March 19, 2020

Coronavirus, shrimp diseases and world market transformations

India and Ecuador replaced faltering Southeast Asian and Chinese production and China became the world's top importer. Coronavirus is squeezing already thin profit margins, bringing both low prices and a new market upturn sooner than expected.

By Eric J. Brooks

An eFeedLink Hot Topic

Keynoted by large output increases and down trending prices, the last five years have been good for shrimp buyers but challenging for growers. Even lower prices are ahead but after that, coronavirus probably brought forward the inevitable day when supplies grow tight and the price cycle turns upward.

Defying predictions of a 100,000-tonne output drop for the second year in a row, top producer India boosted 2019 output rise by 7.2%. Speaking at Aqua India 2020, Ravi Kumar Yellanki, president of the Society of Aquaculture Professionals stated that 2019 shrimp production totaled 804,000 tonnes, up from 750,000 tonnes in 2018 and 640,000 tonnes in 2017. For a second consecutive time, pundits predicted Indian shrimp output would level off near 600,000 tonnes, followed by late-year news of the old production record being broken.

This, in turn, allowed Indian shrimp exports to rise 9%, from 630,000 tonnes in 2018 to 686,710 tonnes last year, generating US$4.47 billion in revenue. Indian shrimp exports and output have increased by 97% and 145% respectively since 2014 when our current era of low shrimp prices began.

Flourishing output also keynoted number two exporter Ecuador. Blessed with lower stocking densities, more untapped land for expansion and the recent electrification of existing farms, Ecuadorian shrimp production rose 15.8%, from 2018's 570,000 tonnes to 650,000 tonnes last year.

That allowed exports to increase a whopping 25%, from 507,111 tonnes in 2018 to 633,890 tonnes last year. Ecuador's impressive performance was made possible by China, which increased the volume and value of its Ecuadorian shrimp imports by 252% (to 348,000 tonnes) and 225% (to US$2.08 billion) respectively. It single-handily accounts for 53.4% of the US$3.89 billion in revenue earned by Ecuadorian shrimp exports in 2019.

China also factored into India's export success, though mostly through smuggling: Of the 171,700 tonnes of shrimp India shipped to Vietnam, approximately 144,200 tonnes was subsequently smuggled into China. Vietnam thus accounted for just 4% of Indian shrimp exports while China (unofficially) absorbed 21%.

All this reflects epic supply and demand transformations: Supply-wise, China and Southeast Asia accounted for a majority of world shrimp exports ten years ago. Today, China is the world's leading shrimp importer.

Southeast Asian shrimp production exceeded 1.5 million tonnes in 2008.  –And it has stayed roughly constant in the 1.5 to 1.7 million tonnes ever since, with higher Vietnamese and Indonesian exports offsetting a 300,000-tonne drop in Thai shipments.

While Chinese shrimp exports disappeared and ASEAN shrimp shipments stayed flat, combined Indian and Ecuadorian shrimp exports jumped 389% --from a collective 0.27 million tonnes in 2008 to 1.32 million tonnes in 2019.

Demand wise, ten years ago, America, the EU, and Japan were the top three shrimp importers. China competed with Thailand as the top exporter. Today, Thailand is a tier 2 exporter, shipping less than half the quantity of shrimp it once did –but China has overtaken America as the top importer by volume, buying three times more than Japan does.

With India and Ecuador collectively boosting exports by 184,000 tonnes in 2019, China single-handily saved the day for exporters, increasing its import volumes by a whopping 150,000 tonnes. From 25,000 tonnes in 2014, Chinese shrimp imports surged to 650,000 tonnes in 2018.

Irreparable damage to Chinese shrimp ponds appears to have permanently damaged their productive capacity. At the Asia-Pacific Aquaculture Expo 2019, Alfredo Medina, technical sales support manager for INVE Aquaculture estimates this caused Chinese shrimp output to fall from 1.2 million tonnes a decade ago to slightly over 400,000 tonnes in 2019.

According to Cui He, president of the Chinese Aquatic Products Processing and Marketing Alliance (CAPPMA), the drop in domestic Chinese production coincided with a comparably steep rise in shrimp consumption. Cui estimates this forced China to import 800,000 metric tons of shrimp valued US$4 billion in 2019. It has overtaken America in shrimp imports by volume (700,065 tonnes) but not value (US$6.0 billion), as the US still imports higher value shrimp products.

800,000 tonnes of Chinese import demand growth over the last five years provided a lot of market support during our current era of deflated shrimp prices. –With coronavirus severely disrupting Chinese seafood consumption, its ability to support world shrimp demand can no longer be taken for granted. Moreover, coronavirus is also starting to severely impact European, Japanese and American consumption.

All this could lead to the following scenario: A steep drop in Chinese imports causes H1 2019 shrimp imports to fall below 2018 levels. Then, just as China recovers, falling US and European shrimp consumption could counterbalance any H2 2019 recovery in Chinese import volumes.

Hence, the coronavirus epidemic's timing is most unfortunate. Even before coronavirus became a factor, shrimp farming returns were under a lot of long-term pressure. As the accompanying graph shows, average world shrimp prices have been in a long-term bear market since 2014 when they peaked at slightly over US$10.50/kg.

From 2014 through 2019, shrimp prices fell by 28% nominally and by over a third in real terms, after inflation. During this same time, feed costs remained flat but the cost of disease abatement and managing shrimp farms increased.

