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Closing India’s Gap Between Beer, Barley

21 September 2013

Rabobank

Barley is the most commonly used grain in the production of malt for use in making beer.

Global beer production is changing, with greater quantities of beer being produced closer to consumers. Growing consumption of beer in emerging markets in Asia and Africa means that brewers in these markets are going to require a steady supply of reliable, cost-effective malt to supply this demand.

In this context, a company considering strategic moves towards a global malting footprint should consider India in terms of both its domestic and export potential.

The Asia-Pacific region, now the world’s largest beer-consuming region, has only 21% of malt capacity – of which 80% is Chinese. Although the centre of gravity for the global beer market lies in emerging markets in Asia, Africa and Latin America, production of barley remains in the US and Europe, which also account for around 60% of the world’s malt production capacity but where demand is slowing.

Malt demand

Indian demand for malt (largely driven by brewers) is increasing due to growth of beer consumption amongst India’s population. In less than five years, India is likely to need additional malting capacity. In a new report, Rabobank suggests maltsters may look to the country both as a supplier and a buyer of malt.

Globally, the supply of barley has failed to keep up with growth in demand for malt. In the past 15 years, global demand for beer has jumped by 53%, while the overall acreage devoted to barley has declined by 10%, not least because of the declining competitiveness of barley compared to other crops such as wheat.

Given this situation, and the fact that emerging markets in Asia are consuming increasingly large amounts of beer and other malt based food & beverages, maltsters would benefit from investment in India for both increasing barley output and malt capacity.

Just as with Latin America, where leading brewers face falling domestic barley supply – mainly from Argentina – at a time when import demand from the Middle East is growing, so too is a squeeze being felt in the Asia-Pacific region. There, a larger proportion of domestic barley is utilised in animal feed and less than 40% is fit for malting. The entire region faces greater dependence on imported barley.

China’s thirst

China is a large consumer of beer, though it too has small domestic barley production relative to demand. Malt exports from China is serving the regional demand but are forecast to decrease in favour of domestic buyers. The need for alternative sources of malt in the region will be exacerbated by competition with China for Australian and Argentinian barley. Chinese capacity is likely to be consumed quickly, leading to increased volumes of imports and, as a result, costs of production.

Alongside these considerations sit the geographic advantages of malt production in India. Relative to other emerging economies in the Asia-Pacific region, India is one of the few major barley producers. With an established alcoholic beverages sector, it has the second-largest malt capacity in Asia Pacific after China.

With shifting malt demand creating a need to establish a malting footprint closer to end-user demand, there are significant export opportunities. The country's location is also advantageous, given the potential for a South Asian malt trade 'corridor'. Global maltsters who have established contracts with the top four brewers can potentially benefit from India’s central location, mid-way between South East Asia and the Middle East and Africa, to create a South-South Asian malt trade route.

Growth in India

Meanwhile, domestic demand for beer in India is predicted to continue to rise rapidly in the next five years, making it one of the fastest-growing markets in the world. Rising per capita income and an evolving lifestyle due to globalisation is creating a critical mass of alcoholic beverage consumers, with demand for beer growing at a CAGR of 10% over the past five years.

This is thrown into sharper focus by the fact that international brewers are competing in the country for a share of the domestic market at a time when years of institutional neglect has driven cultivatable land to non-barley crops and allowed barley quality to slip. The barley area under cultivation has declined from 858,000 hectares in 1998 to 780,000 hectares this year. Although yields have recovered from a sharp decline in the decade to 2008, they remain substantially below the EU-27 average.

Although brewers will need to secure a steady supply of reliable, cost-effective raw materials of sufficient quality to manage price volatility on margins, all these factors promote increased and improved barley production in India. The introduction of new varieties is already improving quality and yield, largely a result of private companies’ investments.

Current excess malting capacity in India is expected to be absorbed over the next three to five years, partly fuelled by premiumisation in whisky and growing demand for malted food and malt extracts from the food industry. For global maltsters, the need to be close to consumers and emerging beer markets will drive development of a global malting footprint. India offers the tactical, strategic, demographic and geographic potential.

September 2013

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