January 12, 2009
Shrimp, tilapia & Thai aquaculture: Seeking opportunity amid crisis
Costs are up, prices are falling and shrimp exports are shrinking. Can tilapia become Thai seafood's new flagship species?
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by F.E. OLIMPO with reports from Attasith Khupratakul
In response to the current global economic slowdown, Thai shrimp farmers recently announced they are cutting down production by up to 20 percent. In order to stabilise prices and profits, Somsak Paneetatyasai, president of the Thai Shrimp Association, aims to restrict 2009 shrimp output level to 390,000 tonnes or just under 80 percent of capacity utilization.
Shrimp: Low prices, thin margins, falling exports
At 231 baht/kg (US$6.68/kg), shrimp's export price is far from satisfactory, making for thin profit margins. One the other hand, Somsak says that for now, there are no signs that shrimp's price is going to drop any further soon. Indeed, the wiping out of fish during severe storms just prior to publication served to firm up shrimp prices, though only by 2 to 4 percent. Nevertheless, given the large price drop endured over the last 7 quarters, this is the one piece of good news in an otherwise bleak scenario.
Nevertheless, a gathering global recession promises to have serious repercussions on shrimp exports, which mostly go to advanced economies most affected by the financial crisis. At present, shrimp exports earn Thailand 80 billion baht (U$2.28 billion) a year and account for approximately 40 percent of the country's total aquaculture exports.
While Thailand has a capacity to produce 490,000 tonnes of shrimp annually, demand in key export markets is shrinking. Orders from the United States, which accounts for roughly half of the country's overseas shipments, fell 4 per cent from January through October 2008.
In Japan, the country's second biggest shrimp buyer, overall shrimp imports fell behind last year's to a record low during the first nine months of this year. With the exception of cooked frozen shrimp, supplies declined for all other shrimp products including prepared shrimp, according to the latest report from the Food and Agriculture Organization. Raw frozen shrimp that constituted 74 percent of Japan's total shrimp imports fell by 16 percent against the same period in 2007. The downward trend is expected to continue, if not get worse, in 2009.
At first, in late 2008, shrimp exporting countries looked to the European Union, where shrimp consumption had been on the upswing, as alternative to recession-bound US and Japan markets. But the gloomy demand outlook appears to have now spread to the EU. European shrimp prices there fell and stayed low, even though the last quarter of the year is supposed to be the peak buying season for shrimp. This year, prices are expected to stay that way given the weak demand in all main markets.
Turning towards domestic-oriented production
The problem is not confined to shrimp. According to Mana Sripitak, president of Thailand's National Fisheries Association, all seafood exports are down. At this time, in response to the drop in exports, many Thai domestic aquaculture sellers have changed the species and fish types they are rearing. Saltwater-based species are now converting part or all of their production to local, freshwater varieties. Though such locally consumed favourites traditionally have lower profit margins, their prices and domestic demand have remained stable in the face of a rapidly dimming export picture.
Freshwater fish eaten locally, marine species exported
Indeed, this divide between locally consumed and export-driven aquaculture brings us to an interesting industry fault line. Aquaculture in Thailand is composed of two groups - a domestically oriented freshwater sector and more export-oriented (but unstable) brackish (saltwater) aquaculture. Freshwater aquaculture, involving mainly ponds, rice fields, cages and ditches, has been around for decades. Its development started in 1922 after the import and cultivation of Chinese carp around Bangkok.
Today, more than 50 freshwater aquatic species are being cultured in the country, mostly for domestic consumption. They include Nile tilapia, catfish, Thai silver barb, and snake-skin gourami. Most freshwater aquaculture farms are located in areas with abundant water such as the provinces of Samut Prakarn, Suphanburi, Nakorn Pathom, Suratthani, Chachoengsao and Chanthaburi.
At this time, the number of registered freshwater farms exceeds 440,000. As we shall later see, one of these traditionally local, low margin seafood line, tilapia, is now becoming the focus of an emerging export drive. This is a very high number of farms compared to the total number in the marine aquaculture sector, and points to freshwater aquaculture's unconsolidated state.
Whereas freshwater fish cultivation has a long history, Thai brackish (saltwater) aquaculture, which is dominated by shrimp farming, is a more recent, export-oriented development, even though it leads the overall industry's prosperity. Shrimp farms number over 30,000 and cover an area of about 75,000 hectares. Aside from shrimp, major marine aquaculture finfish species include groupers and barramundi.
