FBA Issue 22: September / October 2008

Fishmeal on a long-term rebound?


by Eric J. BROOKS


After taking a break in 2007, is fishmeal resuming a multi-year, inflationary spiral that began in the middle of this decade? While the fundamentals are certainly on the side of long-term price increases, there appears to be only limited upside potential for the remainder of this year.


Granted, over the long-term, fishmeal's price path certainly appears inflationary. Given declining ocean catches and booming aquaculture, industry observers expect prices to rise at a real (inflation adjusted) rate of 6 to 8 percent a year. That being so, the graph on your left shows that after 2006, fishmeal clearly jumped beyond its long-term 6 to 8 percent annual price increase average. With substitutability between fishmeal and soy less than most pundits expected, we assume an 8 percent long-term price increase on the accompanying graph –Even so, fishmeal first caught up to its long-term price trend, and then overtook it.


Hence, an adjustment back to its long-term average price increase path was inevitable. After peaking in early 2007, fishmeal fell for the remainder of the year. The relative weakness of fishmeal prices in 2007, especially when compared to booming soymeal prices, was due to little buying interest on the part of China, which had bloated port inventories and a disappointing aquaculture season.


Nevertheless, in the first half of 2008, fishmeal prices regained some lost ground. At $1,210/tonne, fishmeal is up 12 percent since the beginning of the year but still some $100/tonne or 6 percent lower than last year's historic peak price. The second quarter also saw renewed Chinese buying interest as the country's fishmeal imports turned upwards. Indeed, while fishmeal production increased by nominal single digits, January to April Peruvian fishmeal exports jumped to 554,000 tonnes, 23 percent more than in the same period of 2007. Having depleted aging holdover inventories, China was the primary export destination followed by Germany, Japan and Australia. The question is, 'Is this a resumption of the strong upward trend seen in the middle years of this decade?'


Inflationary factors

Supply-wise, totaling 940,000 tonnes, the catch of the top four fishmeal exporters (Peru, Chile, Denmark, Norway) during January-April 2008 is only 3 percent higher than last year's total. In a world accustomed to falling fishmeal catches, this superficially, looks like an improvement. However, even if by some miracle, catches were up by an amount even slightly higher than this, it does not really help long-term supply fundamentals.


This is because, even if catches are up over 2007, they are still way below their historic peaks and demand has grown by leaps and bounds since then. Peru, which accounts for the lion's share of global fishmeal exports, still has a catch down by roughly a quarter from as recently as 2005. Single digit increases, while definitely an improvement, is insufficient to keep pace even with this year's demand growth.


At the same time, with prices for soya beans and other high-protein oil seeds at such high levels, there is very little scope to curtail demand by partially substituting vegetable proteins in place of fishmeal. With Chinese fishmeal imports now rising, current global fishmeal inventories appear insufficient to cover the next quarter's demand.


In addition, Peru's fishmeal catch did carry one ominous sign –there were 3 day fishing bans in some maritime regions, as the fish found there were very small-sized. The continuing presence of small size fish imply that while this year's Peruvian catch may roughly equal or exceed equal last year's, it might be followed by smaller catches in future years. Consequently, it is very possible that over the next few years, Peruvian fishmeal catches may fall from their 1.4 million to 1.5 million tonne plateau.

Outside of Peru, with declining mackerel catches and rising domestic demand, Chilean fishmeal exports are now in deep decline. Chile's 2007 fishmeal production was approximately 10 percent lower than in 2006. As a result, 2007 Chilean exports of fishmeal totaled 490,000 tonnes, down from 520,000 tonnes in 2006 and 710,000 tonnes in 2005. 


Despite a marginally improved catch this year, what the world needs is not for Chile or Peru to stabilize their fishmeal catches but profoundly increase them. This is not going to happen. Given all these factors, there clearly is room for additional, somewhat nominal price increases over the next month or two. Fishmeal may even touch its previous price record. But what of those factors working against a resumption of exponential price increases?


Deflationary factors

Firstly, with more than 2.2 million tonnes caught worldwide, April 2008 was the best fishing month for the main fishmeal exporting countries since May of last year and was twice as large as the previous month (1.0 million tonnes). Even here however, Peru's nominal increase was partly counterbalanced by smaller catches in Chile, Denmark, Norway and Iceland. Nevertheless, thanks to Peru, South American fishmeal catches, while way below their peaks, have stabilised and somewhat rebounded from their lows of 2006 and 2007.  This removes some upward pressure on prices.


Meanwhile, in Asia, it appears that more high-quality Peruvian fishmeal will soon become available. 2007's price crash was led by American and Europeans unwilling to import fishmeal at such high prices.  Moreover, the United States is now relying on Mexico for a higher proportion of its fishmeal imports, leaving higher quality Peruvian and Canadian fishmeal available for Asian markets. Hence, even if prices remain stable, the quality of available imports should improve.


Hence, with the supply of high quality fishmeal available for Asian markets increasing, much depends on the price of soy and rapeseed. Should their prices stay high, fishmeal will remain firm but with more high quality supplies available for China and southeast Asia. On the other hand, should vegetable protein meals decline in price, imported fishmeal could drift into the $1,000 to 1,100/tonne range in late 2008. With July soy down almost 15 percent from its market top just a month or so earlier, this is limiting fishmeal's upside at the time of publication.


Moreover, this medium-term price weakness is driven by mathematical fundamentals as much as by market circumstances. For, only one thing is for certain: Fishmeal, even after its 2007 price crash and 2008's partial recovery, remains slightly above its long-term 6 to 8 percent price increase path. Looking beyond mid 2008, fishmeal will remain confined to the $1,100 to $1,350/tonne price range for at least another year. At that time, a long-term, 8 percent annual upward price trend will finally catch up to fishmeal's market price, giving it a strong lift from the second half of 2009 onwards.
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