A crisis driven reform of Chile's salmon industry?
By Eric J. BROOKS
An eFeedlink Hot Topic
• Chilean salmon has gone from nearly overtaking Norway to falling further and further behind • Disease outbreaks, antibiotic-induced export bans result when output exceeds 600,000 tonnes
• 10 years of failed intensification, slow growth leads to call for legislated production controls
After ten rough years, a trying 2015 may be remembered as the year when Chile's salmon migrated to a new, more sustainable industry model.
As is often the case, the upcoming opportunity to reform itself is born of crisis; a year which cherry topped a miserable decade for this once thriving industry.
A nasty year
Besieged by everything from rising production costs to serious net losses and allegations of antibiotic overuse, Subpesca reports that H1 2015 Atlantic salmon production was down 33% on year, to 205,900 tonnes. At 14,700 tonnes, the H1 2015 Coho salmon was down a steep 67% from the 44,000 tonnes grown in the same period of 2014. Rainbow trout was similarly down 87%, from 68,000 tonnes in H1 2014 to a mere 8,300 tonnes in the first half of 2015.
With Atlantic salmon representing nearly 50% of farmed production, other salmonids fared even worse. According to Subpesca, Atlantic salmon represented 47.5% of Chilean harvests during the first half of 2015 and its production totaled 205 900 tonnes, a drop of 32.8% compared with the first six months of 2014. As for rainbow trout, cumulative harvests up to June reached 8 300 tonnes, representing a drop of 87.8% over the figure recorded for the same period last year. Overall, salmon production is falling an estimate 11% to 13% annually for the next two years. From an estimated 892,000 tonnes in 2014 to perhaps 800,000 tonnes in 2015 to Salmonex's projection of 696,000 tonnes in 2016.
Bad as the output fall was, trade and marketing related difficulties were if anything, even worse. First, a customs strike in the second quarter of 2015 held up exports. Seafood.com estimates that by the time the strike by customs officials ended, Chile had lost US$40 million of sea-based salmon exports orders and an additional US$20 million of air-flown shipments it was unable to fulfil. What made the situation worse however, was the impact on Chilean salmon's international reputation.
According to SalmonChile president Felipe Sandoval, "As important as financial losses, it is the crisis of confidence and image that we are suffering today." In an interview with Saving Seafood, Camanchaca's CEO Ricardo Garcia concurred, stating that, "Chile has lost credibility as a reliable supplier; Buyers are going to buy from Canada and Norway."
Later, high levels of antibiotic residues got Chilean salmon banned from Costco and several other leading American supermarkets. But these are not isolated, individual incidents of bad fortune. They are merely symptoms of a what Chile's salmon industry is now acknowledging to be a larger problem involving trade-offs between limited coastal resources, sub-tropical water temperatures and disease outbreaks versus technology, antibiotics and food safety.
Rapid growth up to 2005, then disappointment
Over the longer term, an exporter that once appeared to overtake Norway as top producer finds its output boxed for nearly a decade. According to FAO statistics, in 1990 Chile farmed a mere 23,121 tonnes of Pacific and Atlantic Ocean salmon species, amounting to a mere 16% of the Atlantic Norway's 145,990 tonnes of Atlantic salmon grown by Norway
Output rose rapidly such that by 2005, Chile produced 491,177 tonnes of salmon, amounting to 84% of Norway's 629,888 tonnes. In the 15 years from 1990 to 2005, Chile's salmon output jumped 21.2 times whereas Norway's production only increased by a factor of 4.3 times.
From the beginning, critics alleged that compared to its Norwegian rival, Chilean producers practiced inadequate biosecurity enforcement and poor and salmon husbandry techniques. These fears were borne out after the turn of the century. As untapped coastline resources dwindled, a trade-off between intensification and sustainability soon manifested itself.
Now 10 years of stagnation
Following two decades of nearly exponential output growth, a slew of disease outbreaks, particularly ISA in the years following 2006, devastated the industry. Output stayed flat around 390,000 to 450,000 tonne range for several years after 2005 before a particularly nasty 2010 outbreak brought it below 250,000 tonnes in 2010 –it regressed to 26% of Norway's salmon output, which totaled 939,536 tonnes in the same year.Thereafter, industry-government collaboration on regulations for better salmon cage management –and boosting of antibiotic usage to control pathogens (particularly ISA) resulted in a slow but sustained recovery of production growth. As a result, by 2014, output reached a new peak of 567,000 tonnes, making for a 4.5% average annual production growth over the previous decade. On the other hand, Norway –without resorting to antibiotics– had boosted its output to 990,000 tonnes, boosting it at a 7.8% annual rate in the years from 2005 to 2015 inclusive.
With major clients in North America snubbing high antibiotic use need for high intensification levels and losses discouraging output, 2015 salmon production is expected to be some 800,000 tonnes, 63% of Norway's production. Even this output growth however, carried a heavy price in terms of food safety and sustainability.
According to statistics from industry association Salmon Chile, from 400 tonnes in 2007 when ISA outbreaks peaked, the amount of antibiotics used in Chilean salmon fell to 160,000 tonnes in 2010. This was partly due to attempts to manage their farms in a more sustainable, Norwegian-like manner, partly because by 2010, in an effort to control outbreaks, it was growing a third less salmon than three years earlier.
