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 QFFI's Global Seafood Magazine - January 2008  |
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With US Economic Uncertainty for 2008, Are Hard Times Ahead for Shrimp Market?
New strategies are needed to deal with weak dollar as well as possible downturn or recession in the United States, one of the world’s leading destinations for imported shrimp and other high-value frozen seafood and fishery products. Companies which are heavily invested in the global shrimp trade are finding it increasingly difficult to make money in their businesses. Faced with higher costs and an uncertain economic outlook, the old ways of doing business may need a fresh approach in order to stay in the game. On the producer side, the continuing slide of the US dollar has made exports to the United States very costly. Thailand, which is the largest supplier to the market (accounting for 34% of all imports), has seen the dollar fall 15% against its currency, the baht, since the beginning of 2007. The shrinking dollar is not the only problem facing producers. Escalating energy costs along with labor shortages are two additional concerns. On the other hand, Thailand’s exports to the US for the first 10 months of 2007 showed a slight increase of 0.5% in tonnage over 2006, and this demonstrates the resiliency of the industry in spite of some serious obstacles. Margins all along the production supply chain have been sharply reduced, but producers keep increasing their output. The big question is what happens if the US economy goes into a tailspin in 2008 and beyond? The answer is most likely lower consumption of shrimp, and low prices. On the buyer side, American companies are facing a number of economic problems that will influence future business and buying decisions. The rhetoric of whether the US is headed for a recession or a downturn is increasing, but the pessimists are growing louder and giving off warnings of serious trouble ahead. There are many factors that support these warnings. First, an imploding housing market that has fallen five percent in the past 11 months and a glut of unsold homes indicates that prices have further to drop. Second, tighter credit resulting from the sub-prime loan crisis means that consumers will not be able to borrow as easily against home equity to support their spending habits. Third, the Federal Reserve lowered the Fed Funds interest rate again in November. Lower interest rates means investors will earn less from interest-bearing securities denominated in dollars, making the greenback less attractive.
Fourth, and most worrisome of all, consumers may cut their spending sharply, which could send the economy into a tailspin. There are some forecasts that suggest the US may be headed for the largest consumer pullback in the last 25 years. It is a “Perfect Storm” of declining housing values, tighter credit restrictions, and higher costs for food and oil that will push consumers into cutting back on spending. If this happens, it will certainly have a negative impact on shrimp consumption and prices. While the “core” inflation rate in the United States is running at about 2% this year, the government says that food prices have risen about 4.4% when compared with last year. Gasoline is up 23% from a year ago. Oil prices have spiked 45%. Heating oil has jumped 10% just in the last month. Bread prices have inflated 16%, while coffee has perked up 10%, and orange juice purchases squeeze an additional 25% in payment from buyers. Eggs in mid-November were up from 89 cents last year to $1.35, and the wholesale price for boneless, skinless chicken breasts is $1.25, up from 95 cents last year. This is not just a US problem. The FAO Food Outlook for 2007 says that in September, global food prices were up about 37% from September 2006. Most of this price inflation can be attributed to higher energy costs, which equate to greater costs for transporting food, the production of fertilizer, and running production facilities. Shrimp farmers and processors are not exempt from this energy cost escalation. The FAO report concluded that higher energy costs along with the growing demand for food will push most agricultural commodities upward. Rising consumer demand in China and India will be a major factor in driving up food prices around the world. How will shrimp prices be affected by these factors? A lot depends on the available supply and how consumers allocate their discretionary income. Let’s look at the supply and market sides for some possible answers. Expect 12-15% Production Increase At a recent Global Aquaculture Alliance (GAA) conference in Madrid, Spain, projections of farmed shrimp production indicate that growth will be around 12-15% for 2008-09. Total world production of farmed shrimp is projected at 3.6 million metric tons by the end of 2009. In Asia, for the period of 2001 (when p. vannamei was introduced) to 2006, the production of white shrimp jumped to 1.6 million tons.
In the period of 2007-09, this figure is expected to jump to 1.8 million tons. The production of farmed vannamei whites will continue to be the shrimp commodity of choice for farmers, worldwide. The reasons are simple: white shrimp are more disease resistant than black tigers; they cost less to grow; and they allow for more efficient production and larger yields. Asian farmers can get a minimum of one additional white shrimp crop than they can with black tigers. It is estimated that black tigers now constitute less than 10% of the total global farmed shrimp production. Just a few years ago, this figure was at 50%. Additionally, there are projections of increased white shrimp production in Indonesia, and an ongoing transition from tigers to whites in Vietnam. New production areas, such as the Philippines, have enormous potential if the government can ever get its act together to support this new specie initiative. In the Americas, Ecuador’s exports to the US are back close to where they were prior to 2000 when the white spot virus almost wiped them out. And finally, Mexico is coming on strong as a provider of large farm raised whites in the 16/20 to 26/30 range. It should be noted that Asian packers are beginning to develop efficient ways to grow vannamei whites to larger sizes. If they are successful, it will put additional pressure on the production of black tigers as whites are less expensive to grow and the market price differentials are considerable. What does all this mean? The first thing that comes to mind is that there will be no shortage of shrimp supplies in 2008 and for the foreseeable future. There is more than enough production and there certainly will be enough to meet any increased demand despite tough economic conditions. At the GAA conference, the top five issues and challenges faced by shrimp producers were listed as follows:
Banned chemicals/antibiotic use, moderately important. With respect to trade barriers, the biggest problem for farmed shrimp producers and importers in the past four years has been the contentious issue of shrimp anti-dumping duties and continuous bond requirements. In June 2007, the World Trade Organization issued a preliminary determination in favor of Ecuador, stating that the US Department of Commerce’s use of “zeroing” to calculate anti-dumping duties was illegal. Zeroing, or counting only shipments sold at below market value without the consideration of shipments made at or above market rates, was challenged by shrimp producers in Ecuador. In August, the final ruling in favor of Ecuador led to the dissolution of duties against producers in that country. Shortly thereafter, India and Thailand filed complaints against the bond requirements. The WTO ruled in October 2007 that cash bonds required by the US to allow foreign shrimp suppliers to get their product into the US are illegal.