For the past year, prices leveled out in the US$7.50/kg to US$8.00/kg range but in both Ecuador and India, costs continue to increase. This created an awkward relationship between shrimp growers and processors, particularly in India, which has higher stocking densities.

The last four years have seen large increases in Indian shrimp production increases coincide with sharply rising outbreaks of EHP, WSSV, and white feces disease. Many disease wary Indian shrimp growers will only risk boosting output if they are compensated by a higher farmgate price.

As a result, in both 2018 and 2019, Indian shrimp farms only boosted production later in the year, when shrimp processors offered them higher farmgate prices. This is why analysts expected Indian shrimp output to fall two years in a row only to see it rise sharply increase later in the year. Afraid of having insufficient supplies to meet their export commitments, processors offered farms higher farmgate prices from late Q3 onwards –but this came at the expense of shrimp processing and exporting returns.

For example, according to Wellcome Fisheries managing director Abdul Karin "The [export] prices have not improved much, but the prices at which we are buying from [shrimp] farmers have gone up." Paying farmers more for their shrimp is only sustainable if export prices increase by a proportionate amount –but this has not been the case.

With coronavirus already denting Chinese, Japanese, US, and European shrimp demand, the most likely forecast is for average prices to form a new bottom below US$7.50/kg for several quarters. That will devastate shrimp farming returns and result in lower production. The resulting supply contraction should result in a price rebound by early 2021. For now, however, both India and Ecuadorian shrimp sectors are poised for deflation.

Of the two, Ecuador will the worst affected for two reasons. First, shipments to China more than tripled, from 99,000 tonnes in 2018 to 348,000 tonnes in 2019. Going from 19.5% to 55% of export volumes in just one year. Coronavirus gave China its first serious recession in over 40 years and this will undoubtedly dent their demand for all shrimp, particularly Ecuadorian imports. The biggest fear is that with coronavirus spreading beyond Italy into greater Europe, importers in France and Spain will curtail their order volumes next.

Second, Ecuadorian shrimp's average selling price declined significantly in 2019, from US$6.61/kg in January 2019 to US$5.77/kg in December. Over this same time, Indian shrimp both started and ended 2019 selling near US$7.30/kg. This was mostly because a high proportion of Indian shrimp makes its way to western and Japanese markets, which pay top dollar. China prefers to buy its shrimp less processed and discounted.

This gap increased when coronavirus hit: In January, Indian shrimp still sold for US$7.28/kg, while Ecuadorian shrimp declined to US$5.69/kg. A 22% difference in unit revenues at a time when profit margins are in the thin single digits can mean the difference between profit and loss. It more than offsets Ecuador's production cost advantage.

Even this past year has seen most of the increases in exports from the largest scale Ecuadorian farms, as they have the lowest cost and can stay profitable when prices are low. Early 2020 China market deflation followed by a European demand downturn may cause many Ecuadorian producers to slash their expansion plans.

Moreover, early 2020 saw this gap between Indian and Ecuadorian unit revenues widen. Indian export revenues fell from US$7.41/kg in December to US$7.28/kg in January. Those of Ecuador declined from US$5.77/kg in December to US$5.69/kg in January. Coinciding with faltering Chinese and European demand, 

Whereas Ecuador frets about the loss of China market share, top shrimp supplier India overcame mounting supply-side woes for yet another year –but possibly at the cost of having its shrimp banned or restricted.

On one hand, India depends greatly on the US market, which pays higher prices and absorbs 41% of its export volume. On the other hand, India is only second to Vietnam in the number of shrimp shipments refused entry to the US market due to high drug (antibiotic) residue levels.
But here, India is caught in a trap: Having fewer untapped ponds than Ecuador, its stocking densities and disease outbreak problems are getting worse. –But the same antibiotics that keep shrimp diseases at bay have stopped India from penetrating European markets and threatens its US export revenues too.

With higher production costs than Ecuador and export prices falling, it is becoming more difficult for Indian shrimp processors to offer farmers high enough prices to boost production further.

Even before coronavirus broke out, America had increased import duties on Indian shrimp from 0.34% in 2018 to 2.34% last year. With the US now undertaking similar restaurant lockdowns, travel restrictions and social distancing measures already implemented in Europe, it is only a matter of time before American shrimp imports are deflated by the same market forces.

In a March 16 interview with India based Economic Times, Anwar Hashim, managing director of Adad Fisheries stated "Most of the seafood-consuming countries in the Mediterranean belt including Italy, Spain, Greece, Portugal, and France are suffering. They have asked us to stop sending shipments till further notice."

Pushkar Mukewar, co-founder and CEO of US-based Drip Capital says, "Quality concerns from buyer markets, particularly in the West, are going to remain a big challenge for Indian farmers who face increasing competition from other markets offering high-quality, value-added products. It will be difficult for Indian farms to fund investments in sustainable, antibiotic-free production at a time when low prices are making profit margins too thin to risk losses from disease outbreaks.

Ecuadorian and Indian producers are thus being confronted with low prices, dwindling profit margins and feel no incentive to boost output at this time. Depending on how long coronavirus restrictions cause recessions and dent seafood demand, this implies falling shrimp production and output through H1 2020 and possibly longer.

When the recovery comes, a sudden, volatile price increase will be needed to jump-start production. At that time Ecuador's lower production costs, lower antibiotic usage, and untapped resources will come into play. Post coronavirus, the 2020s will see Ecuadorian shrimp exports catch up to and overtake those of India.

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