Antibiotics dent reputation, undermine cost competitiveness
Over this time, the amount of antibiotic used per unit of salmon flesh grown fell from 0.06g/kg in 2007 to just under 0.03g/kg in 2010. Thereafter, to try and regain the export market share it lost to Norway in the years after 2005, it greatly boosted its salmon production –and its reliance on antibiotics by even more.
While salmon output jumped 3.5 times from 246,000 tonnes in 2010 to 895,000 in 2014, antibiotic use went up almost 5 times. From 120,000 tonnes in 2010, Reuters reported that in 2014, Chile used 563,200 tonnes in 2014 –approximately 300% more antibiotics to grow 92% more fish.
What is more galling for Chile is that while they use 0.06g per kg of salmon produced, Norway doubled its production over the last ten years while only using 1/100th the amount of antibiotic per kg fish –actually, no antibiotics, except to treat a small minority of fish that have become ill. This is making it increasingly difficult to market Chilean salmon to high-income, educated consumers, particularly those in developed countries.
Not only did the last two years of peak production result in huge antibiotic overuse, the excess supplies came at the worst time possible. When Russia banned Norwegian salmon in mid-2014, hundreds of thousands of surplus tonnes once destined for Russia flooded western markets –just in time to meet rising supplies of Chilean salmon.
As things turned out, Russia bought far less Chilean salmon in place of Norwegian supplies than the volume Norway redirected into countries where Chile was already exporting. The resulting fall in world salmon prices hit all producers, Chile was hit worse than other countries.
According to USDA statistics, the average unit price of exported Chilean salmon fell 22.9%, from US$7.78/kg in 2014 to US$6.00/kg in 2015. As a result, despite exporting 2.1% more salmon in 2015 than in the previous year, export earnings fell a whopping 21.3%, from US$3.372 billion in 2014 to US$2.655 billion in 2015.
However, what made the revenue drop even harder to bear is that unit production costs are rising far faster in Chile than in competing exporters. Improved salmon cage management had already boosted costs. This was followed by a huge increase in antibiotic expenses. The latter was made worse by the fact that antibiotics used in salmon farming tend be imported and priced in US dollars. The Chilean peso's 40% drop against the US dollar during the 2013-15 production surge boosted unit production costs –and unit revenues plunged by 25% over the same period.
With operating margins turning negative as output increased, this put most Chilean producers in a severe net loss position. According to the USDA, at the time of publication, total industry losses of over US$150 million were led by leading producers AquaChile (-U$66.7 million), Australis (-US$43.7 million) and Multifoods (-US$23.7 million).
Alongside outstanding financial losses and the reputation loss due to antibiotic overuse and strike-cancelled export orders, the high production costs are making Chilean salmon uncompetitive versus their Norwegian competitors. With rising supplement usage compounded by the Chilean currency's fall versus the US dollar, Undercurrent News ("Chilean production costs 13% higher than Norway") reported that Chile's salmon production cost had risen to US$4.53/kg, versus US$4.00/kg in Norway.
Pumped up by the rising cost of imported antibiotics and other supplements, in Q3 2015, salmon feed cost approximately US$1.48/kg in Norway, versus US$2.08/kg in Chile. This is ironic, as one of the factors which motivated Chilean salmon farming's rapid expansion was its low production costs versus the marginal cost of expanding existing Norwegian operations.
Slowing growth, new business model needed
The inability to boost farming operational intensity without suffering disease outbreaks, inflated production costs or reputation loss is also reflected in Chilean salmon farming's decelerating growth rate. From 1990 to 2000, Chilean salmon production grew by nearly 30% annually, versus 11.5% for Norway. However, from 2005 through 2015, preliminary estimates by Marine Harvest show that Chile's salmon production rate of 4% badly trailed that of Norway, where despite relying on fully developed sites and facilities, increased its production by 8% over the same time.
With every effort to boost output towards a million tonnes having met with disaster for ten years straight, the industry is now looking at a new approach; one that emphasizes quality over the quantity produced.
In interviews with Bloomberg and Undercurrent News, AquaChile president Victor Hugo Puchi states that because Chile's water temperatures are several degrees higher than that of other producers, faster salmon growth comes at the cost of more disease outbreaks. In particular, Puchi states that whenever production exceeds 650,000 tonnes, disease outbreaks and cost overruns due to antibiotic overuse and higher growth losses undermine the industry.
For this reason, Puchi is calling for Chile's government (which currently allows up to 2 million tonnes of salmon to be grown) to decrease the maximum salmon production amount into a range slightly above 600,000 tonnes. He also wants the government to regulate the planning and location of future salmon farms, "in order to avoid disease propogation." With Norway's own salmon output growth tapering off, all this would result in higher export prices and the restoration of profitability.
According to Puchi, "What we will lose in value for the reduced volume of production, we will compensate for with higher prices and greater stability." Pointing out that Chile is the only remaining exporter that does not limit production for sustainability reasons, Puchi concludes that, "The state is the only one that has the capacity to do this adjustment with a regulation that limits individual liberties in function of a biological situation and an ocean freight capacity. That is what every other country has done."
How Chilean salmon farms will adapt to the realization that they have wasted ten years spinning their wheels, going nowhere will only be known in the coming months. One thing however, is for sure: A mindset shifting from quantity to quality, from revenue to reputation is poised to transform the world's number two salmon exporter –and with it, twenty-five years of falling retail salmon prices will also come to an end.
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