the outlook for groundfish: positive or very positive?

1 Rabobank International

The outlook for groundfish: positive or very positive?

Rabobank International

15 August 2012

Jeroen Leffelaar, Global Co-Head Animal Protein

http://nor-fishing.no/wp-content/uploads/2012/03/NorFish_rgb.zip

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What’s on our minds: the Euro……

Source: Macbond 2012

Unemployment and uncertainty are increasingly impacting individual consumers all over Europe

Low Euro may be good for Europe’s overall export position, it impacts cost in the white fish industry

US, NOK and Ruble denominated raw material become more expensive

Consequently processing fish in China is more expensive

EUR/USD Exchange-rate and Net Speculative position


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31-12-2004 31-12-2005 31-12-2006 31-12-2007 31-12-2008 31-12-2009 31-12-2010 31-12-2011

wheat corn soybean meal soybean oil

....but also the spike of agro-commodities

Currently we are close to approaching levels of the 2007/08 season

Weather problems and record low stock levels have created shortages of key agri-commodities

Investors are quickly rushing into commodity contracts further inflating spot prices

Source: Bloomberg 2012

Key Agro-commodities index 2000=100


...to conclude: fish meal and fish oil back on the rise

Source: Oilworld 2012

A lower TAC in Peru and strong demand from China for pig and aquaculture feed

Additionally the salmon feed industry is running at full capacity

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Fish oil,any orig,cif N.W.Eur Fishmeal, 64/65%, Bremen fca(h)

Fish meal and fish oil usd/mt


All protein species are facing their constraints. Groundfish may have a slightly different faith than others

Meat processors are facing increasing resistance from retailers to pass on the feed higher cost

Overall meat consumption is stagnant at best

Cost are rising for many seafood producers, particularly for those in aqua culture

Non-Euro denominated wild catch may become more expensive but additional supply may offset this

Euro crisis impacting demand

Supply increase

impacting price levels

Rising cost due to agro commodity

prices


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12.3% 15.6%

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Salmon is experiencing one of the largest growth in supply ever

Source: NOS Clearing 2012

Strong supply from Norway is coinciding with Chile recovering from the ISA outbreak

Salmon prices are down to 25 Nok/kg having been above 40 NOK/kg in early 2011

A 37% drop in price due to Norwegian exports rising by more then 30% in H1 2012

Atlantic Salmon prices NOK/kg (left axis) and yearly global supply change (right axis)


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Redfish

Cape hake

Pacific cod

Hoki

Haddock

North Pacific Hake

South American Hakes

Saithe

Atlantic Cod

Alaska pollock

In the broad groundfish market we are witnessing gradual supply expansion

Source: Rabobank based on Groundfish forum and FAO data 2012

The groundfish sector across the world is benefiting from years of improving sustainability

And maybe a helping hand from global warming?

Biomass is high and still increasing for key species

Most of the industry is now MSC certified and considered the best managed wild catch industry globally

Global groundfish production


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Norway Iceland Russia Denmark UK Spain Sweden Germany Canada Other

Although Atlantic Cod production is growing somewhat faster

Source: Rabobank based on Kontali data 2012

Atlantic Cod is probably the fastest expanding groundfish species in terms of TAC

Driven by Russia and Norway, TAC has grown on average by 8.4% in the last four years

Excellent biomass may allow for a 15-20% expansion of the TAC in 2013

If the additional volumes would be harvested will it create a price crash?

Atlantic Cod production


….Probably no price crash, but some cod niche products may be impacted

Source: Kontali Cod Report 2012

Most impacted products are those unique to cod such as clip fish and salted cod

These already have had a price decline

The bulk of the products which can be seen as part of the broader groundfish category (such a blocks and fillets) will be less impacted by the increasing volumes


Groundfish products are primarily positioned in the “recession resistant zone”

Source: Rabobank 2012

Products such as fish and chips, fish fingers, surimi and VAP frozen seafoods are typically more resilient to recessionary dynamics

At retail level groundfish are strongly represented in the frozen seafood category – typically a better performer in recessions

At food service level groundfish are more exposed to QSR then other seafood products - also positive in recessions

Note on salmon: A very large part of salmon is sold fresh and smoked – this is not a market with much overlap with the markets of the groundfish species

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In addition market share can be won back from the farmed fresh water species

Source: Intrafish, Kontali Monthly Groundfish supplement 2012

Pangasius is on the decline in Europe caused by poor quality, sustainability issues and poor image of the species. This will be very hard to improve.

