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Juneary 21, 2019

The world salmon market at a crossroads
Salmon is healthy, affordable and enjoys equally strong growth prospects in both rich and poor countries -but it also faces highly challenging supply-side constraints.

By Eric J. Brooks

An eFeedLink Hot Topic

Once a niche luxury seafood, salmon has gone mainstream and overtaken chicken as the world's fastest-growing protein line. According to a recent study by Rabobank ("Keeping Salmon At the Top of the Menu: How To Maintain High Demand", RaboResearch, January 2019), the years 2007 through 2017 saw world chicken demand growth decelerate to 2.6%. Salmon consumption expanded at a 4.6% annual rate -but it would have grown even far faster where it not for an unfortunate confluence of supply-side constraints.
Due to such impressive growth metrics, Rabobank's concluded that "salmon is winning the battle of the proteins." The question is, can salmon producers continue leveraging its unique advantages, overcome serious challenges and keep growing at anywhere near this rapid pace?
On one hand, developed per capita country chicken consumption at over 30kg but even in wealthy countries, salmon consumption is still in the 1kg to 3kg range. Hence, it will not challenge poultry consumption or red meat consumption any time soon. Even in the west where demand is highest and closest to maturity, it only accounts for a tenth of the 22kg of seafood eaten by Europeans and North Americans every year. 
On the other hand, it is these relatively low consumption numbers give salmon unusually high growth potential -with potential for many more decades of sustained rapid growth than poultry. For example, even after increasing by a whopping 50% in 10 years, US per capita salmon consumption will be no more than 1.5kg in 2019 -with a majority of Americans living away from coastal cities eating only half this amount. Similarly, even though Italian and Spanish per capita salmon consumption has nearly doubled since 2009, Western European per capita consumption ranges from 1.0kg to 2.5kg.
Consequently, even in wealthy nations, salmon consumption is nowhere near saturation levels. At the same time, demand for salmon is growing several times faster in developing countries such as China and Brazil. All this make salmon "the new chicken" -a popular, feed efficient protein line with years of rapid growth ahead -if it can overcome supply-side bottlenecks that have dogged it since 2012.
Prior to 2012, salmon's growth momentum was due to an array of unique (and possibly threatened) advantages. Not least among its advantageous was a tremendous, thirty-year cheapening of salmon's price relative to other meats.
Fishmeal once made up over 50% of salmon feed and prior to the late 2000s, its cost rose more slowly than that of livestock feed inputs. Technology and farm management-based productivity gains were leveraged against farmed salmon feed conversion ratios, which are lower than those of poultry. For four decades, farmed salmon's unit production costs fell far more rapidly than that of livestock meats.
In 1980, beef cost 62% less than salmon. For most of the 15 years between 2000 and 2014 inclusive, the price gap between beef and salmon had narrowed to between 20% and 35%. Wild caught salmon production staying mostly in the 500,000 to 900,000-tonne range. Led by Atlantic Salmon world production of eight farmed salmonid species jumped 40-fold, from 100,000 tonnes in the late 1970s to approximately million tonnes today.
Over 40 years, the world's population roughly doubled but world salmon production skyrocketed by 766%. This massive increase in world salmon supplies coincided with its inflation-adjusted price falling to levels comparable to that of red meat.

