Salmon: has the price hit the roof?
Salmon is the most in-demand fish in the world and for some years now, the demand has only gone one way: up. This has had an effect on the price, which came from a somewhat stable level in 2015, but has climbed to a historically high level throughout 2016. In the following, we will seek to offer an account of the current situation, underlying tendencies and likely expectation for future development.
Farming of Atlantic salmon on a commercial basis started in the 1970s. Since then, the salmon aquaculture industry has grown considerably, with FAO estimating that the current worldwide production of farmed salmon exceeds 1 million metric tons. Norway is the largest producer of Atlantic salmon today, while Chile is also a major producer. Other significant producing countries are Scotland, Canada and the Faroe Islands. The largest consumers are the USA and European countries.
Prices higher than ever
At the end of 2016, the price for salmon was just below 8 EUR per kg, up from around 4.6 EUR per kg at the end of 2015 - an increase of more than 40% in just one year. Several issues were behind this development. In general, the global supply of farmed salmon decreased by around 7% in 2016, combined with an organic increase in the demand by 7%, this resulted in a large pressure on the price. At the same time, the Norwegian crown weakened versus the Euro, allowing exporters to more easily pass on higher prices to buyers.
Norwegian farmers also battled sea lice and the treatment of the fish affected by these, meant that mortality increased, while the surviving fish lost growth during the period. Usually, salmon prices are lower in the third and fourth quarters, as growth is faster in the summer months and more fish thus reach the optimal harvest weight of 3-6 kg in the fall. The opposite was true for both 2015 and 2016, where prices continued to rise during the fall, as supply fell due to the lice situation. Sea lice are a major factor in the drop in supply. Although the number of lice per fish is decreasing, standard treatments are becoming less efficient, meaning that the cost of keeping the number of lice down becomes higher. In an attempt to contain sea lice, the Norwegian government is restricting licensing of new farms. All in all, the output from the Norwegian farms was less than expected and thus affected the price in an upward direction.
In Chile, where the production was only just starting to recover from a massive outbreak of disease some years back, massive algal blooms in the southern part of the country killed some 27 million fish in early 2016. The supply shock drove up prices of both Chilean and Norwegian salmon. The historically high prices are maintained by the mixture of strong demand in the EU and the USA – with the EU forced to pay more to compete with the USA's currency advantage – and the now very limited supply of fish.
So far, the market has absorbed the high prices and while salmon producers have certainly benefitted despite increased production costs, exporters and processors will be wary of the risks of increased volatility and margin squeezes due to resistance further down the supply chain. Due to long contracts, the price increase has not fully broken through to the end consumers in professional kitchens and private homes, but it is expected to do so soon. It remains to be seen whether this will curb the high demand. In the foodservice industry, there are signs that salmon has simply become too expensive and kitchens are substituting with other fish or proteins. Currently, salmon sales in foodservice are at index 70. Key Account Manager Thorsten Schönfisch, from Royal Greenland Garmany states: "Previously, salmon was a bestseller, but my customers in the costsector and canteens are to an increasing degree replacing salmon with less expensive species such as cod and saithe. They are working according to a fixed cost per meal and salmon is now too costly to hit that price point. It has simply become a luxury item, too expensive for everyday meals." From this perspective, a certain stagnation in market development is to be expected – one might state that salmon has priced itself out of the market. On the other hand, some analysts are predicting a 5-6% increase in supply during 2017-18.
Previously, salmon was a bestseller, but my customers in the costsector and canteens are to an increasing degree replacing salmon with less expensive species - Key Account Manager Thorsten Schönfisch
On the other hand, there are indicatives that the price-level will remain unchanged or even increase further. The sea lice situation is unchanged and the Chilean production has still not recovered fully to the levels of the pre-disease and algae years. In addition, there are signs that the demand will continue to rise organically by 7% per year, but also through new markets (re)opening. Expectations are especially high from new well-paying markets in Asia with a large middle class. In 2015, China halted its import of whole Norwegian salmon due to worries that viruses carried by the products could threaten the country's own fish farming industry. If the ban is removed, demand is expected to be boosted even further.
With indications in both directions, it is impossible to predict whether the salmon prices will continue to climb and whether these increases can be absorbed by the market. Purchasing Manager at Royal Greenland Evan Kristiansen contemplates: "From our perspective, the market is in need of stability. At the moment, the only ones profiting from the highly volatile market we see at the moment are the salmon farmers. Stagnating prices will bring stability and ensure continued demand and trust from consumers and end-users."
Fat Trout Weekly 16032017, Newsletter by Norwegian Bank DNB Bank ASA