Global Malting Barley ReportAnalysis of 2007 Barley Harvest and the Implications on Malt Availability, Quality and Costs to the US Craft

Brewing Industry

Ian L WardBrewers Supply GroupOctober 2007

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

Global Barley Production & Malt Exports

6%5% 6% 4%

13%

11%55%

EU 25 Canada Australia USAOther Argentina Uruguay

38%

11%7%9%6%

7%

3%

19%

EU 25 Russia Ukraine Canada

Turkey Australia USA Others

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

The Prelude- 2006 Crop

Major Shortages of Malt Quality Barley in Europe and Australia

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 harvestIn place of a typical 9 MMT only 4 MMT harvested

Source: Euromalt Photograph: Ian Waldie/Getty Images

• 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

North American Harvest 2006

Barley Harvest

MMT

2005 2006

USA 4.41 3.81

Canada 10.84 10.00

100.00

120.00

140.00

160.00

180.00

200.00

220.00

240.00

Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Month

Euro

/MT

Crop 1999Crop 2000Crop 2001Crop 2002Crop 2003Crop 2004Crop 2005Crop 2006Average

Evolution of Barley Pricing 2006

Source: Emalt

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

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• Yield at 80 bu/acre average vs. 79 bu/acre average last 15 years• Other than last year harvested acreage lowest since 1968

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

• 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

Western Canada - Barley Yields

0

1

2

3

4

5

6M

MT

AB SK MB

Province

2005

2006

2007

Western Canada Quality

•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.

1. Protein up both total and soluble2. Sizing down3. Extracts reduced4. Dark in Appearance 5. May see an increase in β-glucan if germination weakens over the season

Barley Crop Quality by Geographic Region

Expected Malt Quality from 2007 Crop

• Excessive rain in Fall 2006 delayed seeding by 3-4 weeks in Central AB and Northwest Saskatchewan

• Conditions good in all other areas.

Crop 2007 – Seeding Conditions

Excessive moisture delays seeding & maturity in Central and Northern Alberta.

Normal moisture pattern in West Central Saskatchewan

Crop 2007 – Growing Conditions

Extremely dry during July in Southern Saskatchewan & Alberta.

Temperatures well above average in all areas during July.

Crop 2007 – Growing Conditions

Crop 2007 Varieties and Trends

• 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 judge’s 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

Canadian Wheat Board

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

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

1.8 2.2 2.6  3.0  3.4  3.8  4.2  4.6 5.0

very wet                               very dry

April May June

July August SeptemberSource: European Union Directorate General JRC

Evolution of Barley Pricing 2007

Source: Emalt

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260.00

280.00

300.00

320.00

340.00

Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Month

Euro

/MT

Crop 1999Crop 2000Crop 2001Crop 2002Crop 2003Crop 2004Crop 2005Crop 2006AverageCrop 2007Crop 2008

EU Supply & Demand Matrix 2007

In 1000’s MT

Malting Capacity

Barley Malt Production

Barley Demand

Supply Variance

Country Winter Spring

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)

Total 8788 8533 10645 2160 8150 -335Note 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 supplySource: H M Gauger

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

• 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

Future Demands on Global Acreage

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

Barley Markets - Ending Stocks

Crop 2007 – Crops and Trends

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

Global Changes in Malt Capacity

Source: MaltEurop March 2007 Presentation

Global Growth in Malt Demand

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

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.