September 22, 2015
World salmon market firms up as output growth tapers off
Norway and Chile find themselves constrained by natural limits, implying that prices must rise and a new driver of export growth must be found.
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After Russia's recession and boycott induced a record one-week price fall in December 2014, the world salmon industry has recovered to have a mixed, though reasonably good year. With higher Norwegian production counterweighted by a topping out of Chile's three year supply boom, prices were lower in H1 2015 but look to be firmer in the second half of this year.
Led by Chile's aggressive production expansion, 2014's 7% in world salmon output will be followed by a 2015's smaller 3% increase, with no output increase for 2016. Thereafter, from 2015 to 2020, Kjetil Lye, an analyst with Norwegian aquaculture consultancy Handelsbanken, sees growth fluctuating in the 0% to 5% range but averaging no more than 2.5% annually, which means it will barely keep up with world consumption growth.
As a result, prices have been around NOK43/kg. Fishpool, a Bergen, Norway based fish futures exchange forecasts average Q4 2015 salmon prices to exceed NOK42/kg (US$5.03/kg) and average NOK44/kg (US$5.28/kg) in 2016. Hence, returns will be noticeably higher than in the latter part of 2014 when the price stayed in the NOK36-38/kg (US$4.32 – US$4.56/kg) range for much of the time.
Among the two main exporters, the tendency for Norway to perform above expectations and Chile to disappoint them persists. Helped by a tripling of H2 shipments to Russia's after the latter's embargo of Norwegian supplies, Chilean salmon exports increased by 24% by value in 2014, to US$4.4 billion in 2014, up from US$3.55 billion in 2013 and triple the US$1.5 billion the industry earned ten years earlier in 2005.
Because Chile successfully took advantage of Russia's banning of Norwegian salmon, export volumes rose a much smaller but still impressive 7.4%, from 2013's 528,000 tonnes to 565,500 tonnes in 2014. This rising export demand dovetailed with a timely production increase: In 2013 and 2014, ISA outbreaks that had devastated Chilean salmon production and exports for nearly four years was brought under control. Salmon production which ISA had slashed from a 2006 secular peak of 647,000 tonnes to less than 466,800 tonnes in 2010, has recovered more quickly than expected.
By 2011, it had equaled its 2006 high and in 2014, set a new record high of 955,000 tonnes, up a whopping 20.6% on 2013's 792,000 tonnes. With ISA devastating production for half of the past decade, this did however, result in Chilean salmon production's 1995-2005 growth rate of nearly 8% falling into the 3.5% to 4.0% range in the 2005 to 2015 decade.
But the last two years have also seen Chilean salmon farms improve their bottom line. With ISA brought under control, the resulting fall in mortality and higher harvest weights boosted productivity and returns as much as Russia's sudden need for non-European salmon imports. For the first time in a decade, the turn of the year saw Chilean salmon farms approaching the profitability levels of their Norwegian competitors.
Unfortunately, the high hopes for 2015 were suddenly disappointed, and production appears poised to fall sharply. Chile's National Fisheries and Aquaculture Service projects 2014's record 955,000 tonne output to drop a sharp 16%, to 802,000 tonnes, then level out into the 820,000 – 830,000 range for 2016. Several factors motivated Chile's salmon farms to grow significantly less salmon than in 2014, but the most important reasons were all related to sustainability, and its close cousin, food safety.
Despite its eagerness to replace European supplies, Russia temporarily banned exports from eleven Chilean salmon processing plants did not meet Russian food safety standards. However, on October 19, Russian inspectors will make a new audit of the banned salmon processing plants, and could approve them for export if they are now found to be complying with standards. –Unfortunately, those inspectors cannot change Russia's demand for salmon imports, which is expected to fall by 40% this year, and by even more in 2016.
Antibiotics fuel Chilean recovery, then undercut it
Second –and most ironically –the 'cure' which enabled Chile's salmon production to recover now plagues the industry almost as much as disease outbreaks. ISA outbreaks were replaced by Salmon Rickettsial Syndrome (a.k.a. "SRS" or "piscirickettsiosis"), a bacterial infection that has no vaccine. SRS bacteria are ubiquitous in Chilean waters and they kill salmonids by causing lesions and hemorrhaging in their kidneys and spleens. Its incidence rises quickly when stocking densities are increased.
To control a rising incidence of SRS outbreaks, Chile's salmon farms boosted their antibiotic use by 25% in one year. However, for both scientific and marketing reasons, this turned out to be unsustainable.
