Peruvian Fish meal Market Trend - Analysis by Gerson Lehrman GroupAnalysis by Gerson Lehrman Group

In the last five year Peruvian fishmeal prices have gone up from $800/mt to $1,500/mt, then down to $1,000, and up again to $1,900/MT. With such volatility of the Peruvian fishmeal price, what can the market expect in the future?
December 9, 2010

Peruvian Fish meal Market Trend

By Jose Luis Delgado de la Borda (email).

In the last five year Peruvian fishmeal prices have gone up from $800/mt to $1,500/mt, then down to $1,000, and up again to $1,900/MT. With such volatility of the Peruvian fishmeal price, what can the market expect in the future?

Analysis by Gerson Lehrman Group

To understand the Peruvian fishmeal market, we must first know the uses of the product. Fishmeal is a source of high content protein used in the formulation of feedstuff for animals. Back in the early stages of the Peruvian fishing industry, fishmeal was of low quality and was used for feeding cattle, pork and poultry. Now, with the development of the aquaculture industry, high quality fishmeal is required for feedstuff.
Having this in mind we can start discussing the forces that influence the fishmeal price trends.
Substitution. Vegetable proteins, such as soybean meal, are also available in the market as a source of protein for feedstuff. Fishmeal is highly substitutable for soybean meal, especially for those industries requiring low quality fishmeal (e.g. pork). So in the short term fishmeal price is influenced by the price of soy meal. If price of soy meal is bullish, then prices trend of fishmeal will be also bullish, and vice versa. That is why when soy meal price went up during the commodities bubble in the 2007/2008; fishmeal prices went from about US$ 800/mt to about $1,500/mt. Price trend of soy meal is affected by crops production in Brazil, Argentina and USA.
As a rule of thumb when the ration fishmeal/soy meal price is around 2-3, fishmeal gets in the formulation of pork-feed; when ratio is around 3-3.5, fishmeal gets in the formulation for aqua feed.
Production & Offer. World' production of fishmeal was between 7 - 6 million metric tons in the 1990's and 6 - 5 million mt in the 2000's. The largest fishmeal producers are Peru, Chile and Scandinavian countries. These top producers countries have strict regulation aimed at securing the sustainability of the biomarine resources for fishmeal production. Being those resources natural and wild, there is little what man can do to control and increase the biomass, except for avoiding an overexploitation. So in the long term it can be expected that world's fishmeal production remain stable or slowly decline.
Peru is the world's largest fishmeal producer (25-30% share), so in the short term, any change in its production level will have impact on the market price. Climate events can affect the production of fishmeal and therefore put pressure on market prices. The most known and feared event is the El Niño phenomena, which lowers the anchovy biomass in Peruvian waters. As a consequence the Peruvian government reduces the fishing quota to protect and help the recovery of the resource. This means that fishmeal production levels falls and market price increases due to shortage. The last El Niño phenomenon was this year (2010), when fishing quota was reduced by aprox. 1 million tons and the price climbed from $1,000/mt to about $1,900/mt.
Demand. World's population is constantly increasing and with it its appetite. So demand for food, and this include marine food, is also increasing. It is a fact that wild fish resources for human consumption are limited; therefore aquaculture is becoming a solution to cope with the increasing demand. Therefore demand for animal feed/aqua feed (and its vegetable/marine protein ingredients) will also increase. So in the long term it can be expected that world's demand for protein (including fishmeal) will increase.
China is the world's largest importer of fishmeal, so in the short term any change in their consumption levels will have an impact on the price levels. In 2008, China's pork industry faced a health problem (blue ear disease) which decreased significantly its production levels. The consumption of fishmeal for pork feed decreased and so it did the market price. Currently China's pork industry is recovered. Other industry that uses fishmeal is the shrimp & aquaculture, which can be affected by the typhoons heavy rains. If a large typhoon impacts the south of China it can heavily affect the aquaculture industry, and then demand for fishmeal will drop pushing fishmeal market prices down.
As a rule of thumb, inventory level of fishmeal in Chinese ports is a fairly good indicator of the internal demand. If inventory level is below 150 thousands, then it is too low to supply the feed industry and the market price behaves bullish. If inventory levels are higher, then trades have no rush to buy, the feed industry is fully supplied and so market prices behaves bearish.
The future of fishmeal: a combination of factors. As the world market is a vivid one, ever changing and transforming, we can get a glimpse of the future of fishmeal industry can by looking at the interaction of the factors and putting them in bigger picture.
With the worlds increasing population, the demand for food, including high protein foods, will also increase in the next 10 years. This will put pressure on the farming industries, such as cattle, poultry, pork, aquaculture, etc., to produce more meat and fish. Therefore a larger demand for protein sources to feed animals and fishes can be expected. This will be true for vegetable protein sources (e.g. soybean) and animal/marine protein sources (e.g. fishmeal).
With the market volatility of fishmeal and its increasing prices, the feed industry is looking for cheaper sources of protein to substitute the fishmeal. This also has become a priority since the supply of fishmeal is limited. Therefore fishmeal will be shifting from a protein source for animal feed (cattle, pork, poultry, etc.) to aqua feed. Even in the aqua feed, fishmeal will be placing itself on formulation for those fish species which are carnivorous (e.g. salmon, tuna), and need fishmeal as their protein source. For those fish species, substitution of fishmeal will be difficult as it is not only a protein source but also is important for the fish metabolism, physiology and health. An example of this was the crisis of the Chilean Salmon Industry, which was heavily hit by the ISA virus. It is believed that the high substitution of fishmeal for soymeal in the feed contributed to have fishes with weaker defensive systems and therefore to the spreading of the disease.
In conclusion, the future use of fishmeal in the feed industry will be limited to aquaculture of high value carnivorous fish species (e.g. salmon, tuna). The aquaculture industry of these species will grow with the world’s population. The limited supply of fishmeal will find equilibrium with the demand from this industry. Being those fish species high valued by consumers, the market price for fishmeal will keep growing or remain high in the future, with ups and downs in short cycles.

[Source: Gerson Lehrman Group]