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March 5, 2018
A strong but problematic salmon output recovery

Amid skyrocketing feed costs and falling productivity, Norwegian output is no higher in 2017 than it was in 2012. Chilean output is rapidly recovering and it is clearly taking over Norway as a growth driver. Even so, it will take several years for prices fall back to normal levels.

By Eric J. Brooks
An eFeedLink Hot Topic
The good news is that world salmon output is rebounding and prices are moderating. After several years of stagnation, world output rose 5% in 2017 (to nearly 2.6 million tonnes). Analyst firm Kontali expects a 2018 production increase to 2.78 million tonnes.

The bad news is despite the past year's output recovery, for nearly five years, no real output growth has occurred in Norway and Chile, which supply three-quarters of world exports.

At 1.3 million tonnes, 2017's output of keynote species Atlantic salmon was no higher than in 2012 or in 2015 -in other words, there has been no output growth in Norwegian salmon production for five consecutive years.

With Norway supplying over half the world's salmon and second-ranked producer having undergone a severe output contraction over this same time, that has left the world market undersupplied and prone to price inflation. Kontali expects 2018 output to finally break it 2015 high and rise 7% to 2.47 million tonnes. That will be the industry's fastest growth since its 10% expansion in 2015.
Nevertheless, even if 2018's optimistic forecast comes true, it only amounts to 2% annual world salmon output growth over the last three years. While supply is growing far more slowly than ever before, Marine Harvest estimates that since 2008, world salmon demand has risen at a 5.7% annual rate.

Even with faster production growth in Canada, Australia, New Zealand, Scotland and Iceland, Marine Harvest estimates that from 2012 through 2016 inclusive, world salmon production stayed near 2.6 million tonnes while revenue from selling that output jumped by 72%.

This supply squeeze is even tighter in world export markets where salmon's price is set. For example, at 1 million tonnes, Norway's 2017 salmon exports were 2.8% higher than 2017's 973,000 tonnes. Even so, total Norwegian salmon exports remained were a mere 4% above what was achieved in 2012 and 3% below the 1.03 million tonnes shipped in 2015.

Similarly, at 523,000 tonnes, Chile's 2017 salmon exports are up an impressive 22% from 428,720 tonnes in 2016 -but no higher than they were in 2015. Even if Chile leverages another year of 10% production growth to boost 2018 shipments 15% (to 600,000 tonnes), it would take several years of consistently strong world supply growth to recreate the salmon abundance and low prices that existed in the early 2010s. The question is if supply can tame the past three years of record price rallies while bringing cost and productivity growth back under control.
Chile, whose output fell by more than any producer is now leading the supply surge. According to statistics from Chilean aquaculture regulatory agency Sernapesca, total salmon production fell from 955,000 tonnes in 2015 as a toxic algal bloom, diseases and antibiotic overuse caused output to crash nearly 30%, to 676,700 tonnes in 2016. While 2017 saw output stage an impressive 16.9% rebound to 791,000 tonnes, this is still 5% to 10% below output levels achieved earlier this decade.

Accounting for approximately 17% of Chilean output, Coho salmon enjoyed a 35% output recovery, from 99,100 tonnes in 2016 to 134,000 tonnes last year. It was complemented by a 15.9% rise in the Atlantic salmon harvest, which makes up 74% of Chilean output.

Going forward, strict enforcement of salmon farm densities, the opening up of frontier areas in southern Chile's cooler, less disease prone waters is making production rebound faster than was expected. All this is being helped along by the adaption of Norwegian developed vaccines to Chilean growing conditions.
Even misfortunes are being managed better than before: Early 2018 saw a toxic algal bloom kill 42,000 tonnes of salmon or 0.9% of biomass -far less than the 14% of biomass and over half million tonnes destroyed in 2016.

Barring any unexpected catastrophes, 2018 is expected to see Chile's salmon production rise another 9.5%, to an estimated 866,000 tonnes. It means that by 2020, Chile may finally exceed its peak salmon output level of 955,000 tonnes set in 2015.

Speaking at the Norwegian Seafood Association conference held in mid-January, Ragnar Nystøyl, managing director of analyst firm Kontali estimates that after falling some 5% to 6% to 1.278 million tonnes in 2016 (from 1.377 million in 2015), Norway's salmon production achieved a 3% expansion, totaling to 1.317 million tonnes in 2017.
Nystoeyl believes that for 2018, Norway will leverage productivity growth and a 4% expansion in salmon licenses into a 7.5% increase in production, to 1.41 million tonnes. Others in the industry predicted that Norway's production could rise as much as 9% -but were they getting ahead of themselves? A late winter cold spell of -15C to -20C temperatures raised fears that Norwegian salmon mortality would rise.

As a result, prices which had fallen from NOK80/kg (US$10.40/kg) in mid-2017 to near NOK50/kg (US$6.50/kg) at the start of 2018 were rebounding to just under NOK70/kg (US$9.10/kg) in early March. Is the price surge justified by cold weather-induced mortality? Only time will tell.

