Stricter sealice rules in Norway, tight supply could see salmon prices spike in 2015, say analysts
Undercurrent News, July 24 2014
Stricter sea lice rules in Norway combined with a tight supply could lead to a new salmon price spike in 2015, argued analysts from the investment bank Norne Securities.
In a report in which they warn that the nature of salmon supply makes stable prices an unlikely prospect, the analysts point to the consequences of potentially far stricter rules on sealice in Norway.
One salmon farmer who “does not know whether to laugh or cry about this” told the financial newspaper Dagens Naeringsliv that new rules being considered by the government could send prices up from NOK 40 per kilo to over NOK 100 per kilo.
Norway’s government said in June it would allow farms to increase their allowed biomass by 5%, but only if they adhered to far stricter sealice regulation allowing fewer than 0.1 adult female lice per fish, and only two vaccinations per year. Current regulation requires the average in any pen to be below 0.5 adult female lice per fish.
Farmers in Norway are now worried over signs that the government may seek to implement similarly strict rules across the entire industry, regardless of whether they take up the 5% increase.
The CEO of Nordlaks, Norway’s fifth largest salmon farmer, recently told Undercurrent News the government’s actions are worrying, saying the rules being considered are not realistic.
The farmer who spoke to Dagens Naeringsliv said only two of his 22 sites would be able to meet the new rules.
The Norwegian government also passed on a chance to increase growth by deciding not to change the current rules on maximum allowed biomass in pens.
Several industry players had called for the rule to be changed to base itself on the average biomass in farms throughout the year, rather than being based on the farms’ annual peak level as is now the case.
Passing this change — which Marine Harvest opposed, but competitors such as Leroy Seafood supported — could have increased Norway’s salmon supply by 15-18%, translating into an 8% global increase, said Norne.
Instead, the government opted for a 5% increase in MAB — representing a 2.5% global increase — conditional on stricter sealice rules, a NOK 1.5m fee.
The Norne analysts don’t see the prospect of salmon jumping to NOK 100/kg as likely. However, they say:
When one of the most efficient salmon producers that has survived more than 20 years of mad swings says sea lice restriction of 0.1 per fish means salmon prices will rise to above NOK 100 per kilo, we are listening. It means there is a substantial risk of a sharp price increase and a boom for salmon stocks ahead.
Spot price above NOK 100 per kilo would destroy the market, they said:
Spot price above NOK 100 per kilo would bankrupt the salmon processors as they would not be able to pass this price along unless they had bought salmon 12 month forward and that is something few have the wits to do. Try to bring NOK 100 per kilo to a food retailer like Wal-Mart’s Sam’s Club where operating margins the last 10 years have read almost like judges grades in old Olympic ice dancing: 6.1, 6.0, 5.9, 5.8, 5.6, 5.9, 6.1, 5.9, 5.9, 5.6. The best food retailers run their business purely with a margin target. No wonder they buy on long term contracts when prices are low and that is what will happen at the end of a price spike for salmon as demand gets destroyed and needs to be rebuilt.
The analysts have buy ratings on Grieg Seafood, Leroy Seafood, Bakkafrost, Salmar, Norway Royal Salmon and Marine Harvest.
“Normally this would be a time to watch out for a jump in global supply, but the current possible provider of growth Norway has opted for slow growth,” they commented.
“Some salmon farmers will cry as they possibly lose all their salmon and all others including financial investors might laugh if salmon prices and salmon shares spike upwards.”