The salmon farming industry, a bankers perspective RaboResearch Food & Agribusiness April 2018, Santiago De Chile Gorjan Nikolik 1
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Table of Contents Sections I Salmon is probably the most sustainably produced protein 4 II Good demand, supply discipline and strong profitability for the foreseeable future 8 III Chile is back on track and closing the gap with Norway 16 3
Farmed salmon is probably the most sustainably produced protein 4
Compared to other proteins and even other fish salmon has an industry leading FCR The low FCR is one of the main features and advantages of salmon farming This is caused by the fact that there is no gravity under water and the fact that salmon do not need to heat their bodies. These are the two main energy losses of any farmed animal. Salmon also outperforms most other industrially farmed seafood as it has the most advanced feed formulation. Eventually other farmed seafood may catch up as technology from salmon farming is applied to other species Comparison of Salmon with other proteins and fish Source: Marine Harvest 2016 5
The low FCR combine with the high edible yield to make salmon some 3x more efficient then chicken Comparison of Salmon with other proteins The anatomy and shape of salmon is simple with no large legs, bones, hoofs, feathers or multiple digestive organs. This streamlined muscular shape creates a very high edible meat yield compared to animal proteins. Of course in the case of both salmon and other animal proteins 100% of the farmed animal is actually used, but the low quality offal and rendered products are a much smaller percentage in the case of salmon then in farmed terrestrial animals Protein Retention 31% 21% 18% 15% Energy Retention 23% 10% 14% 27% Edible Yield 68% 46% 52% 41% Edible Meat per 100 kg fed 61kg 21kg 17kg 4-10 kg Source: Marine Harvest 2016 6
Also due to low FCR and the recirculation in the fresh water stage very little fresh water is used in salmon production Important to note that although fresh water use in animal farming is certainly an issue globally, due to the cold climate requirement for salmon farming salmon is only produced in regions with plentiful fresh water resources. This is not the case with many animal farming regions in many parts of the developing world where fresh water use can be the main limiting factor to animal farming Water use in liters per 1 kg of edible weight 16.000 14.000 12.000 10.000 8.000 6.000 4.000 2.000 0 Salmon Poultry Pork Beef Source: Norwegian Seafood Export Council 2015 7
Salmon is the equivalent of a TESLA car in comparison to other proteins when it comes to CO2 emissions per kg Greenhouse gasses (in kg CO 2 -equivalents per kg produced) 35 30 25 20 15 10 5 0 Salmon Pork Beef Kilde: Eurostat aquaculture and Wild catch, Norwegian Seafood Export Council Source: Alf Helge Aarskog NASF 8
In terms of natural conditions at the farm salmon stand out from other proteins In the EU pigs have to have a minimum space requirement of 0.8m2 per pig They reach 120 kg in 6 months So approximately ten100kg pigs would be housed in a 2mx4m area The EU is a front runner in animal welfare. Other regions have 0,6m2 per pig or less Pigs have much less space to move and exhibit natural behaviour then salmon in virtually any commercial farm other then the most organic free range 9
There is growing criticism on the living conditions in livestock farming Standard chicken minimum requirement: 21 broilers per meter square Premium products are stocked at the rate of 13 to 17 broilers per m2 So for example in 2X4m enclosure there could be approximately 160 to 120 broilers They reach 2kg in approximately 6 weeks Despite major improvement happening currently in the chicken industry salmon still compares very favorably 10
Space available for salmon in salmon farms is more then even most free range or biological terrestrial farmed animals In salmon farming the environment is three dimensional so it is hard to compare but the ample space is obvious and salmon can utilize all of it Salmon are living in their natural environment, and exhibit natural behavior able to school and jump Most density limits are in the range of 10-15kg per m3. This represents approximately 1% to 1,5% of the volume used for farming The growth is slow growing to 5kg in nearly 2 years Perhaps we can call all farmed salmon free range salmon? Source: illustration AKVA Group 2018 11