On one hand, despite the miserable late winter weather, Norway's salmon output may finally achieve the 1.4 million tonne level for the first time. Nystøyl predicts that with diseases such as sea lice finally under control, not only will Norway's salmon output recover but it will achieve the same high proportion of fish grown to heavy finishing weights that were once taken for granted. He expects overall European salmon output to rise 7%, with a 7% to 8% rise in production in the rest of the world.

On the other hand, Norwegian salmon is no longer the high productivity industry model it once was. The nation that pioneered sustainable, antibiotic-free salmon farming is now creaking under the weight of skyrocketing costs and declining growth metrics.

Nystøyl notes that "In 2016 10,000 tonnes [0.8%] more was harvested than in 2012 but it required more than NOK14 billion [US$1.82 billion] to get the same production volume, which is a 56% increase in total costs. If you adjust for normal inflation and increased feed prices, this is a cost increase of NOK7 billion [US$981 million]."

The resulting feed cost inflation was made worse by the fact that key inputs were priced in US dollars and that Norway's currency fell in value by a third over this time.  Feed cost inflation coincided with a rising number of disease losses.

The latter caused a deterioration in feed conversion ratios, thereby boosting the cost and quantity of feed required per kilogram of salmon grown. Thus, Nystøyl states that from 2012 through 2016, salmon feed costs jumped 28.5% in local currency terms while falling 18.8% in US dollar terms, from NOK14/kg (US$2.33/kg) to NOK18 (US$1.89/kg).

--But feed cost inflation is only part of the story. With non-feed costs rising in price even more rapidly, feed fell from 54% of total costs in 2012 to 50% in 2016. Expenses ranging from investments in new, disease resistant fish cages to new vaccines and high mortality losses have risen far more rapidly than feed costs.

Worst of all, this remarkable rise in production costs occurred amid stagnant output. A US$1.8 billion increase in production costs over four years resulted in a mere 0.8%, 10,000 increase in Norway's salmon output.

The Norwegian Directorate of Fisheries estimated 2018 unit production costs at NOK35/kg (US$4.55/kg). -This means that Norway's current salmon production costs are higher than the average price of salmon for most years prior to 2014.

Thanks to a succession of record-setting salmon price rallies, FAO publication Globefish noted that "Spiking production costs and reduced harvests have so far been more than offset by the inflated revenues that the sustained high price level has been generating."  If however, this year's anticipated supply recovery turns out to be true, Norway which once had the lowest production costs, will instead face increased competition from rival producers.

Its inability to significantly boost production after 2012 has already made Norway's share of the world salmon market fall from 65% in 2010 to an estimated 52% in 2017. Going forward, the industry consensus is that Norway has finally resolved its inter-related salmon stocking density and disease problems and is ready to resume production growth -but at a steep cost.

On one hand, Nystøl estimated that Norway can boost salmon production at a 4.5% annual rate, such that it will total approximately 1.85 to 1.90 million tonnes by 2025. On the other hand, this projected 35% production increase in output requires a whopping 83% NOK15 billion (US$2 billion) increase in production costs, from the current NOK18 billion (US$2.3 billion) to NOK33 billion (US$3.3 billion).

Concerned that rising production will deflate prices as unit costs skyrocket, Nystøl concludes that "Capacity growth must be paid for, but will it pay off? Norwegian salmon growers understood that unit costs had bottomed out around 2010 and had nowhere to go but up. Even so, this steep, ongoing rise in production costs is far worse than was expected.

At the same time, by some metrics, Chile is for the first time, showing higher salmon farming productivity than Norway. Nystøl shared with conference attendees that "In 2017, Chile was also better off than Norway, and beat it with higher survival for the 16G [2016 generation salmon] stocking. They have also achieved 200g to 300g higher finishing weights than in Norway,"

What is one to make of all this? First, after disappointing everyone for fifteen years, Chile may finally be using its larger, undeveloped salmon farming resources to overtake Norway as the main driver of world salmon supply growth. The past year's superior grow out weights and lower mortality may be a sign that Chile has finally managed to adapt its larger resource base to a sustainable production model.

Moreover, if one were to discard all the above industry facts and do a strictly technical analysis of salmon prices, it appears that while a long-term bull market has reached an important inflection point, there is no short-term return to low prices. Instead, the attached price chart clearly shows that a steep multi-year price rally giving way to a "topping out" formation.

That implies at the very least, several more years of historically high prices before the market returns to normal price levels. This in turn concurs with the fact that while Norway and Chile have taken promising steps forward, supply needs at least several years to catch up the past decade's demand growth.

Hence, while the market will eventually soften, we can expect prices to stay at the high levels seen since 2015 for at least a few more years. The greater uncertainty is whether Norway can defy five frustrating years and somehow innovate itself out of its increasingly tight resource constraints.

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