After years of growth Tilapia consumption in the US declined in 2011

It is hard to imagine that China will continue to dominate the export of Tilapia given its internal demand, increasing pressure on resources (land, feed, water)

Long term: Either exports will decline or global tilapia prices will increase significantly


In the last 5 years groundfish has returned as the leading white fish source

Source: Rabobank based on FAO, Kontali and Groundfish form figures

In the 1990 the groundfish industry was declining as TAC had to be cut to ensure long term sustainability. There was a growing, but very small fresh water white fish industry.

Between 2002 and 2008 while the groundfish supply stagnated pangasius and tilapia expanded greatly. At that time expectations were that the market will be dominated by farmed products.

High commodity costs, declining image and production constraints have greatly reduced the growth rate of white fish aquaculture in the last 5 years. At the same time strong wild biomass has allowed for increasing catches of groundfish

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Groundfish Fresh water white fish

-0.5% p.a.

• Market declining • No fresh water species presence yet

• Fresh water species booming

• Groundfish recovering • Fresh water low growth


In the future China may become an important market for groundfish products

China currently is a growing consumer of surimi but otherwise not a market for groundfish

VAP seafood and frozen seafood can not be sold at a wet market

Modern retail can supply both a frozen and a fresh VAP seafood category which in the west has been the realm of the groundfish

Traditional Chinese QSR has no breaded and battered groundfish fish. Rapidly expanding western fast food chains could be a platform for and expansion of these product


Population growth and urbanization

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1,396 mln

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Henan Gansu

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Beijing

Anhui Shanghai

Sichuan Zhejiang Chongqing

Taiwan

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Urbanization Rate

57.5% 42.5%

53.8% 46.2%

47.3% 52.7%

36.2% 63.8%

China’s population forecast in 2020 Source: United Nations, Rabobank

Current urbanization rate by province Source: China Statistics Yearbook 2009

China’s cities will gain 182 million consumers in the next 10 years bringing the urban share to ~60%


China’s consumer channels are adopting Western model

QSR and food retail dominate this change

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China’s supermarket growth Source: Rabobank, Company data (Trillion RMB)

QSR revenues in China Source: China Statistics Yearbook (Billion RMB)


Key takeaways

Its a volatile environment in Europe also impacting the seafood industry

– Consumer spending in the EU under pressure

– In general production costs are increasing while the end products price are falling (for example salmon and shrimp farmers world wide)

– Groundfish sector may be exposed to increasing fuel cost and the consequences of moving exchange rates

The groundfish sector is also experiencing increasing supply, but we do not believe a price crash similar to that of salmon is likely to occur

– Groundfish end products are largely found in recession resistant parts of the seafood market

– Salmon is not a real competitor

– Competition with fresh water white fish is reducing. We do not believe that Pangasius and Tilapia will erode prices and continue to grow at historical levels in Europe or the US

– Key markets Spain and Portugal are holding up to date. Increasing demand from Brazil

Long term positive view on the sector

– Strong commitment to sustainable fishing has paid off with excellent biomass conditions

– Also in the long run cost competiveness of Tilapia and Pangasisus is unlikely to improve versus the wild caught groundfish, therefore allowing groundfish to recapture market share

– Potential additional demand for groundfish:

Asia and China are largely unexplored markets for this industry

Market penetration of modern retail and Western food consumption patterns may unlock significant opportunities for groundfish in Asia

Increasing internal demand may limit export of competing white fish products from China

Long term outlook groundfish sector is positive

A sustainable sector with good biomass

Potential additional demand in emerging markets

Short term demand could be impacted rather by worsening global economic conditions and exchange rates than additional quota

the outlook for groundfish: positive or very positive?

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