But it is the region and the farming environment which is the truly unique feature of salmon farming Salmon is farmed in some of the least populated parts of the world The pristine environment where Salmon is farmed is the most unique feature of the Salmon industry Cold, pure waters, clean air, strong currents away from any industry or major population centres This is an open natural environment that only the most organic, and free range poultry, pork or beef can compare too Most people would like to go on holiday in the area where salmon is farmed 12
Key point: Salmon is probably the most sustainable protein 1 Very efficient use of feed commodities and fresh water salmon is the Tesla of the farmed proteins 2 All farmed salmon is basically free range and with salmon farmed only in their natural habitat, far from human population centers and with enormous space availability and ability to display natural behavior 13
Good demand, supply discipline and high prices for foreseeable future 14
In recent periods Americas and China had driven salmon consumption Estimated Volumes Compared to Q4 2016 Markets Q4 Q4 2016 Volume % EU 268,200 253,200 15,000 5.9% Russia 23,000 19,800 3,200 16.2% Other Europe 24,200 20,200 4,000 19.8% Total Europe 315,400 293,200 22,200 7.6% USA 103,100 87,000 16,100 18.5% Brazil 21,800 19,600 2,200 11.2% Other Americas 31,600 28,300 3,300 11.7% Total Americas 156,500 134,900 26,600 16.0% China/ Hong Kong 26,200 19,000 7,200 37.9% Japan 16,000 16,600-600 -3.6% South Korea/ Taiwan 12,000 9,500 2,500 26.3% Other Asia 20,400 16,000 4,400 27.5% Total Asia 74,600 61,100 13,500 22.1% All Other Markets 32,000 30,200 1,800 6.0% Total 578,500 519,400 59,100 11.4% Source: Rabobank, Marine Harvest, Kontali, 2018 15
Positive Development of Global Salmon Markets Is Expected to Continue Potential growth of salmon markets, 2008-2028e 000 tonnes 4.000 CAGR 2008- CAGR -2028 3.500 3.000 4.4% EU 3.6% 3.6% US 4.7% 4.6% Russia 0.1% 1.7% 2.500 4.9% Brazil 8.0% 5.5% 2.000 China/HK/ Vietnam 16.1% 9.4% 1.500 Others 6.4% 4.4% 1.000 Total 4.9% 4.4% 500 0 EU US Russia Brazil China/HK/Vietnam Others 4.4% p.a. growth = 1.4 million MT more by 2028. This approximately another Norway and Canada in Source: Kontali, Rabobank 2018 16
Globally supply is now constrained by legislation, which means the double digit growth rates of the past will likely not repeat YOY change in global Atlantic Salmon supply and forecast (%) 25% 22% 20% 15% 10% 5% 13% 7% 8% 5% 4% 10% 7% ISA outbreak 12% 9% Lice and Algae Bloom 4% 7% Depending on biological factors 3-4% growth is possible in the mid term 5% 5% 5% 4% 3% 2% 2% 0% -1% -1% -5% -7% -10% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016 2018E 2019E 2020E 2021E 2022E Source: Rabobank, Kontali, Subsecretaría de Pesca, 2018 17
Aug-14 Oct 14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct 15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct 16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 The tight S/D balance has gradually shifted the long term price expectation from 35-40NOK/kg to above 55 NOK/kg Norwegian Salmon price futures by Fishpool NOK/kg 80 75 70 Up shift due to poor biology and low growth in in both Chile and Norway Slight improvement but long term price is now above 55 NOK 65 60 Russian Embargo 55 50 45 40 35 Present time (April 2018) Aug-14 Oct-14 Jan-15 Apr-15 Jun-15 Sep-15 Dec-15 Feb-16 Apr-16 Jun-16 Oct-16 jan-17 Mar-17 May-17 Jul-17 Oct-17 Oct-18 Source: Rabobank, Fishpool, 2018 18
Innovation is booming in the sector, roughly there are two types: Transformational and incremental Examples of transformational innovation in salmon farming, land based farming and off-shore farming Land-based technology There is also more incremental innovation occurring focused on improving the current business model Offshore faming Land-based farming Challenges of the coastal zone Salmon lice Concentration of stakeholder interest Available space for expansion Environmental impacts of concentrated activities Offshore farming Shoreline Sources: Company website, Rabobank Research, 2018 19
