The Q3 of our discontent

Over the past few weeks, publicly traded salmon companies have been releasing their quarterly reports and, in general, Q3 was challenging for most. Here are the EBIT/kg figures for a few of them:

Figures from Quarterly reports converted to Euros

(I’ve used current conversion rates to translate 2023 figures from DKK and NOK to Euros – because I am a lazy and unreliable narrator.)

We can relax because they’re all making a ton of money on a YTD basis but Q3 2024 was clearly a rough patch for salmon farmers. Quarterly results for all the companies listed were significantly below earnings for the same quarter last year. YTD results are more mixed – a couple were up; a couple were down.

Market conditions

Prices were low all summer but, in week 39, prices dropped to a break-even or worse level. These were the lowest prices seen for quite a few years and a 50% drop from the peak in March/April.

Fish Pool prices courtesy of @Dag Sletmo

If one takes a long-term view of the salmon market, the appetite for farmed salmon is insatiable. In the short term, however, a fragile balance exists between supply and demand and a temporary surplus in the market can crush prices. In September, the supply out of Norway was estimated to be up 10% over the previous year.

Most salmon companies have focused their resources and energies on commodity products – primarily dressed head-on (DHON) and fillets (trim C or D). For the non-farmers reading this blog, DHON is a fish with gills-in, guts removed, cleaned, graded for quality and sold according to size. Trim C and D fillets are fillets trimmed to certain specifications. Trim D for example is a quality graded fillet, fins removed, tail squared and, generally, pin-bones removed. A few companies, Cooke Seafood is one of them, have developed sophisticated value-added programs but they are more the exception than the norm.

There are a few drivers for this:

1)        Salmon farming is a cash-is-king business – at least it used to be. Prior to the run of super profits, we have seen in the last 8 – 10 years, it was a business where cash could be scarce at times and after 3 years of raising salmon, a fresh, commodity sale was a good way to get the fastest return on cash.

2)        From an economics perspective, true value in salmon farming is created by the conversion of feed into flesh. For the most part, everything else is limiting the loss of value or pure costs that reduce value. Value-added production, while it, in theory, improves returns and can boost profits, if you have limited investment funds available, it will always be a priority to invest those funds in areas of the business that increase the amount of fish produced, improve efficiency and/or limit loss. In areas, like Norway and Chile, where growth is possible, every effort has gone into maximizing production volume.

3)        A key metric for publicly listed companies is tons of production per full-time-equivalent employee. Creating and selling value-added products, add complexity and employees to production, sales and administrative roles. They are labor-intensive to produce and sell and, given the relatively lower margins of these products, profitability per employee is decreased. Cooke Seafood, the company mentioned above, is a family-owned business and is not required to adhere to this metric.

4)        Consumers have a strong preference for fresh salmon and will not pay the same price for frozen. (This is a preference rooted in tradition rather than fact, but that’s a blog post for a different day).

Unlike other fish and protein markets, salmon producers have little to no ability to manage their release to the market through a finished product inventory. Once the fish are harvested, they must be sold or go to waste. In Q3, many farmers in Norway were forced to harvest into a weak market. There were two main drivers for this:

Maximum Allowed Biomass (MAB) rules

In Norway, salmon farming licenses have an upper limit for living biomass on a farm at any given time. Farmers stock their farms with an amount of fish that will exceed the permitted biomass on a farm if not controlled by harvesting. In summer, a farm permitted for 4,000 metric tons, with 1 million 4 kg fish feeding at 0.9% body-weight/day will register daily growth of 30,000 kgs. To stay below their MAB limit, they will need to harvest no less than 30 tons per day.

Prices are always lower in Q3 and, for the most part, farmers can manage their biomass to maintain a constant presence in the fresh market and minimize sales during Q3 but planning for full MAB utilization and rapid summer growth will always be a challenge.

Emergency harvesting

The factors that made this Q3 extra spicy were high summer temperatures (faster growth if you didn’t have fish health challenges), sea lice pressure and jellyfish (maybe?)

In most regions, farmers are required to monitor sea lice infestations on a weekly level and implement emergency harvesting if they can’t keep levels below a certain threshold through treatments. I don’t have the exact number at my fingertips, but the fish media published several articles mentioning farmers exceeding sea lice tolerances. These harvests contributed to a volume increase and the market had trouble accommodating. It likely didn’t help that a lot of these fish would have been undersized and potentially downgraded due to sea lice damage.

What’s next?

My expectation is that prices will rise to eye-watering levels in the next few weeks and farmers will make up everything they lost in Q3 and then some. Supply in the next 6 months will be very tight. A few points for consideration:

Jellyfish attacks in the fall of 2023 resulted in an unprecedented amount of fish harvested – up to 40% per some reports – with skin damage. You cannot have this level of damage in a fish population without significant impacts on mortality and growth.

Extraordinary sea lice driven harvesting will have removed substantial biomass from the population and removed undersized fish from the biomass that would have been needed to drive further growth. So not only is the biomass reduced, but the potential future biomass is also reduced as well.

Once seawater conditions stabilize, farmers will scale back their harvesting to the minimum possible level to try and recoup some growth and come closer to the projections they issued for the full year. The strongest prices are typically experienced in March/April and unless they are forced to do otherwise, they will try to have the maximum sales in that period.

This might be a bit of non sequitur but in the salmon industry, when Norway get’s a cold, the rest of us get pneumonia. Norwegian volumes drive the market and there is almost no potential that any other country can produce enough to offset the ebbs and flows from Norway. (I recognize that one of the examples I used, Bakkafrost, is not Norwegian. Still Vikings though)

Thanks a ton, if you are still reading. Feedback, criticism, fulsome praise can be tendered via my LinkedIn profile or by email at info@AlanWCook.com.