Down but ready to turn upwards: Will Chilean salmon travel the Norwegian road?
An eFeedLink Hot Top Topic  
  • The world's most promising salmon production region has been repeatedly hindered by disease outbreaks and their impact on production costs
  • After two years when low prices and high production costs devastated producers, prices are forecast to stay 40% from their 2015-16 lows amid falling unit costs
  • With new vaccine-based solutions to SRS and sea lice being rolled out and Norway's currency rising, Chile could again become the world's lowest cost producer
  • Provided vaccines are successfully substituted in place of antimicrobials, Chile could overtake Norway in the salmon market during the 2020s
The brutal decade endured by Chile's salmon industry has cast a dark cloud over the world salmon sector. As no other country has the potential for long run salmon supply expansion, Chile's troubles have resulted in greatly constrained world supplies, and did much to power the past year's record breaking price rallies.  Now however, it increasingly appears that the worse is over for the world's most promising but highly beleaguered salmon industry.
A late 2000s Infectious Salmon Anemia (ISA) epidemic brought 2010 output to 34% below 2008 levels and that of Atlantic salmon by 68%. However, with output having fallen from 84% of Norway's production in 2005 to 26% in 2010, Chilean farms were anxious to regain lost market share at any cost. In their case, doubling salmon output from 2010 to 2014 entailed a reckless use of antibiotics and a rapid ramping up of stocking densities.
When these factors coincided with an El Nino-induced warm water shock, 2015 to 2016 saw outbreaks of SRS, ISA and lice return with a vengeance. Large disease losses were followed by bad worldwide publicity of excessive antibiotic use, bans from US and European supermarket chains. Late 2000s criticism of antibiotic overuse returned with a vengeance: 2016 saw a record 660g/tonne of antibiotics used to grow salmon, breaking the old record of 640/tonne set in 2007. To put it another way: While 2016 saw Chile produce only 10% more salmon than in 2011, the quantity of antibiotics used more than doubled.
Later, a deadly red algal bloom wiped out an additional 100,000 tonnes in the second quarter of last year. Led by a 22.5% fall in Atlantic salmon production (from 644,500 tonnes to 498,700 thousand), overall farmed salmon output fell 30% over two years, from 955,200 tonnes in 2014 to 669,600 tonnes in 2016. 
Exports also suffered. After more than doubling from 293,400 tonnes in 2010 to 591,000 in 2015, volumes shipped slumped 26%, to 436,000 thousand tonnes in 2016. That is even less than the 446,000 tonnes shipped back in 2008, when the industry's troubles began.
Moreover, as the second largest world market supplier, Chilean salmon exports usually equal or exceed those of countries with smaller market shares. In 2016 however, all other countries except Norway shipped approximately 150,000 tonnes more salmon than Chile did.
Norway, which has had its own troubles of late exported 980,000 tonnes by comparison. Not only was this twice Chile's volume, the 11% drop from peak Norwegian volumes was more than made up for a record salmon price of NOK60/kg (US$7.20/kg), making the value of its exports set a new record amid high profits.
By comparison, Chilean salmon sold for a near 40% discount to its Norwegian competition, average of US$4.66/kg in 2016. While this was an improvement over its average 2015 price of US$3.50/kg, with production costs totaling US$4.90/kg in 2015 and US$4.70/kg in 2016, Chilean salmon producers have endured devastating losses.
Fortunately, the worst appears to be over. Due to record Norwegian salmon prices and a supply shortage caused by Chile's own faltering output, Rabobank reports that H2 Chilean salmon prices in the US market rebounded to over US$5.60/lb, up 45% to 50% from their early 2016 lows. It forecasts them to average US$6.00/lb for H1 2017. Over the longer term, Rabobank expects US importers to US$5-US$6/lb over the next two years, averaging US$5.50/lb.
This has turned industry fundamentals from severe losses 1.5 years ago to margins above 20% over the next two years. Moreover, because of Chilean salmon's new regulatory environment, the high returns will play a critical role in the industry's ability to expand output.
Tired of watching producers repeatedly jack up salmon stocking densities up to unsustainable, disastrous levels, Chile's government is restricting production growth in mature salmon farming regions to no more than 3% –and the latter will only be allowed if no health problems were encountered during the previous growing season.
Production growth of more than 3% will be only be allowed in established farms in frontier regions until 2023. Alongside Norway's own production constraints, this guarantees high prices and returns through the end of this decade.
Consequently, to have sustained production growth of 4% or more, returns have to be high enough to justify the investment capital required to build new salmon farming ponds in frontier from scratch. Needless to say, the forecasted two-year period of returns in the 20% range is exactly what the industry needs to expand output into new areas.

