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COMMENTARY & ANALYSIS
 
August 31, 2018

A long-awaited and shaky shrimp supply recovery
 
After several years of 10%+ expansion, prices are crashing but for the first time, supply was increased entirely through the opening of frontier areas. Has a forty-year decline in shrimp production costs run its course?
 
By Eric J. Brooks
 
An eFeedLink Hot Topic
 
After five years of failed predictions, world shrimp supplies are finally recovering strongly. Based on revised Global Aquaculture Alliance estimates, after peaking at 2.8 million tonnes and high stocking densities in 2009, disease outbreaks of EMS, EHP, WSSV caused world shrimp production to fall over four years, bottoming out near 2.3 million tonnes in 2013.
 
Rather than recovering, the next three years saw output stagnate in the 2.6 to 2.8 million tonne range, as faltering Chinese and Thai shrimp production was counterbalanced by booming Indian and Ecuadorian output expansion. From 2010 through 2017, India boosted its output by approximately 560,000 tonnes, Ecuador by 270,000 tonnes. Along with rising output in other nations, it more than counterbalances the loss of over 600,000 tonnes of combined Chinese and Thai shrimp production.
 

 
Similarly, after peaking at 352,000 tonnes in 2010 and falling to 200,000 tonnes by 2013, Vietnam finally shook off three years of disease and stagnant production to grow a record 470,000 tonnes of shrimp in 2017. Another 13.5% increase in Vietnam shrimp production (to 470,000 tonnes) is forecast for this year.
 
After 2015, Chinese and Thai production losses leveled off but high prices encouraged a rapid expansion of Indian and Ecuadorian shrimp farming. Alongside slow but steady output growth in Vietnam, Indonesia and Central America, world shrimp production increased 38.5% in three years.
 
For 2018, Rabobank estimated 3.64 million tonnes consisted of 3.03 million tonnes of Pacific whiteleg shrimp with hardier but less productive black tiger shrimp accounting for most of the rest. Rising by 14.8% in 2017, last year saw world shrimp production finally surpass its pre-crisis record.
 

With output rising at a double-digit rate for three years, supply has finally caught up to demand and prices have crashed, falling by a third since the start of this year.
 
This price crash however, is a cycle component within a larger, long-term trend: Over the long run, shrimp prices are in gradual long-term decline -but inflation and disease-driven market rallies hide this fact.
 
Speaking at The Aquaculture Roundtable (TARS 2018) Conference in Chiang Mai, Thailand from August 15 to 16, CP Foods executive vice president Robins McIntosh noted that shrimp market rallies coincide with disease epidemics. This is usually followed by innovations that abate disease outbreaks, boost productivity and lead to several years of and gradually falling prices. According to McIntosh "With every major disruption in world shrimp supply, and the subsequent increase in shrimp prices, rapid innovation followed for the next growth phase in shrimp supply."
 
-But the current, ongoing production recovery is of an entirely different character.  According to McIntosh "Today, we are experiencing a growth phase but much of this growth is not through innovation but using new farming areas."
 
While we understand them much better than we did eight years ago, diseases such as EMS, AHP and WSSV were never eradicated by the technical innovations developed in response to them. Even today, large pond acreages throughout China and Southeast Asia can no longer be used to grow shrimp due to the enduring presence of such pathogens.
 
The ongoing production recovery's new output accounted for by expanded pond acreage is much higher than in previous shrimp production booms. With China and Thailand still unable to produce more than 60% of their previous whiteleg shrimp volume, almost no additional output that came from higher stocking densities.
 
Furthermore, it must be remembered that the large expansion in Indian shrimp pond acreage was made possible by an extended period of high prices -which according to a recent Rabobank report has now ended.
 
With very little to show in the way of productivity increase, this market downturn has seen prices fall by significantly more than unit costs. As a result, McIntosh stated, "we now have a situation where farmers see margins being reduced."
 
Similarly, Rabobank chief aquaculture analyst Gorjan Nikolik states that "Many farmers are harvesting their shrimp at a loss -- or at least with a far lower profit margin in the last five years -- mainly because the key elements of the cost part of the equation, such as feed, energy, and labor, have not contracted (and for some, have increased)."
 
With supply increasing and returns rapidly diminishing, McIntosh concluded that "It may be that this will be a 'false rise' in supply that may slow down or even slightly reverse itself" ---and signs of this are already apparent in number one exporter India.
 
