Not enough fat fish: The world salmon market first hyper inflates, then divides
By ERIC J. BROOKS
An eFeedLink Hot Topic
- A record price gap: Large fish sold 15% above their old record, small fish 10% below their historical highs
- 130,000 tonne reduction in world exports was followed by two rounds of forced early harvesting at Norwegian salmon farms
- With hopes for an H2 2016 output recovery aborted, price records were broken for the third time in less than a year
- While the market is in short supply, disease-driven culling has created an oversupply of small fish and acute shortage of larger specimens
- Supplies will recover but not enough to keep up with demand. NOK50/kg looks to be the new price floor
The world salmon market has now seen several years of smashed price records and new peaks are being established as these words are being written, with very little relief in sight. It was originally hoped the fall in world salmon output would be limited to 5%, but this is no longer likely. Led by farmed output drops of 5% in Norway (from 1.328 to 1.261 million tonnes) and 25% in Chile (from 0.804 to 0.603 million tonnes), world salmon production looks more likely to drop by at least 8% to 9% this year. With the two countries responsible for over three quarters of exports are seeing their production 16% lower than it was two years ago –but world demand continues to rise 3% annually. Though it had been widely anticipated, our current inflationary era began with Chile's SRS outbreak, which sparked a price rally from the NOK41.50/kg (US$5.00/kg) range in the fourth quarter of 2015 up to approximately NOK57/kg (US$6.45/kg) in January.
Then, just as everyone thought the worst was over, sea lice outbreaks in Norway's salmon industry forced its growers to minimize losses by slaughtering their fish before they had reached their full grown weight. This has cut Norway's first half salmon production by 5% or 30,000 tonnes. Consequently, from a nadir of NOK37/kg (US$4.80/kg) in October, prices for the larger sized salmon peaked at a record NOK63/kg (US$8.19/kg) by early January.
Then, in the latter half of the first quarter, after the average price had retreated to NOK48/kg (US5.75/kg), two new supply shocks hit the industry. First, due to El Nino, a warm-water induced toxic algal bloom devastated Chilean production by 15%. With number two exporter Chile growing 25% less or 100,000 fewer tonnes of salmon than two years ago, over 130,000 tonnes of Norwegian and Chilean salmon was removed from the world market in just three months. That shot salmon's average price back to new record highs well above NOK60/kg level in the early second quarter. The price rose 70% in six months; but even more inflation was to come.The good news came from Chile, where El Nino's retreat is bringing an unusually fast cooling of coastal East Pacific Ocean water –provided no other upsets happen, this promises good supply growth in early 2017. This caused prices to initially soften during the early second quarter.
Unfortunately, more bad news soon came from Norway: Rather than recovering from late 2015's sea lice infestation, new outbreaks of infectious salmon anemia (ISA) and pancreatic disease forced farmers to repeat history: For a second time in a few months, disease outbreaks once again forced Norwegian salmon growers to harvest young, uninfected fish; lest they die and inflate their losses.
Consequently, H1 2016's disappointing salmon supply situation has now extended itself into an aborted H2 2016 output recovery. Moreover, while overall salmon supplies (as measured by biomass) fell by less than earlier in the year, the market now has an oversupply of small salmon fish and acute shortage of larger size fish. This has manifested itself in a coincidence of broken price records, falling fish sizes and huge spreads between the cost of small and large salmon.
Just as there were two rounds of premature Norwegian salmon culling, this is reflected in two cycles of wide price spreads between large and small fish. Since peaking at 5.28kg six weeks ago (which was already below average the biomass per fish), the average Norwegian salmon weight fell to 4.67kg in early July.
With the average fish size falling, price spreads widened considerably. For example, the price spread between fish weighing 3kg to 4kg and those weighing over 6kg is usually NOK2/kg to NOK3/kg (US$0.24-0.36/kg). In response to the first wave of culling the price spread widened to over NOK7/kg (US$0.84/kg) in the late first quarter. In the middle of the second quarter, with the market recovering from the first round of early Norwegian harvesting, the spread narrow to a near-normal NOK3/kg.
