July 16, 2010
Fishmeal's price finally cracks but its market cycle has changed
After nearly a year of steady, unrelenting gains, fishmeal's powerful rally finally broke. Prices wentfrom about US$1,000/tonne in early 2009 to a peak of nearly US$2,000/tonne at the end of the first quarter.
Indeed, the price would have risen even higher, except that buyers offering more than US$2,000/tonne still could not obtain the fishmeal they were seeking. It was a rally based on brutal fundamentals which not even shaky economic conditions could tame.
But in a classic turnaround, the last three months have seen prices fall 25%, down to between US$1,420/tonne and US$1,500/tonne, depending on the grade and quantity of fishmeal being purchased. Both aquaculture farms and speculators must ask themselves if this is the start of a downtrend, a new price plateau, or a temporary pause before prices trend upwards again.
Based on the available evidence, fishmeal's appears to be consolidating at a new plateau, with more upward movement to follow within six months to a year. Below, we explain both historical patterns and the current market conditions which support such an interpretation.
Historically speaking, the last twenty-five years have seen two very distinct fishmeal price eras. After setting new records in the inflationary late 1970s, from 1985 to 1999, fishmeal's price went literally nowhere: During those 15 years, fishmeal's price floated up and down from approximately US$380/tonne to US$760/tonne. With its price stuck within a constant range an d inflation rising about 2% per annum over this time, fishmeal's average real price dropped by a third over this decade and a half.
For the first half of this era, anchovy catches gradually increased, meat demand grew slowly and aquaculture accounted for less than 20% of all seafood production.
Moreover, the link between fishmeal and soymeal prices was strong. With soymeal's price going nowhere in the 1980s and 1990s, fishmeal could not rise in price by much. Between 1998 and 1999, adjusted for inflation, fishmeal's price bottomed out at a ridiculously low level far below its 1970s peak.
By coincidence, it happened at nearly the same time that crude oil's price crashed to US$10/barrel. That's because the Asian economic crisis temporarily halted growth in both fishmeal and fossil fuel demand. Within a few years however, fishmeal's price behaviour was forever transformed.
That's because the mid 1990s saw profound shifts in market fundamentals that would only manifest themselves some years later. First, China, East Asian and Latin American economic growth pulled up meat consumption and with it, hog and poultry fishmeal demand.
The transitional phase occurred between 2000 and 2003, when after watching its real price after inflation fall by a third over the previous fifteen years, fishmeal kept pace with inflation and even stayed slightly ahead.
After 2004, there was not enough supply to keep pace with demand and we entered the current era of constantly escalating fishmeal costs. In a little over two years, fishmeal's price doubled, before retreating by a third to a new plateau near US$1,000/tonne. That's because aquaculture demand kept growing amid a continuous fall in anchovy catches
Since then, prices have doubled, just as they did between 2004 and 2006. However, because demand is higher and fishmeal supplies have become tighter, it took even less time for this rally to both peak and crash.
Hence, fishmeal is already down 25% from its April peak and if the post 2003 market dynamics are any guide, it may fall some more, to about US$1,330/tonne or by 33% below its new record of about US$1,980/tonne. Extrapolating the trend that was interrupted by the Lehman/AIG crisis, fishmeal could then tread in the US$1,330/tonne - US$1,500/tonne price range for six months to a year before embarking on a new rally that would peak some time in the first half of 2012.
This projection does come with two important qualifications: If catches keep falling as aquaculture output keeps rising, the time between rallies and crashes could become shorter. Such an outcome would also see price volatility rising, albeit with a decidedly upward trend.
Second, if a real, low cost, entirely viable substitute for fishmeal were to come along, the market would change profoundly, and so would fishmeal's price. However, no such innovation is in sight at this time.
First of all, this price drop is mostly due to the short-term, unsustainable behaviour of buyers. Fed up with high prices, buyers simply left the market and decided to live off their inventories for as long as possible. More than anything else, it was their behaviour that poured cold water on the rally.
Second, the Chinese account for 50% of fishmeal export purchase. They had just restocked inventories, then encountered a slack aquaculture growing season. Earlier Germany, the second largest importer, had restocked en masse just before prices went hyperbolic.
They and other buyers decided to sit out the market, hoping that prices would fall once the new Peruvian catch arrives. Along with the fact that fishmeal is becoming unaffordable, the deliberate departure of large buyers played a large role in fishmeal's recent price crash.
The question is whether they can sustain such behaviour long enough to bring fishmeal back to historically lower price levels? That is not very likely, since a very high percentage of the Peruvian and Chilean catches are already pre-sold. That means that independent, non-contractual buyers would have to rely on inventories. Thanks to El NiÃ±o and the recent Chilean earthquake, these are very low. With most of this year's catch already pre-sold, it would be difficult for these stocks to recover, thereby keeping pressure on prices.
In his weekly blog, Wayne Bacon, president of Hammersmith Marketing writes that according to an industry insider, "With only an estimated 100,000 tonnes of available produced fishmeal unsold at present and with the Peru season coming to an end, it will not be too long before the end-users and traders start to realize that these limited Peruvian stocks will now have to last until November 2010."
It is unlikely that major importers can live off these remaining 100,000 tonnes of fishmeal for another four months. According to Bacon, as these sparse inventories run low, "This realization will probably give a sudden jolt to demand and push prices higher again or at the very least stop the current drop in prices."
The unknown factor in the above assessment is just how for how long Chinese, German and other major European buyers can afford to stay out of the market. And there are indications that there resolve is starting to crack.
Mid July saw reports of European buyers seeking up to 35,000 tonnes of fishmeal. It is also thought China would need to purchase. Bacon adds that, "trade reports from Peru estimates that China will still have to purchase another 50,000 m/t of fishmeal to cover their needs for the next few months."
Add in the assumed entry of small buyers and that means that while an additional 100,000 tonnes of fishmeal that has not been pre-sold will be manufactured, between now and November, virtually all the old stocks will be bought. Going forward, this makes for a very, very tight world fishmeal market.
The only supply side boost on the horizon is La NiÃ±a. Occurring immediately after El NiÃ±o ends, it brings cold water -and anchovies- to the west coast of South America. Of course, how well nature responds after years of over fishing and declining questions is an unknown factor.
Equally unknown is any possible impact of the BP Deepwater Horizon oil spill, as the Gulf of Mexico produces up to a tenth of the world's fishmeal. It is very possible that any gains in fishmeal production arising from La NiÃ±a could be undone by falling catches in the Gulf of Mexico or other locations.
On the whole, the market does not look like it has much further to fall. A new, cycle of prices doubling, retreating by a third, then forming a new bottom appears to be in the offing. With supply and demand going in different directions, the above-mentioned market cycle is becoming shorter, more volatile and less restrained by soymeal.
Hence, the only question is how long will fishmeal tread at its present level before it takes off again. Chances are that it will not stay at a constant price level for as long as it did during its last two market cycles.