At the TARS conference, S. Santhana Krishnan, a marine biologist and consultant to Indian shrimp producers reported that after output jumped 10% in the first half of the year, disease outbreaks and H1 2018's falling shrimp prices were leading to an output contraction in the second half of the year.

According to Krishnan, production volumes would also be impacted by the action of shrimp farmers, who were harvesting shrimp early. This is being done to mitigate both disease losses and avoid the risk of lower prices in the future, the resulting lower average shrimp size further depresses total output volume.
 
Krishnan predicted that this H2 shrimp output would be up to 20% lower than in H1. That is expected to cause a supply shortage among processors in September and October. This is expected to lead to firmer, slightly higher shrimp prices in the fourth quarter half of this year.
 
This led fellow panelist McIntosh to forecast that 2018 Indian shrimp production will fall by nearly 100,000 tonnes or 15%, an estimated 670,000 to 690,000 tonnes in 2017 to slightly under 600,000 tonnes this year. 
 
India's grim supply forecast was made even worse a week after the conference ended: India's government announced that it would be tripling the tariff on Artemia, miniature brine shrimp which are used as live feed by hatcheries during critical early growth stages from 5% to 15%. This further inflates production costs at a time when profit margins were already very narrow and may result in a larger-than-expected output decline in 2019.
 
While no output decline is expected in number two exporter Ecuador, the past year's price deflation is reducing the incentive to expand capacity. On one hand, Ecuador's government has announced it will connect 100,000 acres or 45% of its pond acreage to the nation's electric grid. By enabling the use of productivity-enhancing technology such as aerators and feed distribution machines, that should enable Ecuador to sustainably increase its pond stocking densities for several years.
 
On the other hand, China is its number one buyer and with the yuan depreciating, its import volumes are leveling off at just under 300,000 tonnes. This is making it awkward for Ecuador to boost exports even as falling prices slash the incentive to maintain the pace of production expansion.
 
Beyond India and Ecuador's slowing growth, tier 2 suppliers face one of two dilemmas: China and Thailand have fully developed their pond acreage but are incapable of achieving the stocking densities they once did.
 
Other Southeast Asian suppliers are also resorting to ways of boosting production that does not require raising stocking densities. Recent industry reports show that parts of Malaysia where EMS and WSSV could not be brought under control are reverting to the cultivation of hardier but less efficient black tiger shrimp.
 
Indonesia is within one year of matching its pre-EMS output levels -but is doing so by opening up frontier regions such as Nusu Tegara and Sulawesi. -The only problem being that starting new ponds requires considerably more investment and higher shrimp prices than boosting stocking densities -something the industry increasingly appears to be giving up on achieving.
 
Similarly, without officially announcing it, Thailand appears to have given up on achieving its previous, pre-EMS days 600,000-tonne annual production volume. Instead, it now intends to focus on the niche marketing of larger size, higher quality shrimp -effectively making grow out sizes compensate for today's lower shrimp stocking densities. This also reflects the fact that as the attached table shows, at a time when prices are falling, large shrimp offer significantly better returns than small sizes.
 
In a 26 June 2018 interview with Undercurrent News, CP aquaculture COO S. Sujint Thammasart states that partly in order to cater to Chinese import demand, CP doubled the average vannamei shrimp grow out size from 10g to 15g to 25g to 30g. In the past, you would never see vannamei at 30g.
 
Revealing that they have achieved vannamei grow out sizes of up to 50, Thammasart concedes buyers do not find them as tasty as equally large sized tiger shrimp. As Chinese buyers are very taste conscious, Thammasart also revealed CP was preparing to boost its cultivation of larger size Black Tiger shrimp, which are preferred by them. Thammasart later reveals that all of the above will have a higher unit cost that he hopes will be offset by their garnering higher revenues.
 
What matters in all this is that unlike during previous crises is that nearly 10 years after EMS first was reported, no way of raising stocking densities without triggering new rounds of disease outbreaks has been found. This has forced the industry to focus on boosting returns, as diseases are clearly blocking the path to further cost minimization via the expansion of scale economies.
 
Along with implying that the current boom in shrimp production may end sooner than expected, it may also mean that forty years of gradually falling shrimp prices may be at an end. Shrimp's current deflationary bout may be similar to that of salmon's in the early 2010s: An important industry inflection point after which decades of gradually falling prices suddenly gave way to sharply rising unit costs.
 


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