All this changed when news of the second early harvesting of fish hit the market. By late May salmon in the 3kg to 4kg range were selling for NOK59/kg (US$7.80/kg) and those above 6kg at NOK68/kg (US$8.16/kg) –with a NOK9/kg (US$.08/kg) price spread that was even wider than the price gap seen during the culling exercise earlier in the year.A new peak occurred in early June, when prices hit NO72/kg (US$8.64/kg) for 3kg to 4kg fish while those at 6Kg+ sold at NOK79/kg (US$9.48/kg). Then, a peculiar –and short-lived– deflationary wave hit the market. In late June, prices retreated 10%, with 3kg to 4kg fish selling at NOK65kg and those above 6kg going for NOK72/kg.
The reason for this deflation was paradoxical –on one hand, salmon demand remained high, particularly from North America, where the US dollar had appreciated against both Norwegian's crown and much more so versus the Chilean peso. On the other and, the market had long digested (and adjusted to) news of disappointing H2 2016 Norwegian supplies.
Overall supplies remained tight but a large, growing surplus offset the shortage of larger fish, temporarily dragging down the market. By early July however, the scarcity of large salmon fish pulled the market back up to record levels; such that mid-month saw 3kg to 4kg fish selling for NOK73/kg (US$8.76/kg) –but while fish over 6kg sold for 85/kg. This made for a whopping price gap of NOK15/kg or 22% between that of medium and large size salmon fish. –Meanwhile, small salmon of 2kg to 3kg size sold for NOK59/kg –the same price they were at two months earlier, before the cost of large fish took off.
--Here we see evidence of a tug-of-war battle between scarce large salmon and overabundant smaller ones. In mid-July however, the battle went to larger fish. With fish above 6kg reportedly selling for up to NOK90/kg (US$1.08/kg), smaller 1kg to 2k fish were carried upwards to around NOK75/kg (US$0.90/kg). Midrange 3kg to 4kg fish went to NOK80/kg (US$9.60/kg), making for yet another broken price record.
Given how the NOK10/kg gap between midrange and large fish, the current price structure is not sustainable over the longterm. Even if another disease were to force Chilean or Norwegian growers to prematurely harvest another salmon crop, the near division of prices into two-size dependent markets reflects buyer resistance. In the longrun, both size categories must respond to the market fundamental based on the salmon crop's actual physical mass, which looks to be down close to a tenth this year.
Barring any further unexpected events, prices may rise higher than NOK90/kg for a while this month, then turn downwards as traditionally happens in August and September. Beyond the fourth quarter, the (admittedly long range) supply forecast looks bright: Both off the coast of Chile and in the North Atlantic Ocean, water temperatures have fallen off in an unusually steep manner. Should this persist, we should see good salmon growing conditions and minimized disease outbreak risks from the fourth quarter onwards.
With prices now roughly 100% above their Q4 2015 lows, the market cycle has nowhere to go but down –but when it does, it will be facing a relatively high price floor. While fishmeal 'bottoming out' above US$1,500/tonne, it costs nearly three times more than it did 10 years ago. Soymeal, which is fishmeal's main substitute costs 50% more than it did ten years earlier and has risen 45% in price over the last six months.
To this can be added the fact that first Chile, and now Norway, is finding it increasingly difficult to boost salmon output and stocking densities without encountering disease outbreaks, which apart from constraining supplies, significantly boost production expenses. To all these cost-push inflation sources can now be added a significant demand pull component. This year, combined Norwegian and Chilean production will fall below 1.9 million tonnes –but several years ago, analysts commonly expected their combined output to total 2.6 million tonnes by this time.
World salmon demand growing 3% annually. Even before this year's market shocks, supplies were expected to fall short of demand growth. Now, it will take until at least 2018 for production to finally exceed 2014 levels. Pushed upwards by a rising cost base, constrained by supply expansion problems and pulled along by demand growth, world salmon market's dynamics have changed. Even after prices fall back and production growth resumes, three decades of falling prices are over and a new price floor of NOK50/kg (US$6.00/kg) is emerging.
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