December 2, 2011
Fishmeal: A balanced market, thin inventories and good fish growing weather
Two consecutive La NiÃ±as and slack Chinese aquaculture have dampened but not crashed prices. How a constellation of supply, demand and inventory trends are forming the floors and roof of a historically high price range.
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In early 2011, Peru's poor fishing season and subsequent fishing bans implied that short of an extraordinary event, fishmeal shortages would ensue. Such an exceptional event did occur: Anchovy thrive in cold water. The past year has seen an unusual coincidence of two consecutive La NiÃ±a's deliver cold water to the coast line of Peru and Chile.
Anchovy numbers recover strongly but fishmeal output lags
Along with Peru's zealous fishing ban earlier in the year, this has allowed anchovy numbers to skyrocket, giving a much needed boost fishmeal supplies. At the same time, the high prices encouraged the substitution of soymeal and other feed alternatives in place of fishmeal, where ever possible. Hence, except for China, all other major fishmeal importers such as the United States, Germany and Britain are importing less fishmeal than a year ago. This helped bring the market into balance and prices back to earth. They are down 25%, falling from average US$1,750/tonne in April and bottoming out near US$1,350/tonne by the late fourth quarter.
While prices may slip a little further on news of an expected bountiful anchovy fishing season, circumstances imply they may soon flatten out. Although anchovy numbers have staged a good recovery, policies and circumstances have muted their impact on market fundamentals.
From January to September of this year, Peru's anchovy catch jumped by 58% over the same period of 2010, rising from 3.6 million tonnes to 5.7 million tonnes. Moreover, this increased catch is the result of the first La NiÃ±a episode which ended in early 2011. Going forward, a second La NiÃ±a commenced in the third quarter of 2011. It has the potential to once more boost both anchovy landings and fishmeal production in the first three quarters of 2012.
In a normal market, such a large boost in supplies would beat the price down to well below historically average levels. In fishmeal's case however, while prices fell by an impressive amount and well below the US$2,000/tonne record set in April 2010, it remains well above its US$750/tonne to US$850/tonne average for the 2000 to 2009 decade, let alone the US$481/tonne to US$750/tonne price range it stayed in from 2000 to 2005. There are several reasons for both the muted rebound in fishmeal supplies (relative to higher anchovy catches) and the lower but still historically high prices.
Low inventories, exports eat up 99% of higher output
First, both exports and actual fishmeal production increased by far less than Peru's 2011 anchovy catch. With high fishmeal prices and slack Chinese aquaculture dampening demand, the USDA estimates that actual Peruvian fishmeal production rose by only 16.7%, from 1.2 million tonnes in 2010 to an estimated 1.4 million tonnes this year. Similarly, January to October fishmeal exports rose by a lesser 14.3%, to 1.20 million tonnes. With the USDA expecting 2011 Peruvian fishmeal exports to total 1.39 million tonnes, they will have increased by 15.9% over 2010.
Second, with this year's production at 1.400 million tonnes, estimated exports of 1.385 million tonnes are eating up 99% of this year's Peruvian output. A mere 1% of this year's higher output can be used to rebuild Peruvian inventories, which enter 2012 at a sparse 22,000 tonnes, unchanged from their early 2011 levels. To put this into historical perspective: Peruvian fishmeal inventories fluctuated between 70,000 and 300,000 tonnes for most of the forty years prior to 2002, when world aquaculture demand was much lower than it is today.
Third, despite the current recovery, production remains well below the 1.8 to 2.3 million tonne peaks seen between the early 1990s and early 2000s. Consequently, a much larger global aquaculture industry must now be supplied from a significantly diminished fishmeal supply base.
Fourth, both to keep prices from falling and also to sustain its long-term anchovy population, Peru's government is taking a conservative line on its recent good fortune: In the fishing season that commenced in late November 2011, it cut its late 2011 anchovy catch quota to 2.6 million tonnes, 7.5% less than its 2010 season limit. Keeping anchovy catch numbers low during a La NiÃ±a's episode may cause the anchovy population to rebound strongly in years to come. However, over the medium term, it diminishes the quantity of feedstock available for fishmeal production in the first half of 2012.
Chilean exports, inventories below historic levels
Fourth, number two exporter Chile's fishmeal production increased by a comparable 15.4%, its exports increased a relatively anemic 4.7%, from a USDA estimated 650,000 tonnes in 2010 to 750,000 tonnes in 2011. Much like Peru, with the anchovy catch having peaked decades ago, production is a far cry from the 1.1 to 1.4 million it produced from the mid 1980s to mid 1990s. To put it another way: These days, number one exporter Peru only ships as much fishmeal as the number two producer Chile did twenty years ago.
With 2010's earthquake having devastated Chilean fishmeal production, the country was forced to meet that year's export commitments from inventories. This year, it was forced to rebuild its depleted stocks, which began 2011 at approximately 10,000 tonnes ended the year at 35,000 tonnes. These too, are a far cry from the 100,000 to 250,000 tonnes of fishmeal Chile used to keep inventoried during the 1990s and early 2000s. With both Peruvian and Chilean inventories far below historic levels, the market has very little back up in event of a supply disruption.
Fifth, on the demand side, trends are deflationary, yet mixed. With a little over 200,000 tonnes in inventory, China's fishmeal inventories are almost unchanged from a year ago. However, the past year's high prices motivated other major aquaculture producers to run down their inventories. Thailand, for example, went from 78,000 tonnes in 2008 to 51,000 thousand in 2009, 41,000 tonnes in 2010 and is closing this year with just 26,000 tonnes. Already thin US inventories were further run down, from 10,000 tonnes in 2009 to 5,000 tonnes this year.
Output pre-sold, Asian buyers on the prowl
At the same time, the impact of China cannot be understated. Cold spring weather made its aquaculture season get off to a late start, keeping its fishmeal import growth minimal. While China's fishmeal imports were up over last year's total, they are nearly a third below the peaks of five years ago. Despite the fact that aquaculture is China's fastest growing protein line, the substitution of other feed ingredients in place of fishmeal is also tempering its import demand.
At the same time however, observers report that while European buyers sat out late November and early December, Asian buyers, particularly China and Thailand, where making exploratory procurement inquiries early in the late year fishing season. With China closing the year with over 200,000 tonnes in inventory, it does not need to restock quickly and can sit on its supply to negotiate better prices. For China to make queries when it has adequate supplies on hand implies that prices may have bottomed out.
In a late 2011 blog entry, Wayne Bacon, president of Hammersmith Marketing Pte noted that, "According to some trade reports, up to 300,000 tonnes of this [Peruvian] fishing season's production has been pre-sold." He adds that, "With only just 200,000 to 250,000 tonnes available for sale and to last until the next fishing season in 4 or 5 months, there seems to be very little reason to expect that prices will be moving lower."
And that seems to be the nub in fishmeal's market change over the past year: A coincidence of good fish growing conditions, slack demand and feed ingredient substitution brought a chronically short-supplied, out-of-balance market back into equilibrium. While market fundamentals are nominally balanced, it has very few inventories to sustain it in the face of any sudden supply shocks or demand surges. With a majority of this Peruvian season's fishmeal output already sold, late buyers will probably have to accept sellers' terms.
The implication is obvious: With a second La Nina promising further growth in the anchovy population, a larger catch quota in 2012 could boost fishmeal supplies and drop prices in latter half of the year, particularly if it coincides with a new global recession. For now however, the market looks set to stay flat as supply, demand and inventory levels form the floors and roof of a historically high price range.
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