Alberta’s craft beer supply chain: The maltsters who set the standards (Part 3)
COVID-19 took a toll on almost every Alberta manufacturing sector last year. This 4-part series describes the economics behind one of Alberta’s many barley-to-beer supply chains. We explore how craft beer’s unique ties to its consumers were able to shield it from some of the damage wrought by COVID – and how far the pandemic’s impacts reached.
Post 1 describes the shift in the supply chain that put consumers in the driver’s seat of craft beer.
Post 2 explains how a demand-driven supply chain was uniquely situated to withstand some of the effects of COVID.
In Post 3, we explore the role of the maltster as the indispensable conduit between craft brewer and barley producer.
Post 4 illustrates how much influence COVID had – and didn’t have – at the farm of a barley producer with close ties to an Alberta maltster.
Kevin Sich has been a professional grain buyer for 30 years. But the events of 2020 were unlike anything he’s seen. A perfect storm of chaos created by COVID-19 and exacerbated by many other factors.
Sich works at Rahr Malting in Alix, Alberta, in the heart of Canada’s renowned malt barley industry. As the Supply Chain Director, he works directly with barley growers to ensure Rahr will receive the malt-quality barley they need throughout the year.
What is malt?
Malt turns water into beer. Together, the two ingredients provide about 98% of the overall composition of every beer. The ancient process of malting unlocks the starches occurring naturally in barley and makes them available as sugars. Malt is sweet – think of malted milkshakes or the Maltesers candy from the UK.
The malthouse receives raw barley grain from producers and converts the barley through a 3-step malting process into malt, which looks very much like the raw barley. It then sells the malt to brewers.
To make beer, the brewer mashes the malted barley grains into a mash that the added yeast feeds on. As the yeast consumes the sugar in the mashed grain, it excretes waste in the form of alcohol and gas in the form of carbon dioxide (fizz). This is fermentation.
The indispensable middlemen
In any year, typical or not, the malthouse operates in the middle ground between barley producer and brew master (Figure 1). “Over the last 10 years, we’ve started spending more time listening to what the brewers wanted,” Sich says. “For the first time, we were becoming the conduit. We're starting to tell producers what the brewery wants because the brewer's got his ear to the public.”
Rahr Malting, Alix, Alberta.
As the middleman, the malthouse must process feedback both producers and craft breweries provide. Usually, they work to balance the two: a barley variety that works well for the producer may make malting difficult or may ultimately make a beer few people want to buy. A variety that makes great beer and the maltster prefers because it’s easy to work with may come from a crop with low yields or less disease-resistance and that’s more expensive to grow – and is of less interest to the producer.
But 2020 was anything but typical. When COVID first hit in late March, Rahr was forced into the rare position of allowing some growers out of their signed production contracts.
Figure 1: The craft beer supply chain, with maltster as conduit
Production contracts key to malthouse risk management
Production contracts specify the barley varieties the contracted barley producer must grow with the grain characteristics needed for malting. They also specify volumes the producer intends to deliver in response to Rahr’s bids throughout the upcoming calendar year. Contracts reduce malthouse risk by ensuring a supply of good-quality malting barley 365 days per year. Contracts also reduce risk for the producer by guaranteeing a market for the high-end specialty crop with an otherwise limited market. But in 2020, Rahr’s production contracts would be sorely tested.
At the start of the year, the malthouse bought 2019 crop, contracted in late 2018, to serve their U.S. customers. About 80% of Rahr’s annual production goes to the U.S., to brewers like Sierra Nevada, New Belgium and Lagunitas Brewing Company. Each produces at least 1 million hL of craft beer per year (breweries in the U.S. are classified as craft if they produce less than roughly 7 million hectoliters). They also sell and deliver to thousands of other smaller U.S. brewers. By late March, early April 2020, Rahr’s 200 producers across the Canadian prairies were getting ready to plant that year’s crop. While news of the virus was global and urgent, nothing suggested those producers could do anything but move forward as planned.
From heft to selection: the other side of malting
Seventy kilometres from Rahr near Penhold, Alberta, John Hamill and his family were also preparing to plant their malt barley crop on their 92-year-old farm. Hamill Farms is a fourth-generation grains and oilseeds operation, producing, among other crops, 1,200 to 1,500 metric tonnes (MT) of malt barley per year. They had typically sold their malt barley to Canada Malting, Canada’s largest maltster, in Calgary, then buying the big malthouse’s malt to make their homebrews.
That changed in 2014. They built a custom-made malt plant that owner-operators John and son Joe designed themselves, with advice from Rahr and others, and they added a high-end Turkish roaster – the first of its kind in Canada – to produce wholly new lines of specialty malts. Red Shed Malting was the province’s first specialty maltster. Now, they grow malt barley on the farm and sell it to the malthouse using production contracts. They also have malting contracts with breweries across the province to malt barley from farms that are local to the breweries’ supply chains.
Base vs specialty malts
Maltsters make base and specialty malts. Base malts make up at least 90% of the malt used in any beer (and 100% of the macro-brewed beers). Mainly used in the fermentation process (to make the alcohol), base malt is the staple in all beer regardless of whether it’s a craft or macro brew.
Rahr’s tower malthouse produces base malt with an annual capacity of 180,000 MT of grain. Their sister plant near Minneapolis does 415,000 MT, making Rahr one of the largest malthouses in North America.
