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August 5, 2011
 
Fishmeal prices soften on a restored Peruvian catch
 
A far-sighted early 2011 fishing ban and a slack Chinese aquaculture season have stabilised prices. Much still hinges on Peru's late year fishing season.
An eFeedLink Hot Topic
 
by Eric J. BROOKS
 
 
 
We usually take pride in making predictions that are correct but half of all wisdom comes from humility. In our last fishmeal report several months ago, we anticipated that Peru's ban mid-way through the early year fishing season could make prices skyrocket.
 
Instead, a coincidence of circumstance made fishmeal prices visibly soften. Below, we examine the conditions that led to this market break and what price and supply conditions aquaculture stakeholders can expect going forward.
 
 
El Niño, La Niña & Peru drives supply balance
 
Peru accounts for over half of the fishmeal caught by the top five producers and over half of world fishmeal exports. Hence, the Peruvian catch drives the market more than any other supply-side factor. According to the International Fishmeal and Fish Oil Organisation (IFFO), from 2006 to 2010, Peru caught an average of 669.8 thousand tonnes of anchovy during in the January to April fishing period.
 
The first quarter of 2010 saw that year's El Niño's coastal warm water current devastate anchovy numbers. At 44,298 tonnes, Peru's first quarter catch plunge 93.4% below its five-year average. A country accounting for half of world fishmeal exports had its fishing season kicked out from under it. With Chile's earthquake curtailing the latter's fishmeal production and China coming on the world fishmeal market as its aquaculture season commenced, April 2010 saw fishmeal set a new record price of US$2,000/tonne. This situation was made worse by Chinese inventories, which happened to be at very low levels at that time.
 
Then, in late 2010, El Niño was followed by a La Niña. Although the latter's cold ocean currents create ideal conditions for anchovy, the sudden temperature change's first effect was to reduce the availability of anchovy. With anchovy numbers low and many of them small in size, Peru was forced to drastically curtail its late 2010 and early 2011 fishing season.
 
This crimped already tight global fishmeal inventories, leading to a partial price recovery back to above US$1,700/tonne. Fortunately, the northern hemisphere's aquaculture growing season had ended by this time so the impact on prices was less than would otherwise have been case.
 
 
Peru's rebound more than offsets lower Atlantic catch
 
 
Thereafter, the late first quarter and early second quarter brought a series of happy coincidences. First, with La Nina having chilled Peruvian waters to an ideal temperature, anchovy numbers rebounded. Furthermore, the fact that Peru's government practically called off late 2010's anchovy fishing season turned out to be a far sighted measure.
 
Over the short-term, supply anxieties caused by Peru's early year fishing bans pushed fishmeal back over US$1,700/tonne at that time. Over the longer-term however, it prevented many small anchovy from being caught. With La Nina's cooler waters firmly in place, this enabled them to breed and reproduce under ideal conditions.
 
This had the effect of constraining world fishmeal output early this year but led to an anchovy population explosion off Peru's coast by March. That gave Peru an especially bountiful anchovy late first quarter and early second quarter fishing season.
 
By April, Peru's cumulative 2011 catch amounted to 1.64 million tonnes. This was a whopping 3,592% improvement over the same period of 2010's meager 44,298 tonnes. More importantly, it was also a whopping 244% above the average 2006 to 2010 average January to April Peruvian anchovy catch of 0.669 million tonnes.
 
By comparison, the January to April fishmeal wild ocean catch in other major fishmeal producing countries showed very mixed results. They ranged from a 92% fall off Iceland and the North Atlantic Ocean to a 9% drop off Chile and a 39% jump off Denmark and Norway. But with Peru acting as the Saudi Arabia of global fishmeal exports, among the top five fishmeal producers, the overall raw wild catch jumped by an impressive (and much needed) 204%. This on its own was enough to stabilize the market -and saved the day for the world's aquaculture industry.

According to IFFO, Peru's exceptionally bountiful early 2011 anchovy season boosted total catch of supply of wild fish for use in fishmeal to above 2 million tonnes for the first time since 2008. In fact, at 2.21 million tonnes, raw fishmeal feedstock inventories rose to their highest level since 2005, just before fishmeal exceeded the US$1,000/tonne price barrier for the first time. In all, this was still well below the peak Peruvian catches of the 1980s and 1990s but a vast improvement over the previous decade's fishing seasons.
 
However, with 2010's catastrophic Peruvian catch having reduced its domestic inventories to near zero, this bountiful anchovy catch was insufficient to push the price to below US$1,000/tonne. It was enough to meet market demand and start a rebuilding of very run down inventories.
 
 
Slack China demand tempers prices but supply uncertain
 
Market conditions were also loosening up on the demand front. On one hand, Peru's rebound meant that during the late first quarter and early second quarter, China was able to rebuild its fishmeal inventories amid weakening prices. IFFO figures show China port inventories rising from a little over 140,000 tonnes in mid March to a peak of some 210,000 tonnes by early July.
 
Demand-wise, China's cold spring weather led to a slow, lethargic start to that country's fish growing season. With China taking up more than half of world fishmeal imports, this led to slack fishmeal demand just as Peru's large spring catch came in.
 
According to eFeedLink's early August report, this has left China's fishmeal port prices approximately 20% lower than in the same period in 2010. eFeedLink noted that amid "lackluster aquaculture demand and low piglet inventories…traders were more willing to negotiate prices."
 
At near 200,000 tonnes, China's early August fishmeal inventories are far higher than their late 2009 low of 50,000 tonnes. They are also some 40,000 tonnes or 25% above their average early August level of the last three years. In all, this coincidence of supply and demand factors forced a 25% to 30% climb down from early 2011's price peak, such that fishmeal currently trades in the US$1,250 to US$1,450/tonne range.
 
This is an admittedly large trading price range and it is due to the widening price spread between different fishmeal grades. In his weekly blog, Wayne Bacon, president of Hammersmith Marketing Pte noted that, "There is a very wide price spread between the higher and lower grades of fishmeal," adding that, "one trade report puts the spread at up as high as US$300/tonne."
 
Moreover, within this widening price spread between fishmeal quality grades lies a darker cloud: According to Bacon, one reason for the widening spread is that, "supplies of the higher grades are getting much more difficult to find." Among other things, this betrays that while the quantity of anchovies caught has increased, both catch and fishmeal quality are very indeterminate at this time.
 
Going forward, about 175,000 tonnes of anchovy out the southern Peruvian coast's 400,000 tonne will most likely be caught before September. If one looks at the fishmeal that is unsold and how much anchovy has been caught and will be caught, it implies that roughly 250,000 tonnes of fishmeal that will have to cover global import demand from now to the start of the next anchovy fishing season in early December.
 
Given that China's aquaculture demand can swallow up 15,000 to 20,000 tonnes a week, that is not much of a supply bridge into early 2012. With market stability but tight underlying fundamentals, eFeedLink commented that, "Fishmeal prices are therefore seen stable to higher with little scope to move lower."
 
Therefore, despite its large six-month decline, fishmeal's supply balance remains tight. This can be seen in everything from the next four month's supply projection to the readiness of buyers to purchase lower quality fishmeal.
 
One one hand, the best Peruvian catch in years was a start but we would need several more like these to rebuild inventories and tame prices below US$1,000/tonne. A December reversion back to the average anchovy catch of the last five years would quickly put upward pressure back on prices.
 
On the other hand, rising financial market turbulence could catch fishmeal in its downdraft -though in the last crisis, it only fell 19%, which was far less than other feed grains or protein meals. In sum, the market is balanced but remains highly volatile and requires a larger inventory recovery before true stability can be achieved.
  


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