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August 25, 2017
Salmon hyperinflation: Pink fish flesh turns to gold
Resource shortages and biological constraints responsible for the underlying scarcity have not been solved. Solutions are being rolled out, but their impact may not be fully felt for another six years.
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With salmon falling from its near NOK80/kg Q1 highs to near NOK50/kg in late August, its latest market rally is over –Even so, the resource scarcities and supply-side constraints that triggered the past two year's hyperinflation are merely waiting for a new market event to rekindle underlying tendency towards price inflation.
Analyst firm Kontali Analyse notes that production of Atlantic salmon (which accounts for 80% of farmed salmonid production) grew at 6.6% annual rate, from 1.26 million tonnes in 2007 to a peak of 2.10 million tonnes in 2015. It has since experienced negative growth, falling 5% to 2.0 million tonnes in 2016 and production is expected to remain flat this year.
With production topping out after 2012, falling after 2015 amid 4% annual demand growth, prices had nowhere to go but up. As a result, while the volume of salmon farmed jumped by a Kontali estimated 79% from 2004 through 2016 inclusive, its value increased by nearly 300%, with most of that inflation occurring after 2015.

Since 2012, demand has grown 4% annually in volume but world salmon production increased by less than 10% over these five years. As the result, Kontali states that from 2012 through 2016 inclusive, with world production nearly flat, the value of the salmon produced jumped at a 14% annual rate. The first large price jump occurred as 'cost-push' inflation by high þed prices in 2012, but thereafter, the price increases were demand driven.
This reversed a long-term trend of declining (after adjusted for inflation) prices that justified salmon farming's existence. Before it was farmed, salmon's unit price was six to eight times higher than that of beef. Salmon farming brought its price down into the NOK25/kg to NOK30/kg (US$3/kg to US$4/kg) range by the mid-2000s, making it only 2.5 times as expensive.
Thereafter, feed cost inflation jacked up its production cost, causing world salmon prices to fluctuate in a slightly higher NOK30/kg to NOK45kg (US$6.00/kg to US$7.50/kg range). Even so, with feed becoming more expensive input for all protein classes, salmon's production cost did not rise faster than that of other meats, nor did its price level.