At the other end of the scale, Red Shed is profitable producing 4 MT of specialty malts per week. Specialty malts are used solely to make craft beer. They’re allowed to release their flavours, aromas, and colours through a steeping process. Craft brewers use, on average, four times more barley per barrel of beer than the macro brewers do.
As COVID appeared
The pandemic was declared on March 11, 2020. Shortly after, across both the U.S. and Canada, breweries stopped brewing. Restaurants closed. Keg sales vanished. Worried perhaps they’d be stuck at home indefinitely, consumers began stockpiling beer with overall sales rising year-over-year. Everybody wanted cans. While that worked out well for established craft brewers who were more likely to have been canning their beer already, newer, smaller brewers relying more heavily on taproom sales had a harder pivot to make. Some of the smaller Canadian breweries buy their specialty malts from Red Shed.
“It was scary,” John says. “When COVID first happened, our phone stopped ringing. Nobody was looking for the specialty malts, and we weren’t sure when or if they’d start again. Nobody knew what was happening or how long this would last.”
A tale of two malthouses
Even the largest global breweries are no longer vertically integrated with command of each stage of the barley-to-beer supply chain. However, the Hamills, with both farm and specialty malthouse, operate within a different supply chain than do the big base maltsters like Rahr. From Hamill Farms’ annual production of roughly 1,300 MT of malt-quality barley, Red Shed buys 200 to 250 MT per year. They keep an additional 500 MT of crop on hand in case of a poor crop year. The rest goes to Canada Malting on contract. In 2020, that happened as usual. The farm’s diversified market structure with their largest buyer sustained through the downturn meant they didn’t have to seek out further markets.
It was a different story for Rahr. The first round of COVID shutdowns shrunk the output of brewers such as Lagunitas, who were relatively new to cans. In the U.S., overall beer sales dropped slightly in the first months of the pandemic, but craft sales plummeted over 9%. Sales were also down for craft maltsters, with malthouses on average experiencing a 34% reduction in malt purchases before June 2020. But then, according to Bob Sutton, Rahr’s Vice President of Sales and Logistics, they regained demand.
“We saw a big difference in malt demand,” he says. “It was maintained or maybe even up a little bit with craft brewers who not only were canning but also were canning in the larger format.” Boxes of 12, 15 and 24 cans replaced taproom sales for those who could easily make the leap. Regional craft brewers like Lagunitas, Sierra Nevada, Firestone, and New Belgium are national brands enjoyed from coast to coast. Thanks to the huge U.S. customer base that was busy stockpiling canned beer, and thanks to decent summer sales, demand for Rahr’s base malt was largely stable through the first half of the year.
In the eye of the storm
After the initial setback, the Hamills’ year continued much as it normally would. Lower volumes contracted to Canada Malting for the 2021 crop is one difference. But their commitment to local communities remained strong, and they used social media and on-farm visits to further social connections with brewers.
Sometimes, however, being in the middle can make you feel alone. Acting as the conduit, Rahr responded to cues from brewers’ shutdowns in late spring and early summer with a slowing number of bids put out to their producer group for barley deliveries of the 2019 crop. Their onsite storage facility always holds 2 months worth of raw barley, so they couldn’t even accept shipments of producers’ grain to store for when demand would pick up. And there was too much uncertainty there’d be a malt market later that would be worth storing grain for very long in on-farm bins. Producers wanted to sell their grain while the market was hot.
Long COVID and agriculture
Summer 2020 promised a resurgence of demand as U.S. restaurants, bars and patios started to open. But as summer waned and with the grain they needed to meet demand already in hand, Rahr was then faced with an additional challenge. The malt barley crop in 2020 was exceptional. Yields and quality were well above average. That helped the Hamills keep their contracts with Canada Malting for 2020. As prices of other grains and oilseeds continued to rise, malt barley’s usual premium fell to a premium for feed barley, a lower-quality grain that was nonetheless in high demand both domestically and globally. Malt had become “a true dog,” says Sich. “Growers were very upfront with us, saying ‘You don't think you need this barley? Let me out of my contract. I can go put it on a vessel in Vancouver’.” A real impact of COVID was a lot of malt-quality barley sold in domestic and global markets as feed.
The bad news didn’t stop there, however. Late fall, COVID returned to California in a devastating third wave. Everything shut down. At a time of record stocks of malt barley, there were suddenly no buyers. Sutton says that through the darkest days of winter, Rahr’s production was hurt by the maltster’s worst scenario: they missed entire batches because there was no place to put the finished malt. Production was halted. Railcars were put into storage. Contracts were ended. Heading into summer 2021, there was still a surplus of raw grain to get through and a new crop to soon deal with. The impact has been staggering: the market interference that COVID and restrictions produced have challenged Rahr’s purchases of 3 crop years’ worth of malt barley. Long COVID, indeed.
What it all comes down to
COVID distorted the influence that consumers bear on the craft beer supply chain. They were perhaps most notable for their absence in 2020. But while Kevin-as-conduit was breaking links that he usually works hard to protect, Alberta’s craft beer supply chain ultimately starts and ends with the producer. Next week, we’ll look at the decisions that Sheldon Stang, a malt barley producer in mid-central Saskatchewan, had to make during a period of unprecedented uncertainty.
Martha joined the Economics team in 2013, focusing on research insights about risk and success factors for agricultural producers and agri-businesses. She has 25 years’ experience conducting and communicating quantitative and qualitative research results to industry experts. Martha holds a Master of Sociology degree from Queen’s University in Kingston, Ontario and a Master of Fine Arts degree in non-fiction writing from the University of King’s College.