November 23, 2018
Reality finally catches up to India's shrimp sector
After nearly a decade of 600% growth, low shrimp prices is causing production to fall. The real problem is an unconsolidated, capital-scarce business model that expands output via pond acreage rather than productivity.

By Eric J. Brooks
An eFeedLink Hot Topic
Will 2018 be remembered as the year that India's shrimp sector achieved world-leading status  --and started losing its title to new competitors? Already the leading shrimp exporter for several years, revised production estimates have put Indian shrimp production ahead of China's for the first time.
At the AquaSG'18 Conference held in Singapore in early October, Vaisakhi Bio-Marine CEO Ravikumar Yellanki drew attention to output's exceptionally rapid 600% expansion in seven years, from slightly over 100,000 tonnes in 2009 to 700,000 tonnes in 2016 and a record 700,000 tonnes in 2017. Exports (which include wild catch shrimp) underwent a similar meteoric rise, from 146,000 tonnes in 2010 to 541,000 tonnes last year.
From an earnings perspective, 2017 saw India export US$4.8 billion of shrimp, significantly more than second-ranked Ecuador's US$3.1 billion.  The fact that Indian exports exceed Ecuadorian ones by less than 25% by value but 55% by value belies the additional processing and value-added accrued by Indian shrimp.
Whereas much Ecuadorian shrimp is shipped in unprocessed form, that is not the case with Indian prawns. 80% of Indian shrimp exports are headless, 20% head on. In Ecuador's case, only 20% are headless; the remaining 80% are head-on.
-Yet as is often a case, no sooner did Indian shrimp dominate the world market than setbacks began to be suffered. Depending on which industry observer you speak to, Indian shrimp production estimates for 2020 range from a retreat back to 600,000 tonnes to continued expansion to a million tonnes. What is the cause of this uncertainty?
According to Yellanki, it is partly due to rising production costs from aging ponds in Andhra Pradesh (which accounts for a majority of output). Partly due to rising difficulties with diseases such as WSSV and EHP as stocking densities increase.
Most of all, Yellanki blames India's own rapid production growth for depressing shrimp prices, slashing profit margins, resulting in a large H2 2018 output cutbacks. When shrimp prices fell in H1 2018, many Indian producers cut their losses by keeping a large number of ponds fallow.
Consequently, he expects 2018 output to fall by 15% into the 590,000 to 600,000-tonne range. Whiteleg shrimp, which led the output surge and accounted for over 90% of 2017 output is leading the contraction, with output falling by over 20% in some regions.
The output contraction has impacted exports, which after years of 10%+ increases are declining by 2.7%, to an estimated 527,000 tonnes in 2018. The output slowdown is acutely impacting export growth to the United States, which bought 42% of shipment volumes in 2017.
Shipments to the US had grown rapidly in recent years, increasing at an average of 26% annually since 2013. They increased 24% to 165,827 tonnes in 2016, from 134,143 tonnes the previous year.
With 2017 output hitting 700,000 tonnes, they expanded an even faster 29%, to 214,000 tonnes last year. Due to H2 2018's sharp output contraction, industry sources only expect at most 7.5% growth in 2018 shipments to the US, to no more than 230,000 tonnes.
But the US situation is better than Indian shrimp's European export performance, which has seen shipments fall from 81,849 tonnes in 2016 to 71,178 tonnes in 2017, with Yellanki expecting a further decline to near 69,900 tonnes this year.
It reflects both European protectionism and the weakest link in Indian shrimp production: The export slump occurred when the EU boosted its inspection rate of Indian shrimp samples from 10% to 50%. That made many suppliers divert supplies from the European market, which they saw as too demanding.
Yellanki believes that winning back the European market requires "Increased monitoring of individual shrimp farms and a change in business processes." These he states must take a new approach to everything from pond water quality to antibiotic usage
The one thing Yellanki says the industry cannot adapt itself to, is low returns, as they do not set shrimp's price or the revenue level they receive. In that sense, Indian shrimp is a victim of its own success. Record high shrimp prices that followed the disease-induced collapse of Thai and Chinese shrimp farming played a large role in financing Indian shrimp's exponential production expansion.
Centered mostly in Andhra Pradesh state (which accounts for 70% of output), Indian shrimp's boom time business model used high prices and returns to successfully finance the expansion of production into new ponds. When stocking densities or pond age made diseases break out, the industry's decentralized, fragmented nature should have held it back.
Instead, an era of historically high prices made expansion into new, virgin areas easily justifiable. Amid a plethora of small, capital and skill deficient farms, expanding pond acreage played a greater role in raising production than boosting stocking densities or improving farm management.
--But as the attached graph shows, in Q1 2018 shrimp prices did not "crash" as much as they returned to its long-run moving average: After five years of Chinese and Southeast Asian supply disruptions, rising Indian and Ecuadorian output finally caught up to world demand. If one factors in the higher feed cost level, shrimp prices have "fallen back" to the same price level (adjusted for feed inflation) that they were at in the late 2000s -which was the last time supply grew in tandem with demand.
But whereas Chinese and Thai shrimp responded to higher demand by raising stocking densities, India leveraged high prices to expand acreage -but this is no longer possible. While the rupee's recent 10% devaluation provides support for a short-term, 2019 output rebound, it is not a permanent, stable solution.
According to Yellanki, raising productivity in an economically viable manner requires a boosting of industry scale. Despite its successes, Indian shrimp is unconsolidated and lacks both financial and human capital skills. He states "The smaller the farm, the more problems there are."
Gujarat state is a frontier region accounting for less than a tenth of national shrimp output, but it leads in productivity. In the 2015-16 marketing year, Gujarat's 2.5 million hectares of ponds produced 51,000 tonnes of shrimp, or 20.4 tonnes/hectare. In the rest of India, it took 47.7 million tonnes of pond acreage to produce 488,000 tonnes, and only 10.2 tonnes/hectare of shrimp were grown.
Significantly higher productivity seems to go hand-in-hand with farm size: The average Gujarat shrimp farm is 10ha, compared to the 2ha average for the rest of India. Pointing out that there have been countless cases of small farms contaminating larger, better-run ones nearby, Yellanki concludes that "One small farmer can spoil the show for an entire region."
If Yellanki is correct, then a period of slow growth and low, deflated prices is the best thing that can happen to Indian shrimp farming. The decade-long boom has significantly increased output but productivity still greatly trails levels taken for granted in Southeast Asia.
There is no knowing if prices will recover or if a currency devaluation will re-ignite its decade-long shrimp boom. At this point, the industry's long-run competitiveness depends on boosting the size, scale and capital resources of its ownership base more than it does on a shrimp market recovery.

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