Coincidentally, salmon's price plunge occurred just as consumers were seeking "healthy" alternatives to red meat consumption. In salmon's case, its heart-healthy fat composition dovetailed with the discovery that omega 3 oils were vital to human health -and salmon was the tastiest source of this vital but rare nutrient.
While that gave salmon a huge following among wealthy educated consumers, its falling price stimulated its consumption among increasingly larger demographic groups. Moreover, with aquaculture providing fresh salmon supplies year-round, consumption was no longer tied to seasonal availability.
With outstanding health benefits, low feed conversion ratios, booming supply growth and constantly falling prices, salmon consumption grew rapidly even in wealthy countries where per capita protein consumption exceeded 100kg.
Moreover, salmon never suffered the food safety scandals or negative publicity endured by antibiotic dependent, labor-intensive, low wage seafood lines such as shrimp or tilapia. Even negative reports of Chilean antibiotic overuse were counterbalanced by the fact that Norwegian salmon is the only major protein line to be raised without using antibiotics. With both Norway and Chile now practicing sustainable aquaculture, salmon farming's food safety record exceeds that of any protein line.
Even in fast-growing economies with per capita GDPs under $10,000, salmon's premium price did not hold back its consumption growth. Rabobank noted, "Salmon became a winning protein due to its modern appeal, known health benefits, mild taste and attractive product offerings."
Sadly, while salmon's stellar reputation is higher than ever, supply-side constraints are having trouble meeting demand, inflating production costs and even threaten its healthy reputation. Salmon's average price bottomed out around NOK30/kg (US$3.50/kg) in the late 2000s.
From 2010 onwards, plummeting world fishmeal supplies made this traditional salmon feed component break a succession of price records. It jumped from US$550/tonne in the early 2000s into the US$1,500/tonne to US$2,000/tonne range after 2010, while supplies shrank more than 50%. Moreover, fishmeal hyperinflation coincided with leading producer Norway running out of frontier salmon growing regions.
On one hand, by substituting soymeal and enzymes in place of fishmeal, the latter's feed inclusion rate was reduced from 55% twenty years ago to near 10% today. That made it possible to keep salmon production expanding after 2010 and into the foreseeable future. On the other hand, lower fishmeal content in salmon feed may have impacted salmon productivity and contributed to a rising number of salmonid health problems, such as sea lice.
Consequently, an impressive sounding 4.5% annual increase in world salmon production from 2008 through 2018 must be broken down and qualified: Atlantic salmon output rose at an 8.6% annual rate from 2008 through 2013 -but from 2013 through 2018, increased at only a 2.2% annual rate, amid mounting supply-side issues. Even though 2018's output rebounded by a handsome 6%, 2017's world salmon production was lower than it was in 2015.
Consequently, the past five years have seen the demand for salmon growing twice as fast as its supply. As a result, prices hyperinflated from their NOK30/kg (US$3.50/kg) average, setting new price records near NOK80/kg (US$9.35/kg) over the past two years.
Even though prices are down more than 20% from such record peaks, Marine Harvest states that costly new investments and technical measures required to keep output growing have boosted average production costs to around NOK35/kg  (US$4.09/kg). It will take years of above average supply growth before prices can climb down from the NOK60kg (US$7.00/kg), which Rabobank is now calling "the new normal."
At the same time, with supply unable to keep pace with demand, Rabobank concludes that any further cost inflation threatens salmon's status as "an affordable luxury." Cost inflation -if not kept in check-could even bring salmon's consumption growth down to the 1% to 2% rate of mature proteins.
Against these two challenges, salmon has several advantages, both of which have only been partly exploited. First, "prices have been mainly demand disruptive in [wealthy] established salmon markets." For example, France and Britain both saw their above 2kg per capita consumption fall 10% during the past few hyperinflationary years.
On the other hand, Germany's lower per capita salmon consumption of 1.8kg stopped growing but did not fall even when prices doubled. Even with the same salmon price hyperinflation, the less mature US market's salmon consumption continued rising over the last five years, from 1kg to around 1.2kg. In developing countries such as China, consumption growth is unaffected, as it still mainly occurs in a very high-income demographic that is immune to food price inflation.
Rabobank's report states "new markets in emerging economies showed no specific response to the change [increase] in salmon prices." Hence, even if salmon continues to rise in price, developing country consumption should keep rising by 3% to 5% annually.
Second, in wealthy but immature markets like America or Germany, consumption growth among new customers that do not yet regularly consume customers will at the very least, counterbalance in price-induced fall in salmon consumption among established, longstanding customers.
Third, unlike many other seafoods that require being purchased fresh and a long, at home preparation time, salmon's physical characteristics and well-developed supply chain allow it to be easily processed and marketed as pre-packed, instant or ready-to-go food. For example, in the face of hyperinflation and record high prices, the years 2014 through 2017 saw pre-packed, ready-to-eat salmon sales rise 18% in Germany and an even faster 38% in the larger but less mature American market.
At the same time, the report warns that "high and volatile prices have already created fragility in demand in mature markets, and a further increase in prices could create disruptions in demand even in relatively new markets."
The bad news is that due to the above-mentioned hyperinflation and growth constraints, it is doubtful that world salmon consumption can continue growing by 4%+ annually. The good news is that after five years of nearly flat output, new investments in Chilean and Norwegian production and improved farm management mean that salmon output is poised to resume growing at a 3% to 4% annual rate well into the 2020s.
That means that well into the foreseeable future, salmon output and consumption will expand more slowly than before, but still faster than other meat lines, chicken included.
For now, Canada, Brazil and coastal Africa have not provided a legal and institutional framework capable of actualizing their massive salmon growing potential. Should one of them come to their senses and do so, the happy days of 4%+ annual growth in world salmon consumption would return.

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