The result of this ruling may be a dramatic reduction or possible abolition of the current duty on Thai shrimp. India will have the continuous bond requirement rescinded but it will still have to pay 7.22% duty, based on the latest administrative review. Furthermore, it will have to move forward with its own complaint against zeroing. Do these rulings mean the end of the shrimp dumping case? Not yet, but there is now light at the end of the dark tunnel. The rulings certainly mean lower costs for some of the defendants in the anti-dumping case, and they can eventually expect to receive some reimbursement of the bond monies and duties that have been paid if the rulings continue to be as favorable as they were for Ecuador. Lower costs will result in increased exports to the US from countries such as India, whose sales to the US were off 23.9% through October 2007. Imports Fall Eight Months in Row US imports of shrimp through the month of October, 2007, were down for the eighth consecutive month when compared to 2006. However, the volume was only off by about 3.8%, and with the final two months of 2007 expected to be seasonally strong, it now appears likely that 2007 imports could be down about 5% when compared to the 2006 figures. This is not a bad performance when one considers that 2006 was a record year for imports. What has changed is the composition of the product forms and reduced shipments from China. There are more white shrimp and fewer tiger. There has been a pronounced shift towards more production of raw peeled shrimp in 2007, about 17% higher than 2006. When the USFDA made its detention announcement, there was speculation that prices would escalate, as former importers of Chinese shrimp would have to seek out their replacement supplies from other Asian producers. It is interesting that this did not happen and indicates that the shortfall of Chinese shrimp was easily made up by other Asian sources. Again, it demonstrates the resiliency of the Asian shrimp suppliers in spite of serious cost and economic problems facing them. The real problem for China is one of a public relations disaster. Even though the FDA concluded that this was not a long-term health issue and there was no danger to consumers, the damage was done. Overnight, it seems that the words “Product of China” became a term synonymous with inferior quality and inadequate export controls. At the end of the day, it was a wake up call for China to get its house in order. It will cost the PRC billions of dollars to install the seafood safety controls and infrastructure needed to meet global import requirements.
China will fix the system and repair its image over time as a reliable farmed seafood supplier to the US. However, high American shrimp tariffs will still be an insurmountable barrier for most Chinese producers, with breaded shrimp being the exception. The strong domestic demand for shrimp in China’s consumer market will probably mean that the majority of China’s future production will flow to its internal market. Prices Low, Cost of Production High Every shrimp producer will tell you that international market prices are too low. They will say that their costs are going up (energy, labor, tariffs and exchange rates) and their margins are shrinking to the point that there is no longer any profit in the business. Every shrimp buyer will certainly agree that prices are low, but they add that the prices are nothing more than a reflection of the fundamental patterns of supply and demand. What is keeping prices low is too much supply chasing too few customers. For prices to go higher, either the supply must decline or new markets must be developed, or some combination in between. There is validity in both viewpoints. Both sides are facing higher operating costs and decreasing profits. The introduction of vannamei whites into Asia in 2000 has been the primary factor in the decline of prices over the last few years. Since 2001, Asian suppliers have shipped over six billion pounds to the US market. As expected, this supply has put a lot of pressure on prices. Lower prices created a consumption boom and the consumer has been the primary beneficiary. Shrimp was previously perceived as a “gourmet” item by US consumers and was generally ordered on special occasions. The increased volume and the resulting lower prices made shrimp almost an every day, affordable food resource. Unfortunately, it has pushed prices down to marginal profit levels. This incredible growth will continue, perhaps at a slower pace if the US falls into an economic downturn, but it will continue nevertheless. The production trend in Asia and the Americas appears to be towards raising larger sizes. This has shortened the availability of smaller sizes, especially from 41/50 to 71/90 headless shell-on. This may explain why the market has seen some price increases in the last quarter of 2007, when spot demand and prices are typically quiet. Most of the imports during the last quarter of each year are destined for contract or program business targeted for the year-end holidays. As black tiger shrimp production continues to decline in favor of white shrimp, it is expected that more large whites will continue coming out to fill the black tiger void. More production in large sizes in Asia and the Americas should keep 16/20 to 26/30 prices at or near current price levels. Shorter availability of small sizes from 36/40 to 71/90 may push these prices to higher levels in the first quarter of 2008. Overall, it can be said that the upward price movement seen at the end of 2007 is being driven by supply side economics and not because of increased demand from the market side. A recession in the US will negatively impact price trends through more selective consumer spending, and this will force shrimp consumption down. On a positive note, it is likely that a continued firm price trend will be witnessed during the first three to four months of 2008, and then a seasonal decline in anticipation of new harvests. Beyond that point, it is just too difficult to make any predictions except that the second half of 2008 may be a more difficult time for shrimp traders than the first half. Recession or not, there are ample signs that American consumers are already tightening their belts. Hold onto your hats for the bumpy road ahead in 2008-09. In Conclusion Slower growth due to higher energy costs, tighter credit standards, declining housing prices, higher food costs and a declining dollar will impact the shrimp market in the next couple of years and beyond. What are some possible strategies that companies can implement to lessen the impact of these looming global threats? Producers may want to consider the following:
Importers may want to consider:
All of these suggestions are easy to write or talk about, but very difficult to execute. Nevertheless, in difficult business conditions, those companies that can innovate, change direction, and execute their plans successfully will be the winners over the long term. |