According to a July 2015 Reuters report, in 2014, Chile used 563,200 kg of medicinal and growth promoting antibiotics to grow its salmon. This both a huge sum in itself and also up a steep 25% from the 450,560 tonnes of antibiotics used to raise salmon in 2013.
–By comparison, Norway used only 0.972 tonnes of strictly medicinal antibiotics that Norway used to grow 1.3 million tonnes of salmon. Whereas Chile uses 0.63g antibiotics per kg of salmon meat produced, Norway only used 0.0007g. Realising this would inevitably attract negative media coverage, Jose Miguel Burgos, the Chile National Fisheries and Aquaculture Service director, stated that lower stocking densities were necessary to bring SRS outbreaks under control –and lessen the industry's dependence on antibiotics.
Unfortunately,  damage to Chilean salmon's reputation for food safety has already occurred: Costco, a leading American supermarket, announced that it was replacing the Chilean salmon it sells in US supermarkets every year with Norwegian salmon that would be labelled "antibiotic free."
Costco's action follows that of Target, Whole Foods and Trader Joes, all of whom previously removed Chile's antibiotic-raised salmon from US supermarket shelves. Tobias Aguirre, executive director of seafood consultancy FishWise, "Other retailers will look at their [Costco's] lead and try to better understand why Costco made this move, and I think they will follow."

This is not to say that Chilean salmon will drastically lose market share to Norway or other suppliers of sustainable salmon. For now, America absorbs 33% of Chile's salmon exports, Japan 22% and Brazil 13%.  Chile's salmon exports however, are growing most rapidly in developing country markets like Russia and China, who are indifferent to antibiotic usage and in Latin America, where low transport costs give it a huge advantage over its Norwegian competition.
Over the short-term, partly due to lower consumer demand in Russia and Brazil, partly due to its fall in salmon production, Chile will its export volumes decline and flatten out over the next two years. From last year's 565,500 tonnes, export volumes look to stay in the 480,000 to 520,000 tonne range in 2015 and 2016.
Over the longer-term, Chilean salmon's problem is one of marketing, image and value-added revenue: Consumers in wealthy countries could shun it and opt to buy more expensive but antibiotic free Norwegian salmon. This could permanently relegate Chilean salmon to a downmarket status; such that only lower-income countries people too 'poor' to afford Norwegian salmon will import it.
Export expansion beats Russian ban
Norway by comparison, is doing its best to boost EU exports to make up for lost Russian shipments, and has been reasonably successful so far. At 492,000 tonnes, H1 2015 exports were 6% higher than the 464,000 tonnes shipped in the first half of 2014.
On the whole, a 70%, 23,500 tonne H1 2015 drop in exports to Russia and Eastern Europe was more than offset by 34,000 tonnes more salmon shipped to Europe (+10%, 373,000 tonnes), 4,900 tonnes more to America (+38%, 18,000 tonnes) and 20% more Asia (+20%, 76,000 tonnes).
This follows a highly successful 2014, where a 37%, 54,000 tonne drop in exports to Eastern Europe (due to Russia's export ban) was successfully counterbalanced by 77,000 tonnes more of  Norwegian salmon shipments to the EU (+11%, 720,000 tonnes), 14,000 tonnes more to Asia (+11.1%, 140,000 tonnes), and 9,000 tonnes more to America (+47%, 28,000 tonnes).
This is an impressive export performance, particularly in light of Russia's embargo and a rising quantity of cheaper Chilean salmon. Going forward however, the forecast for years to come is more conservative. After rising to 1.05 million tonnes this year, exports are expected to level off slightly under 1.1 million tonnes in 2016 and thereafter expand by about 2.5% annually through to 2020.
This however is mostly due to the Norwegian approach's defining value of choosing quality over quantity: It knows that unlike Chile, its salmon's reputation for being free of antibiotics brings in more value added. To maintain this reputation, it is raising stocking densities in a very conservative, incremental manner, thereby constraining how quickly output and exports can rise in years to come.
The irony of the matter is that both Chile and Norway have arrived at the same inflection point: Norway did by respecting nature and managing its salmon farms in a sustainable conservative manner. Chile aggressively used antibiotics to boost output; and thereafter suffered consequences. With the two top exporters approaching the limits of their productive capacity, the question is now 'which country will step up to take over export growth, and how high the price will rise before it happens'?

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