June 5, 2015
An end to fishmeal disinflation?
Costly fishmeal finds itself range bound between currency cheapened European supplies and El Niño driven supply uncertainty.
An eFeedLink Hot Topic
Our first quarter fishmeal report correctly anticipated a break in this feed input's upward price trend. Unfortunately, after falling and levelling off for five months, fishmeal's disinflationary pause may have run its course.
Off South America's west coast, a second consecutive El Niño is pushing Peru's coastal sea surface temperatures even higher than last year's event, which itself had a devastating impact on world fishmeal supplies and the aquaculture sector which depends on them.

A longer, hotter El Niño + thin inventories
Last year's damaging El Niño was barely warm enough to qualify as one and lasted only several months. By comparison, this year's El Niño has a sea surface temperature significantly above the borderline between normal and warm sea surface temperatures. Moreover, America's National Climate Prediction Centre predicted a 90% chance of El Niño conditions persisting through the third quarter and 80% chance of it lasting through the end of this year. That could force this year's anchovy fishing season into an emergency shutdown even more quickly than last year, when the Peru's government was forced to suspend fishing in November.
Last year's milder El Niño tanked anchovy reproduction and caused the country's anchovy catch to amount to 1.71 million tonnes. That was far below the previous year's 2.35 million tonne catch. Previously, the government mandated a 2.53 million tonne quota but it was set before the November 2014 to February 2015 fishing ban was announced.
At a USDA estimated 855,000 tonnes, Peru kept its 2014 exports nearly stable at 853,000 tonnes. This however, is a far cry from the 1.50 to over 2.3 million tonnes it was shipping in the late 1990s and early 2000s. It is also significantly less than the 1.09 to 1.58 million tonnes it exported annually from 2005 to 2011.
-- In fact, since 2012, with anchovy catches faltering, to keep annual fishmeal exports steady in the 850,000 to 865,000 tonne range, Peruvian inventories have fallen from 125,000 tonnes in early 2013 to 66,000 tonnes at the beginning of this year. During late 1960s through to the late 1990s, at a time when aquaculture's fishmeal consumption was much lower than it is today, Peru often kept up to several hundred thousand tonnes of fishmeal in inventory.
On the other side of the world, Peru's dwindling supplies were matched by those of top importer China, where inventories plunged from over 230,000 tonnes two years ago to 30,000 tonnes by February's Chinese Lunar New Year. The resulting supply shock caused prices to hit an all-time high of US$2,400/tonne, and placed fishmeal 471% above its 21st century market low, set in early 2000.
Good early 2015 catch, trash fish, falling Euro tame prices
Fortunately, early 2015's seasonal downturn in northern hemisphere aquaculture output coincided with a short-lived return to near normal ocean temperatures. After the fishing ban expired in early March, Peru's early year anchovy fishing season was successful. In fact, as of early June, approximately 80% of the country's H1 2015 fishing quota had been caught. Although regional fishing bans kept them from filling up the entire quota by late May as expected, producers are confident that the entire 2.58 million tonne quota should be reached before the first half fishing season closes in late June.
This is much more than the 1.71 million tonnes caught during all of 2014. It means that even if El Niño forces the cancellation ofH2's fishing season, 2015's fishmeal production should exceed 2014 output by at least 33%.
All this dovetailed with bad weather in China. The delayed start of China's aquaculture production kept fishmeal demand slacker than anticipated in the early second quarter.
Moreover, while Peru entered this year with depleted inventories, Scandinavia enjoyed a good late 2014 fishing season and this helped to soften European export prices. Because fishmeal is priced in US dollars and the Euro fell nearly 15% against the dollar in early 2015, Danish and Icelandic exporters could undercut Peruvian and Chilean suppliers.
At one point, a 17% spread of up to US$330/tonne opened up between European and South American fishmeal export prices. 
High fishmeal costs are also encouraging the use of discarded seafood processing waste (a.k.a. 'trash fish') as fishmeal feed stock. According to the UN FAO, "increased use of by-products from filleting operations, which currently makes up about 25% of fishmeal…has insured a steady supply for fishmeal producers."
Alongside the aggressive substitution of inputs based on soymeal, algae or krill by aquaculture farms, this brought average fishmeal price across all grades down to around US$1,700/tonne by early June, more than 25% below its peak above US$2,350/tonne earlier in the year.
Uncertainty over late year catch
Unfortunately, the late second quarter also saw a sharp, rapid resumption of El Niño conditions. By early June, due to sea surface temperature anomalies nearly twice as large as those of 2014, Peru's government announcing regional 'mini-bans' on fishing in the country's warmest, most southerly coastal waters.
On one hand, with Peru's government deliberately pulling forward the start of the early fishing season in anticipation of the currently emerging El Niño, it had no significant impact on anchovy landings, which have already exceed those for all of 2014 by a healthy amount.
On the other hand, after a slow start to its aquaculture season, Chinese aquaculture's inevitable resumption is putting an end to four months of price deflation. In his late May blog entry, Wayne Bacon, president of Hammersmith Marketing noted that, "more interest from China seems to be coming to the market with business booked to China now starting to build."
In another sign that the market is bottoming out, partly due to El Niño driven market anxieties, partly due to the Euro currency's partial recovery from its earlier devaluation, Bacon notes that spread between Peruvian and Danish fishmeal prices narrowed from over US$350/tonne in early April to slightly under US$100/tonne by June.
Although Peruvian fishmeal still has to fall by another US$100/tonne before it can garner interest from EU importers, this closing price spread implies that the market deflation experienced in the first half of 2015 is coming to an end.
Moreover, according to JC Intelligence, as of early June, at Chinese ports, fishmeal is selling at a significant premium to Peru's asking price. At US$1,800/tonne for 65% protein fishmeal, even after shipping costs are factored in, Chinese fishmeal costs US$100/tonne more than its Peruvian equivalent.
Consequently, with its own supply side fundamentals deteriorating, China can only slash Peruvian fishmeal's price to match the prices offered by European producers and not go lower. With South America's export dominance giving it a price setting role, this implies that fishmeal costs are bottoming out around US$1,600/tonne.
While we are certain that the current El Niño will act as a price bottom, over the short-term, its potential to ignite a new inflation round very much depends on its duration. Even if it persists through the rest of 2015, the fact more anchovy has already been caught by Peru than during all of 2014 should limit the potential for price inflation this year.
Of course, should this El Niño persist well into the fourth quarter, it could seriously impact late 2015's fishing season and induce another price spiral next year. For now however, fishmeal is finding itself range-bound: European supplies and a faltering Euro exerts deflationary pressure, while China's inventory restocking and El Niño-induced supply uncertainty makes for a high price floor.

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