A tale of two fisheries

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This is the tale of two salmon producers and how the pervasive fingers of market economics pry into even the more obscure areas of trade.

Fortunes have diverged between the world’s number one and two salmon exporters Norway and Chile. The former is enjoying record high prices, while the Latin American country is suffering from low demand and declining prices.

Their fates have been divided by the tumbling oil price and its impact on commodity currencies.

In Norway, the krone has weakened 16 per cent against the dollar since the start of 2015 and 6 per cent against the euro, increasing revenues in the local currency for farmers who were forced to cut prices in the wake of the Russian food import ban in 2014.

A subsequent squeeze on supplies due to sea lice and disease then pushed up the price further to record levels.

This is a good time to be a Norwegian salmon farmer, says Geir Ove Ystmark, chief executive of the Norwegian Seafood Federation.

Spot prices for Norwegian salmon have soared to levels with benchmark prices just under NKr60 a kilogramme.

With more than half the costs in krone and most of their revenues in US dollars or euros, margins for producers have climbed. Share prices of salmon producers have performed well, with Marine Harvest, the market leader, up 14 per cent since the start of 2015 and Leroy advancing 17 per cent.

It’s currency magic, says Kolbjorn Giskeodegard, analyst at Nordea Bank.

Chile, on the other hand, has seen weak commodities hit the currencies of its two large export markets Brazil and Russia. Brazil’s real plunged 34 per cent since the beginning of last year while the Russian rouble lost 25 per cent.

Meanwhile its share in the US market the Latin American country’s largest customer has also been eroded by the export push by Norway and its price competitive exports.

As a result, Chilean salmon prices have fallen to three-year lows. At the end of last year, prices fell 14.5 per cent from the start of 2015 to $3.44 per pound, according to SalmonEx, a price provider for the Chilean salmon industry.

Apart from currency volatility, the Russian food import ban as well as US retailers’ concerns about the use of antibiotics have hit Chile.

The embargo by Russia, one of its most important customers, led Norway’s exporters to respond with a big sales push into the EU and US, aided by the weak krone that allowed them to undercut competitors.

As a result, Norway exported salmon worth a record NKr48bn in 2015, up 9 per cent, according to the Norwegian Seafood Council. Sales to the EU rose 15 per cent to NKr35bn, while exports to the US rose 33 per cent to NKr626m.

Chilean shipments of salmon, on the other hand, fell more than a fifth in the first half of 2015, according to the UN Food and Agricultural Organization.

US worries about antibiotic usage among Chilean producers have also made Norwegian salmon a favourable alternative. Since peaking in 1987, antibiotic use in the Norwegian salmon farming industry has fallen sharply as the growers have turned to the use of vaccines.

In 2013, Chile produced about 750,000 tonnes of salmon, used more than 450 tonnes of antibiotics compared with a total 972kg among Norwegian growers, who produced 1.25m tonnes.

However, there are no residues of antibiotics in the fish on the shelves and executives say this is a marketing problem. We need to communicate that the product is antibiotic free, says Arturo Clément, founder of SalmonEx.

The market woes have hit Chile’s salmon industry, which had already been struggling with high debt and cash availability following the country’s financial crisis in 2012.

AquaChile, the country’s largest salmon producer that was the target of an aborted bid from Marine Harvest, reported three consecutive quarters of losses in 2015, and its share price more than halved since the start of last year.

Analysts see consolidation of a fragmented industry as one of the solutions, but many of Chile’s salmon producers are parts of family-owned conglomerates. With its costs largely in US dollars, Chile is facing falling prices and higher production costs than most other producing countries, says the FAO.

Nevertheless, industry executives are hoping for a better 2016. We have seen a turnround in prices in the last four to five weeks. Things are much more positive than six months ago, Mr Clément says.

The outlook for the Norwegian salmon sector is rosier, with higher prices on the horizon and demand growth expected to be stable, says Piotr Wingaard at FishPool, which trades forward contracts for salmon.

Some are even more bullish. Mr Giskeodegard at Nordea believes the Norwegian sector is seeing a new supercycle for the coming two years.

However, there is caution in the air. It is unclear how high prices can climb before demand starts to be affected. Tom Solomon, analyst at Investec Asset Management says: Everyone is trying to find that higher price where demand destruction occurs?.

Some input costs are expected to rise due to the lower krone, while the price of fishmeal and fish oil are also firm. Mr Ystmark at the Norwegian Seafood Federation warns: In good times, you really have to focus on costs.

The Financial Times Ltd 2016

URL: http://www.ft.com/cms/s/0/2d6edf6a-b884-11e5-bf7e-8a339b6f2164.html#axzz3xCSvnwee

A tale of two fisheries

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