt refund is transparent and open for all world players to see. In recent years, we have seen grain boards adjust malting barley prices with discretion to give domestic maltsters a competitive advantage. This has resulted in a loss of E.U. malt market share in South America, and the practice of such boards must be questioned at the next W.T.O. round of trade talks.
The European Union has already committed to reducing its volume of “subsidized” exports by 21%, with malt being included within the coarse grains category. To date, this has had no effect on malt export volumes, but clearly as the threshold level declines and if set-aside rates remain low, problems will be encountered. There is no doubt that the pressure to further reduce or eliminate subsidized exports will increase, and this is likely to be one of the key considerations in the second round of W.T.O. talks.
E.U. maltsters are most definitely in favor of liberalizing world trade and are confident of their ability to compete given a level playing field. It is clear that to achieve this aim, further reform of the CAP is a prerequisite.
E.U. cereal prices must be allowed to equalize with those prevailing on the world market, which in turn would eliminate the requirement for compensatory export refunds. Political interference in the market is unwelcome, as are the increasing number of bureaucratic burdens placed on exporters by Brussels.
What does the future hold for the malting industry and malt trade?
Without doubt, production and consumption of beer worldwide will continue to grow and with it the demand for malt. As this growth is primarily in the developing countries with little or no malting industries of their own, there will be a complimentary increase in malt trade.
As in most industries, consolidation continues and this is certainly true of the brewing industry with some 20 brewers worldwide now accounting for more than 50% of total global beer production. This situation will be reflected in the malting industry.
One of the key challenges of the next five years is to reduce the amount of worldwide political interference in the agricultural sector. While being an objective to which most would subscribe, the likelihood is that the major political powers will seek to retain some policy control in an area of social and strategic importance.
David Wilkes is sales director, Pauls Malt Ltd., U.K. This article is based on Mr. Wilkes' presentation at the International Grains Council's June conference in London.