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Frozen barley crops to push craft beer prices higher in N. America

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Beer prices in North America may rise next year as brewers and maltsters face higher costs after cold, wet weather damaged Canadian barley crops and left farmers and tipplers crying in their beer.

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Canada, the world's second-biggest exporter of malting barley, was already harvesting its smallest crop since 1968, before a recent dump of snow and freezing temperatures in Alberta, the biggest barley-growing province.

The shortage will hit craft brewers the hardest, since they typically keep less malt inventory on hand than larger breweries that are also better able to absorb costs.

"Prices (going) up means our costs go up and beer prices ultimately go up," said Neil Herbst, co-owner of Edmonton-based Alley Kat Brewery. "Any small brewery is going to be exposed."

With supplies tight, the premium maltsters pay for high-quality malting barley has grown and that cost will pass along to brewers who are not protected by long-term supply contracts.

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Craft brewers, the small breweries that are independently owned, typically have shorter-term supply contracts than big brewers to buy malt, which is a product made from germinating and drying cereal grains.

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(Graphic on Canada barley production, beer prices: http://link.reuters.com/fec92w)

Brick Brewing Co Ltd, an Ontario-based company, has an assured supply of malt at a fixed price through the end of 2014 with Canada Malting, a unit of Australia's Graincorp Ltd . But starting in 2015, Brick, whose brands include Waterloo and Laker beers, expects to pay more for malt, reflecting the poor barley crop.

"We're expecting a little bit of price adjustment for sure, just because the harvest is late, weather's been bad, everyone's predicting yields are down," said Russell Tabata, Brick's chief operating officer.

Malt prices have already moved 10 percent higher than Brick's contracted rate, a level it may be able to absorb, Tabata said. If malt prices climb 20 to 30 percent above Brick's contract rate, it would have to raise beer prices around 5 percent, or about 10 Canadian cents for a C$2 can, he said.

"WORST YEAR I'VE EVER SEEN"

Canadian farmers are on track to produce just 7.2 million tonnes of barley this autumn, the smallest crop since 1968. In the United States, farmers are expected to grow 192.7 million bushels, the smallest crop in three years.

The European Union, which is the biggest barley producer, along with Australia and Argentina all expect to harvest smaller crops because of weather and other factors.

"The big concern at the end of the day is, are we going to have enough barley to carry us through to next year's harvest?" said Pat Rowan, senior manager of BARI-Canada Inc, a division of Anheuser-Busch InBev. It procures barley to be malted for the brewer.

"In North America, it's probably the worst year I've ever seen."

Rowan said the maker of Budweiser would not likely need to boost beer prices.

Craft brewers are also at greater risk than some big brewers because they generally use more malt in brewing. Some larger brewers such as Anheuser-Busch add corn or rice for a different flavor, which are more plentiful.

SMALL, LOW-QUALITY CROP

In Canada, barley has fallen out of favor with some farmers because other crops are more profitable and because of the large price risk they shoulder. Farmers sign contracts with maltsters to sell them their top-quality barley but are forced to sell at a discount to other buyers when their crop is downgraded to animal feed use.

Much of Alberta's barley crop ended up covered in a thick layer of snow in early September. The snow blanket was followed by freezing temperatures that may have killed any immature crop, leaving it unfit for use in brewing.

Farmers fear the crop may have prematurely sprouted in the snow, a process called chitting that renders barley useless for malting.

Farmers and maltsters may have malting barley in storage from last year's big crop, but some say that is unlikely to tide the industry over for long.

"By this time next year, everyone's going to be sweeping the bottom of the bins to keep the (malting) plant going," said Doug McBain, a Cremona, Alberta farmer whose 1,000 acres of barley has sat under a layer of snow. "There better be a good crop everywhere next year."

Maltsters can adjust their malting processes to handle barley that is lower quality than usual, said Bob Sutton, vice president, commercial, at Alberta's Rahr Malting.

A slower germination process would lower a plant's output, however. And the crop might have higher protein content than usual, a common outcome with smaller, low-quality cereal crops.

"We'll find enough (malt) out of this crop," Sutton said. "Is it ideal? No."