Monday, 16 February 2015

Fish Farms Are a Boom Bust Industry

I have done a couple of posts on the boom bust nature of fish farms since the beginning of 2015. These companies are huge multinational firms that exist for shareholder profits. They are not about employee and fish 'happiness'. They are big oligopolies that tend toward market share and result in barriers to entry to individual farmers supporting their families.

Below are chunks from a couple of articles that you can read and educate yourself, as fish farms like to say, on the 'correct facts'. You make your own mind up on this point. I will put mycomments in boldface, so it is clear who is speaking.

Chilean supply pressure
Following the merger of Marine Harvest's Chilean operations with Aquachile, it was highlighted that the deal will bring greater biosecurity for Chile.

The move will also allow a better coordination in the market supply, since fewer sellers will have more margin to negotiate, Giskeodegard said.
DCR: this speaks to the power of oligopolies and barriers to entry.
“Consolidation in the selling side is definitely needed in Chile,” the analyst said.
This could help to avoid situations such as the current Chilean supply pressure, that hit Marine Harvest’s Canadian results in Q4.

DCR: Marine Harvest is in BC Canada. While the lower dollar should have helped Marine Harvest export into the USA, Chilean costs are lower, and they supply more frozen product into the USA.

Current prices involve negative margins for most of Chilean players due to a harvest increase, Giskeodegard said.
“This will last until the supply pressure start to decline; we expect that to happen in the first half of the year,” he said.
“However we expect that the first months of 2015 will be marked by this excessive supply from Chile,” the analyst said.

DCR: The point is oligopoly power. In economics terms, huge firms and cartels/oligopolies tend to less efficient markets, ending in monopolies and higher prices:

The closure of the Russian market has been less of a problem for Marine Harvest than some its competitors, as the company "benefits from its global sales reach and logistical flexibility, its comprehensive contracts with long term customers and its increasing share of salmon sold as value added products, with less volatile prices".

Marine Harvest has proved less sensitive to regional cost variation due to its geographically well diversified production structure, the company said.
Despite this, "the fourth quarter was, however, impacted by the reduction in Russian purchasing power, high regional costs due to biological challenges in Europe and weak prices in Americas", said Marine Harvest.
DCR: This article is good to illustrate that fish farms are about shareholders, not fish welfare, not sea welfare, not employees. It’s all about business. 
The cost of medication per kg harvested was 70% higher in the fourth quarter of 2014 than in the corresponding period in 2013, while the estimated exceptional cost related to sea lice mitigation amounted to NOK 117m, compared to NOK 62m.

(In Europe)
Exceptional mortality losses amounting to NOK 27m were recognized in the quarter, of which NOK 21m is included in the cost of lice mitigation. Losses from exceptional mortality in the fourth quarter of 2013 were NOK 18m.

DCR: Marine Harvest, Cermaq and Grieg Seafood all operate in Norway, where lice have been a very big issue in the past couple of years.

Canadian results hit by lower prices
In Canada, increased supply from Chile suppressed prices and saw the company’s Q4 ebit decline 56.89% y-o-y, to NOK 25m. Meanwhile, harvest volumes were 6,819t, up from 5,726t in Q4 of 2013.
The reduction in profitability is due to a reduction in the reference price in market currency of 26% compared to the fourth quarter of 2013.
The cost per kg harvested has been reduced from 2013, however.

“The market for fresh whole Canadian salmon has been challenging in the period, due to a significant increase in the supply of salmon of both North American and Chilean origin,” said Marine Harvest.
DCR: Typically the BC advantage is shipping fresh fish and fresh fillets, something that Chile can't do. And still there were losses. With Marine Harvest operating in both BC and Chile. In other words, they play one country against the other to maximize profits.
After a dip in supply in 2013 and the first half of 2014, the supply of North American salmon started to increase in the third quarter.
In the fourth quarter the increase was more than 10% compared to the same period in 2013.
The increase in the supply of Chilean salmon was approximately 19% in the period compared to 2013. “The increase in salmon supply in the US market has therefore been substantial compared to the same period one year ago, which is the driver behind the low market price in the period,” the company said.
DCR: Do note that Norwegian companies were granted a big advantage by removal of 26% tarrif in the USA a year ago. Still they are are trying to open up farms now in the US, having floated a big bond on the stock market to raise cash. Playing one country against another, against another.
Compared to the fourth quarter of 2013, the reference price in market currency was down by 26%.
On a positive note, biological costs for salmon harvested in the period decreased by 8% compared to the fourth quarter of 2013. There was no exceptional mortality recognized in the fourth quarter of 2013 and 2014.
Chile turns back to US

Operational ebit for salmon of Chilean origin amounted to NOK 6m in the period, down 82.82% y-o-y.
Harvested volume was 16,602t in the fourth quarter, compared to 14,136t.
“The significant reduction in market prices compared to the fourth quarter of 2013 was only partially mitigated by favorable cost development, good market performance and volume increase,” said Marine Harvest.
The Urner Barry reference price for Chilean salmon was down by 13% compared to the fourth quarter of 2013 due to increased supply in the North American market.
“Even if all European salmon origins, with the exception of Faroese salmon currently is banned in Russia, the lack of customer guarantees and the sudden reduction in the Russian purchasing power distorted Chilean sales to this market in the period,” said Marine Harvest.
DCR: So Marine Harvest, with farms in Norway which Russia has blocked, still has sales to Russia from Chile that is not part of the sanction of the western allies regarding the war in the Ukraine.
The resulting increase in salmon supply in the US market has been substantial compared to the same period one year ago, which is the driver behind the low market price in the quarter, the company said.
Cost wise, Marine Harvest said its Chilean operations performs well as a result of good farming practices and changes in the feeding regime, “but the biological development in Chile remains a concern”.
The sea lice load at the end of the quarter was higher than at the corresponding time in 2013, the company said.
DCR: Chile has ISA, too, but with low reporting, of this and other factors, Chile is acknowledged as particularly fouled ocean.
Compared to the fourth quarter of 2013, the biological cost has been reduced by 10%.
Improvements in the feed conversion ratio have mitigated the effect of increasing feed prices, while good seawater growth has contributed to reduce other seawater cost per kg. Lice mitigation costs have remained stable compared to the same period last year, the company said.
In the fourth quarter, the full cost per kg for a head on gutted salmon packed in a standard box was approximately $4.50/kg, which is up by $0.20/kg from the third quarter in 2014.
The company has significant plans for expansion in Chile, with its deals for the assets of Acuinova Chile, formerly part of Pescanova, as well as an agreement to merge with Aquachile.
DCR: Merger, merger, merger.
The deal for Acuinova Chile represents a capacity to produce about 40 000t of salmon gutted weight per year.
This asset purchase includes a hatchery, a smolt facility, 36 seawater licenses and a primary and secondary processing facility, all located in Chile’s region XI. The biomass included in the deal is expected to generate a harvest volume of about 15,000t gutted weight in 2015, Marine Harvest said.
The deal to merge Marine Harvest's Chilean business with Aquachile is considered transformative for the sector.
On Jan. 19, Marine Harvest announced the plan, which will mean the surviving entity will be Aquachile, which will continue to be listed on the Santiago Stock Exchange on a stand-alone basis.
Upon completion of the merger, Marine Harvest will own 42.8% of the combined entity. In conjunction with the merger, Marine Harvest has agreed on a standstill position of its ownership in Aquachile until June 15, 2016. From June 15, 2016 until June 15, 2017, Marine Harvest will have the option to acquire further shares in Aquachile through a tender offer that at a minimum will give Marine Harvest an ownership interest of 55%.
The resulting increase in salmon supply in the US market has been... 

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