FEED Business Worldwide - July 2012

 

Fishmeal prices rise sharply amid supply uncertainties and a looming recession  

 

by Eric J. BROOKS

 

 

In our earlier fishmeal reports, we warned that warming Peruvian coastal waters implied that fishmeal and its anchovy feedstock would tighten as the year progressed. This so far appears to be the case. 

 

 

 

Pacific Ocean currents off South America went from cold to slightly above average temperatures. That along with last year's unexpectedly large catch has made for a disappointing early 2012 fishing season. Writing in his weekly blog, Wayne Bacon, president of Hammersmith Marketing Pte noted that, "Water temperatures in Peru are not at normal levels, actually warmer than expected, and the fish are not in the regions where they are normally seen - a result of too much warm water.  So, fishing is a tad more complicated this year than the last couple of years." 

 

The market responded accordingly: After bottoming out in January near US$1,300/tonne international fishmeal prices rose gradually in February and early March on news of falling catch numbers. Spring time's aquaculture season commencement and Peru's strict fishing quota made prices rise by 19%, up to US$1,550/tonne by late May. Buyer reluctance to give in to such high prices was getting ready to tame the rally but Peru's 15-day fishing ban changed market sentiment back towards an inflationary bias. 

 

Moreover, these supply concerns quickly spread to China, which imports 60% of Peru's fishmeal exports. From mid March to mid May, eFeedLink reported that China's port price for imported fishmeal jumped by 20% (in local currency terms), from RMB7,880/tonne US$1,245/tonne) to RMB9,300/tonne (US$1,460/tonne).

 

At first, it was thought that with prices rising sharply and China's currency falling against the US dollar, buyers would demand lower prices. Instead, the last three weeks have seen no let up in the inflationary momentum. Average foreign fishmeal prices at Chinese ports jumped by 7.5%,  from approximately RMB9,300/tonne (US$1,460/tonne) in mid May to RMB10,000/tonne (US$1,565/tonne) in early June.

 

After such a sharp rally, prices normally top out, or at least pause for a while. Unfortunately, Peru's two-part response to the situation surprised market observers: First, it slashed the May to July anchovy fishing season by 27%, to 2.7 million tonnes, from the 3.7 million tonnes permitted in the same period of 2011.

 

That implies fishmeal produced from this May to July season will amount to 630,000 tonnes, some 110,000  tonnes or nearly 15% less than was anticipated. While nobody is expecting a repeat of 2010's disastrous 699,000 tonnes, the lower catch quota could put 2012 Peruvian fishmeal production on track to finish below one million tonnes, or some 10% to 15% less than 2011's output.

 

Second, this lower quota was made more stringent by late May's 15-day ban on catching small fish within 30km of Peru's shore along the coastal latitudes ranging from 9 to 15 degrees south of the equator. All this was much more than most suppliers had expected.

 

 

 

Although Chinese buyers were suffering from price shock and had started to hold back on their purchases, the ban shifted market sentiment. Bacon explained that, "The [last] week [of May] had been quiet until the ban but then some buyers were scurrying around trying to cover needs that they had left open in the hopes of softer prices, but there just did not seem to be any seller."  Apparently, because of the ban, "Producers are busily filling all the orders on hand but all say that they have nothing much left to sell [beyond pre-ordered commitments]."

 

What made matters worse is that too many buyers and sellers assumed that last year's bountiful catch would repeat itself this year: Several weeks prior to the ban, prices had already risen 20% and industry reports stated that the market was oversold and short somewhere between 150,000 and 250,000 tonnes of fishmeal. With alternative exporter Chile using more of its anchovy catch to feed its salmon farming industry, there is very little in the way of alternatives to Peru's falling output.

 

The lack of alternatives also extends to plant proteins: Since January, fishmeal's 19% price increase, though impressive has been outraced by a 32% rise in soymeal costs. The last time the fishmeal to soymeal price ratio was in its current 3.1 to 3.6 price range was mid to late 2009, before it embarked on a record setting rally.

 

With rapeseed also showing price strength, not only are there few non-Peruvian anchovy suppliers left but plant-based protein meals are also getting more expensive, thereby creating less scope for substitution.

 

For all these supply-based reasons, we broadly agree with the UN FAO's recent assessment that, "Fishmeal prices can be expected to rise, due to Peru's lower quotas for anchovy catches in 2012, at a time when demand is high." –But even so, we must qualify this rather broad generalisation.

 

While prevailing circumstances imply a short-term price increase of US$100 to US$150/tonne, the third quarter brings with it many uncertainties.

 

 

 

At first, an exceptionally rapid rise in offshore Peruvian coastal temperatures caused a sharp drop in anchovy numbers. It also led to widespread talk of another hot current "El Nino" spell, which would have decimated the anchovy catch. But the latest data shows that ocean temperatures, while above normal, have stayed in a side-ways pattern for well over a month.

 

Bluntly put, if they continue to stay constant at this moderately above average level, all things being equal, a slightly disappointing catch would imply another 10% rise in prices. On the other hand, if the current warms up El Nino levels, we could see price records being set by late year.

 

There is also an outside chance that Peruvian waters will fall back into cooler, La Nina-like conditions for a rare, third consecutive time. That could make for a bountiful late year anchovy catch and make prices soften towards US$1,000/tonne.

 

But even an inflationary, El Nino-driven forecast must be qualified by dour macroeconomic fundamentals: The world economy has decelerated to the same slow pace last seen before 2008's deep recession. All reports confirm that China's economy has also slowed sharply. While a corresponding fall in China's aquaculture demand would normally take several quarters to manifest, there exists an additional factor capable of causing a near-immediate, sudden drop in Chinese fishmeal imports: In response to the emerging world economic crisis, China's currency has fallen very sharply against the US dollar. This makes fishmeal more expensive to Chinese importers even when its price remains constant, let alone when it is rising sharply.

 

China's recent interest rate cut puts even more downward pressure on its currency. If the renminbi falls too sharply against the US dollar, this along with rising (US dollar) fishmeal prices could cause importers to sharply slash their purchases, or use inventory run-downs to delay them –by which time China's economy could be in recession.

 

On the whole we are in a situation where fishmeal supplies are falling but demand appears ready to falter at any time. This last time this happened was during the 2008 recession. Lower fishmeal demand ran into the 2009's El Nino reduced catch. While fishmeal prices fell 19%, this was considerably less than the 50% price drop suffered by other feed ingredients.  Going forward, beyond the aquaculture season's cyclical third quarter peak, a medium-term downturn in China's fishmeal demand looks increasingly imminent.

 

While the anchovy catch is relatively scarce over the short-term, the medium term supply trend is much more uncertain. The question is whether fishmeal's tight supply trend will track what looks like an impending drop in export demand, be overtaken by a recession-induced demand drop, or outrace it. The answer to that question determines tomorrow's price path.