Other innovations are aimed at improving the current farming system, particularly in terms of biosecurity Many new technologies are being developed which can impact the biological performance of salmon farming especially versus diseases and lice Examples of technological innovation in in the salmon farming sector In recent years many global agro industry leaders (e.g. Zoetis, Corbion, Benchmark, Cargill, EW Group) have entered various salmon farming input technologies bringing scale and expertise from other industries There are also many innovations unique to the salmon industry such as the use of cleaner fish or the use of fresh water in well boats which are increasingly more effective at cleaning lice Improved Genetics ThermoLicer, cleaning lice with warm water Cleaner fish Algae based oils and meals for salmon feed Feed solutions New vaccines Improved lice treatments in well boats Source: Rabobank, company websites 2018 20
We expect more controlled growth and good profitability in the foreseeable future 1 Demand growth is strong while supply is legislatively constrained resulting in an excess demand situation 2 Consequently the new normal is much higher price levels for at least the medium term 3 Innovation is booming in the salmon industry, but it is much more likely to improve the cost function of the current farming model than transform the industry with a move on land or off shore 21
Chile is back on track and closing the gap with Norway 22
Due to improving biological conditions and higher harvest weight Chilean cost of production is now similar to that of Norway Chilean harvest weight is now much more similar to Norway Which is a key reason why cost per kilogram in USD is converging Harvest weight 5,60 7,0 5,40 6,5 5,20 6,0 5,00 5,5 4,80 5,0 4,60 4,5 4,40 4,0 4,20 3,5 4,00 3,0 4Q 2015 1Q 2016 2Q 2016 3Q 2016 4Q 2016 1Q 2Q 3Q 4Q Harvest weight Chile wfe Harvest weight Norway wfe Cost/kg Chile Cost/kg Norway Source: Kepler Chevraux 2018 23
The improved cost combined with a reduced Norwegian premium means profitability is now similar Achieved price in by the Chilean salmon industry is now much closer to that of Norway Meaning the Chilean industry now has comparable in profitability to that of Norway on a per kg basis 8,0 3,5 7,5 3,0 7,0 2,5 6,5 2,0 6,0 1,5 5,5 1,0 5,0 0,5 4,5 0,0 4,0-0,5 3,5-1,0 3,0 4Q 2015 1Q 2016 2Q 2016 3Q 2016 4Q 2016 1Q 2Q 3Q 4Q -1,5 4Q 2015 1Q 2016 2Q 2016 3Q 2016 4Q 2016 1Q 2Q 3Q 4Q Achieved price Chile Achieved price Norway EBIT/kg Chile EBIT/kg Norway Source: Kepler Chevraux 2018 24
Contact Us Rabobank Gorjan Nikolik Senior Analyst Seafood Telephon e +31 30 712 3825 Mobile +31 6 1243 2463 E-mail gorjan.nikolik@rabobank.com This document is meant exclusively for you and does not carry any right of publication or disclosure other than to Coöperatieve Rabobank U.A. ( Rabobank ), registered in Amsterdam. Neither this document nor any of its contents may be distributed, reproduced, or used for any other purpose without the prior written consent of Rabobank. The information in this document reflects prevailing market conditions and our judgement as of this date, all of which may be subject to change. This document is based on public information. The information and opinions contained in this document have been compiled or derived from sources believed to be reliable; however, Rabobank does not guarantee the correctness or completeness of this document, and does not accept any liability in this respect. The information and opinions contained in this document are indicative and for discussion purposes only. No rights may be derived from any potential offers, transactions, commercial ideas, et cetera contained in this document. This document does not constitute an offer, invitation, or recommendation. This document shall not form the basis of, or cannot be relied upon in connection with, any contract or commitment whatsoever. The information in this document is not intended, and may not be understood, as an advice (including, without limitation, an advice within the meaning of article 1:1 and article 4:23 of the Dutch Financial Supervision Act). This document is governed by Dutch law. The competent court in Amsterdam, the Netherlands has exclusive jurisdiction to settle any dispute which may arise out of, or in connection with, this document and/or any discussions or negotiations based on it. This report has been published in line with Rabobank s long-term commitment to international food and agribusiness. It is one of a series of publications undertaken by the global department of RaboResearch Food & Agribusiness. 2018 - All Rights Reserved. 25