It is for this reason that we believe that Rabobank's forecast for Atlantic salmon output of 515,000 tonnes in 2017, 565,000 tonnes in 2018 and 580,000 tonnes for 2019 may be too conservative. With Brazil (which absorbs a large portion of Chilean salmon exports) recovering from recession, it appears more likely that Atlantic salmon output could total 600,000 tonnes by the end of this period.
Total output totaled a SalmonChile estimated 669,700 tonnes in 2016, and is expected to rise to an eFeedLink estimated 750,000 tonnes in 2017. Powered by high returns in H1 2017, production could be ramped up to 900,000 tonnes in 2018 and in the 950,000 to 1 million tonne range by 2020.
Based on such production forecasts, exports should total 510,000 tonnes in 2017, a record 634,000 tonnes in 2018 and exceed 700,000 tonnes in 2019.
While this forecast may seem optimistic, it is being powered by more than just favorable earnings. The record 2015 El Nino's warm water conditions have receded. With a cold water La Nina event on its way, everything from disease outbreaks to toxic algal blooms will become less likely and more easily manageable.

With nature turning favorable, so are farm management conditions. H2 2016 saw Norway-based Pharmaq introduce a new SRS vaccine tailored to the unique environmental conditions of Chile's salmon farming industry, with solutions for controlling sea lice on the way. The last six months saw only a minority of producers substitute the SRS vaccine in place of antibiotics but this too, may soon change.
With Pharmaq's new SRS vaccine proven to be effective and far less expensive than antibiotic treatments, Rabobank reports that, "As the satisfactory results become more known, use is expected to increase." It concludes that with this new SRS vaccine, "It may be possible to eliminate the use of antibiotics" –and doing so would cut production costs by US$1.00/kg. This would eliminate the cost advantage Norway has enjoyed ever since the industry's troubles began ten years ago.
Nor is this the only emerging frontier of falling costs and higher returns: "There are other innovations that will impact the Chilean industry; especially in the field of lice control. If lice numbers are successfully lowered, costs could decline further."
Two years ago, with Chilean salmon costing US4.90/kg to produce versus US$3.30/kg for its Norwegian competition, the latter had a huge production cost advantage. It also made Norwegian salmon farming far more profitable by comparison.
By early 2017, better farm management, new vaccines and restricted stocking densities had lowered Chilean production costs. On the other hand, Rabobank reports that due to Norwegian salmon farming's own troubles with diseases such as sea lice and its rising currency, the US$1.60/kg, 48% cost advantage Norwegian salmon had enjoyed two years ago, had narrowed to less than NOK10 (US$0.12/kg).
The important takeaway from this trend is the following fact: Chile is finally learning how to successfully substitute innovations such as vaccines and superior farm management methods in place of antibiotics. Over the next five years, Chile could go some way towards substituting vaccines in place of more expensive antimicrobials.
Given Chile salmon's lower input costs and larger supply of untapped frontier regions, this could restore the US$0.50/kg+ production cost advantage that it once enjoyed over its Norwegian competition. It will happen ten years later than expected; in the 2020s rather than in 2010s as was widely forecasted. Nevertheless, one can now see a scenario where Chile could overtake Norway as the largest salmon producer and exporter sometime during the next decade.*

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