Before 2015, salmon production costs –and prices– were kept under control was done by minimizing the use of its only constantly hyperinflating feed input, fishmeal. While fishmeal's cost tripled over the last seventeen years (and spiking up to five times its year 2000 at times), it went from comprising 55% to 60% of salmon feed 25 years ago to 12% to 15% today.
Unfortunately, the post-2015 inflation was not due to higher input costs but a combination of rising demand and hard, biological constraints on further farm intensification. Norway found that the vaccines it used to boost production of sustainable, antibiotic free salmon were helpless before stubborn sea lice infestations, as did northern hemisphere suppliers everywhere from Scotland to Canada. As a result, Norway's 2017 salmon output will remain stuck in the 1.2 to 1.3 million tonne range for a fourth consecutive year.
Chile's warmer water, more temperature steady southern ocean forced it to either endure devastating pathogen attacks or resort to antibiotic levels that got its salmon banned and created a public relations disaster. Eventually, a combination of disease outbreaks and poisonous algal bloom caused Chilean production to crash by a third.
The disastrous algal bloom, while induced by high, El Nino water temperatures, may also be partly man made: Many marine researchers believe that accumulations of dead salmon, uneaten food and faeces may have helped create ideal conditions for the formation of this deadly 'red tide' algal bloom. –Whatever its cause, the toxic algal bloom played a large role in removing approximately 300,000 tonnes of salmon from the world market over two years.
Amid flat Norwegian, tier 2 exporters could not counterbalance a precipitous 30%+ decline in Chilean production, let alone meet constant demand growth. The world market lost 400,000 tonnes of Chilean and Norwegian salmon. With a handful of other suppliers producing only 50,000 to 200,000 tonnes each, they could not bridge the supply deficit, much less meet ongoing demand growth. Moreover, with Norway's Krona falling 6% against the US dollar and Asian interest in consuming salmon rising over this time, demand held up better than the price inflation would imply.
 Consequently, from trading at an average price level near NOK40/kg (US$6.45/kg) from 2013 through 2015, prices suddenly spike upwards 70% in three months, setting a new record of NOK63/kg (US$7.66/kg) in early 2016. 
ollowing a short-lived retreat to near NOK50/kg, Norway's growing problems with sea lice and the beginning of Chilean salmon's troubles caused salmon to trade (and set several new price records) in the NOK65/kg to NOK75/kg (US$7.93/kg to US$9.15/kg) range for most of 2016.
This is twice the average 2012 to 2015 price and almost three times what consumers paid from the year 2000 through the early 2010s. Any price relief gained by better H2 2016 Norwegian production was made worse by a 6% drop in the number one producer's salmon output, from 1.303 million tonnes in 2015 to 1.225 million in 2016.
The sea lice problem can be seen in Norwegian salmon mortality statistics, which jumped from 13% in 2013 to over 18% in 2016 and has stubbornly remained at that level. According to Marine Harvest's Salmon Industry Handbook, mortality costs are one of the few expenses where Norway's costs (US0.08/kg) are higher than those of Chile (US$0.03/kg). Coincidentally, that 5% rise in the mortality rate nearly equals the amount by which output fell below previous peak levels.
By early this year, a worsening Norwegian sea lice problem made it clear that 2017's output would remain below 2015's 1.303 million tonne peak. Prices again took off, setting a new price record near NOK79/kg in early 2017.
By mid-year, Russia's withdrawal from the world market, cooler, favourable Chilean water temperatures and Norwegian progress in managing sea lice tamed its prices. They dropped to around NOK50/kg by mid-August. Even so, the above supply-side problems remain.
Moreover, these statistics do not capture the full extent of the hyperinflation that occurred. With everything from sea lice, algal blooms and SRS taking turns to constrain supplies, farms cut their disease losses by slaughtering many fish before they could achieve their full grow size.
That led to record wide price spreads between large and small size salmon. In late 2016 and early 2017 when "average prices" were in the record NOK75/kg to NOK80/kg (US$9.49/kg to US$10.13/kg) range, the largest size fish were trading at NOK100/kg (US$12.66/kg). Similar, unusually wide price spreads between large and small size salmon opened at market peaks during the previous 12 months. Even when the overall price deflated, with large size fish near record price levels, cost savings were not as great as what was implied.
Salmon farms are not content to be so bound by nature and are doing their best to overcome these stocking density limitations.  Partially successful results have been achieved in using, heated water, strong water currents and brushing fish with chemicals to de-lice Norwegian salmon, though they can also boost the rate of injuries and mortality.
A new, 44-metre tall, 33-metre wide enclosed egg-shaped salmon cage built by Hauge Aqua and backed by Marine Harvest was introduced at AquaNor 2015. It received official backing from Marine Harvest this year. At the North Sea Atlantic Fish (NSAF 2017) conference, Norwegian fisheries minister Per Sandberg stated that with 50 other companies also showing interest in adopting it.
With a capacity for raising 1,000 tonnes of salmon, this new pen is designed to keep salmon at water depths where sea lice cannot survive. It has won licenses from Norway's government for further development. If successful and approved, it will allow the government to boost the maximum stocking densities allowed.
Marine Harvest has said that if proven successful, it will roll out this new cage at its operations in Chile, Scotland and Canada within a few years. For now, Norway is capping production growth increases to a mere 3%.
For its part, Chile is in the early stages of rolling out an SRS vaccine that it hopes can get this disease under control without recourse to antibiotics. To put the industry on a sustainable course, Chile's government now publishes the amount of antibiotics used by each producer, revealing large differences: Chilean owned Australis Seafoods used 1.062kg of antibiotics per tonne of salmon produced, while Mitsubishi subsidiary Cermaq only used 0.391kg per tonne of salmon produced.
The bad news is that by using hundreds of times more antibiotics per kilo of salmon than the Norwegian, Chile has a long way to go. The good news is that companies like Cermaq are proving that large reductions in antibiotic use can be achieved by their less advanced competitors in a very short time.
Moreover, whereas existing Chilean salmon growers are mostly off the coast of Patagonia, applications for new farms are mostly in the Strait of Magellan. Though remotely located from major transport hubs, these new farms will enjoy cooler water temperatures that are less friendly to pathogens. That means they should require fewer antibiotics to control diseases.
To help it along, the government has limited stocking density increases to just 3% annually in established farms. That will ease the pressure on boosting antibiotic usage –but means that production is not likely to achieve its 2014 peak of 955,000 tonnes before 2020. This is why Rabobank forecast that "while considerable growth will be achieved in 2018…new legislation will not allow significant growth relative to 2015 production." It forecasts that even in 2019, Chile will grow fewer Atlantic salmon than it did in 2014 or 2015.
All this is compounded by the fact that both Norway and second tier producers will only be able to increase production in a nominal, incremental manner over the next few years. Hence, from now through 2020, the market will not be able to respond to high price signals in a way that will bridge a yawning gap between salmon supplies and demand. Even in 2018 when Chilean production is supposed to have its strongest production increase, Rabobank forecasts "global supply growth in 2017 and probably in 2018 will still be below long-term demand growth."
What can we expect going forward? At the NSAF 2016, salmon farming executives concurred that it would take at least three years to overcome production constraints caused by sea lice. –But at NSAF 2017, those same executives said it may take six years before sea lice issues cease impeding production growth.
Does the past give us clues to the future? In both Q3 2016 and Q3 2017, prices took a breather, bottoming out near NOK50/kg (US$6.33/kg). By late 2016's holiday season and early 2017, prices rebounded 53%.  Prices usually rebound late in the calendar year, there is no reason to believe supplies have to be as tight in Q4 2017 as they in late 2016.
Nevertheless, new vaccines, lice treatments, lice-free salmon cages and colder water Chilean farms will take several years to have a positive impact on production. It is possible that prices will make a saw toothed climb to near NOK100/kg (US$12.66/kg) before a turn-of-the-decade supply surge brings them dramatically back down to earth.

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