Marine aquaculture farms are located mostly in central Thailand, in areas such as Samut Sakhon, Ratburi, Ratchaburi, Samut Prakarn, Prachuab Kiri Khan, and in southern locales such as Chumpon, Suratthani, Krabi, Songkhla, Pattani and Phangnga. However, after suffering months of low prices, hundreds of brackish water fish farms have either closed down or shifted to locally consumed freshwater species, particularly Nile tilapia, whose domestic price and demand remain stable.
Indeed, white shrimp exports may form the backbone of Thailand's aquaculture industry but in terms of actual volume production, the top species are Nile tilapia, hybrid catfish, silver barb, giant river prawn, and snakeskin gourami. These enjoy widespread domestic consumption, less price volatility but lower long-term profitability than export-oriented, mostly saltwater species.
In contrast, white shrimp aquaculture and white shrimp in particular, are relatively new to the country. Fresh water aquaculture was always a peasant driven, backyard farming endeavour. On the other hand, although practiced in Thailand for more than 30 years, marine aquaculture grew out of top down initiatives from feed to poultry giants such as CP.
Thirty years ago, large domestic integrators were seeking to leverage scale economies developed in their feed to frozen poultry supply chain to enter new meat lines. Given Thailand's rich marine resources, aquaculture in general, and shrimp in particular, were a natural fit. Consequently, shrimp farming grew very rapidly after the mid 1980s; following technological breakthroughs in shrimp feed development and successful local production of larvae in 1986.
Years of prosperity, then overproduction
Unlike their fresh water predecessors, brackish water farmed fish, particularly shrimp, were mainly for export in frozen, semi-processed or cooked form, with the United States, European Union, Japan and Australia as major markets.
Today, they are the backbone of Thailand's reputation as the world's largest shrimp supplier and status as one of the world's largest seafood exporters. Yet, while the rise of Thailand as one of the world's leading shrimp producers has been rather phenomenal, it was not accidental.
For one, as an equatorial, warm water country, it can allow cold-blooded fish, whose growth rate is proportional to temperature to develop rapidly. An undulating coastline offers endless miles of coastal areas suitable for shrimp farm construction. Having had long years of experience in farming tiger shrimp, when the more prolific vannamai (white shrimp) came, the switch was quick and easy, accounting for the country's success as a shrimp powerhouse. Finally, integrated feed to poultry giants such as CP and Betagro leveraged their rich financial and human resources to integrate this sector close to its efficiency frontier.
Nevertheless, any fairytale success has its denouement. After having a field day until 2006, Thai shrimp exports started falling under the weight of tighter competition from other countries, unfavourable anti-dumping duties in the US, stringent biosecurity measures in Australia and a rising currency, among other things.
By that time, after many years of high export growth, thousands of farmers were lured into shrimp rearing by the promise of rapid, high returns on investment. With post-2006 export demand turning downward, the result was a gross oversupply. Consequently, a sharp, ongoing slump in prices commenced in April 2007.
Domestic prices for white shrimp dropped 44 percent to about US$1.57 to $1.88/kg in 2007, compared to $2.82 the previous year. Meanwhile, with feed, transport and fossil fuel costs all hyperinflating, production costs averaged $2.20/kg.
Dr. Surapol Pratuangtum, president of the Thai Marine Shrimp Farmers Association, attributed the sharp price drop to, apart from overproduction, a strong Thai baht and US requirements for a continuous bond for countries subject to dumping duties, like Thailand. Thai exporters paid more than $188 million in bond guarantees over the last couple of years. America's bond requirement was outlawed by the World Trade Organization in mid 2008 but with export markets turning downward, this so far has not helped to reverse Thai shrimp's declining fortunes.
Dr. Surapol estimates that from April 2007 through mid-June 2007, Thailand's shrimp industry lost more than $155 million because of the price slump. To stave off further price declines, the industry took its first bitter pill that year - a voluntary cut in output by more than 20 percent. An even larger cut would have been necessary had so many producers not left shrimp rearing for more profitable domestic lines.
This improved local shrimp prices a bit towards the end of 2007, helped in part by the consumers' yearend buying spree. But a few months into 2008, the price slump returned. To date, shrimp fell by more than a third in 2008, with no upturn in sight. By early 2009, this left Thai shrimp prices down by 57 percent since the beginning of 2007.
The government did its best to protect shrimp rearing profit margins. Like in 2007, the government put in 300 million baht from July to October 2008 in a mortgage scheme designed to prop up local shrimp prices. Under the scheme, the government bought shrimp harvests at better prices than those prevailing in the market. These products are being stored in cold storage for release when market prices have improved.
The market clearing scheme, unfortunately, doesn't seem to have worked. Prices remain depressed, with farmers asking for more help. And the tragedy of it all is that other farm products are in a similar predicament - rice, corn, rubber, cassava, etc. The first three have ongoing mortgage schemes, leaving government warehouses full of products it can't sell without aggravating the price slumps.
Integrators like Betagro and CP have been against such subsidy schemes from the very start as, in their words, "they tend to distort the free-market system." They also warned that the government simply can't afford to sustain such programmes for the extended length of time required to make them really effective.
In short, amid calls for more government bailouts, the future of the Thai shrimp remains bleak. Despite the odds, Dr. Surapol remains optimistic that "the export market for Thai shrimp has an opportunity to grow in the future because of lower production costs." This statement however, is not all that it may appear to be: What Surapol does not mention is that among newly industrializing countries, Thailand once had some of the lowest farm wages. Now newer, emerging countries, such as Vietnam and Indonesia, have far cheaper labor and even raw material costs than Thailand.
Local feed quality & costs a point of contention
As profit margins plummet and politicians feel the heat from constituents, Thai aquaculture feed suppliers have also become a bone of political contention. CP, the country's biggest, integrated aqua feed maker and integrated aquaculture conglomerate was accused by a government minister of, "controlling 70 percent of the country's shrimp feed market, of keeping feed prices artificially high in order to drive out small-scale farmers and buy up their ponds."
CP responded that, unlike the Philippines, which imports cheap American soybeans, Thailand protects its uncompetitive, high-cost soya bean farmers by restricting imports (including the lower grade soybeans used in shrimp feed).
CP and other feed companies, it added, are also forced to use low-quality Thai fish meal, with protein content of below 65 percent, because they are prohibited from utilizing high-protein imported fish meal. While such burdens can be sustained during prosperous times of rapid market expansion, this is not the case today. Facing declining export prospects on the revenue side and lower costs from poorer Southeast Asian neighbours, Thai aquaculture finds itself in a truly difficult position.
Given all these problems, the chances of Thai shrimp getting back to where it was in the world market three years ago don't look good. Integrated Thai giants, seeing the future, are already investing in the feed-to-aquaculture supply chains of Vietnam, Indonesia, Malaysia and Philippines. Hence, while Thailand's domestic shrimp sector is far from being a sunset industry per se, reversing its rapid fall would be a monumental challenge indeed.
Tilapia: Thai aquaculture's great, white meat hope
With this in mind, large seafood exporters are looking to build up a new seafood line, rather than trying to hard to rescue shrimp. As this article has made clear Thai aquaculture, thankfully, is not all about shrimp.
What the country did to leverage shrimp in the run-up to 2006 could be done with Nile tilapia, which now accounts for 38 percent of the country's total fish culture produce. According to the Journal of the American Dietetic Association, US tilapia consumption, which totaled 1.5 million tonnes in 2003, will grow by 67 percent to 2.5 million tonnes by 2010.
This low number however, is not due to any disadvantage versus China. Instead, integrated Thai seafood exporters previously made their money mostly in shrimp. They are only now starting to set their sights on tilapia. With Chinese seafood exports coming under growing scrutiny for their excessive additives, antibiotics and long-term health effects, Thailand has an opportunity to take a significant proportion of the middle kingdom's market share of global seafood exports.
In Thailand itself, tilapia is a poor man's source of protein, selling for as low as 12-15 baht (35-44 US cents)/ kg wholesale, while its retail price varies from 20-25 baht (58-73 US cents)/kg. On the other hand, the US typical retail price for whole live tilapia is US$4-10/kg, while fresh tilapia fillet is being sold at US$8-10/kg. So long as this line is backed by integrated Thai feed to supermarket giants, there is no reason why tilapia cannot become the country's next large seafood export.
The export prospect indeed looks very promising. And it has the advantage to start with. In Thailand, the feed cost of tilapia is only 20 percent of its export value. Such a wide cost advantage, at a time of financial distress, could go a long way towards reviving its once dynamic aquaculture sector.
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