Senior AnalystRabobank

Gorjan Nikolik

The Appeal of Fishmeal:Fishmeal’s Transformation from Commodity

to High-Priced, Strategic Protein

Senior AnalystRabobank

Gorjan Nikolik

•  Gorjan Nikolik is a senior analyst on food and agribusiness for Rabobank International.

•  Since joining Rabobank in 2005, are has focused on the global seafood sector, including aquaculture, wild catch, seafood trade and processing.

•  In his primary role, Nikolik works as an internal consultant to Rabobank departments such as Mergers and Acquisitions, Leveraged Finance, Venture Capital and Credit Risk Management.

•  He also produces research articles covering the seafood industry.

Rabobank international

Gorjan Nikolik, Rabobank Food and Agri-business research and advisory

October 2015

Appeal of Fishmeal

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Rabobank: global leading food & agribusiness financial services group

•  Formed in 1898 based on the Raiffeisen cooperative banking model •  Belongs to the top 25 largest bank groups worldwide, >700 billion EUR in assets

•  AA+ rated – among the most capitalized and safest privately owned bank groups

•  Focused on the F&A sector - active in 52 countries; and most key food producing regions

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We recently produced a report on the Fish Meal industry, here are the main points

Source: Rabobank 2013

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Seafood consumption globally is growing

•  In developing countries a diet change from grain/rice towards higher value proteins

•  Healthy and indulged food demand for wealthier consumers globally

Aquaculture is the only way to increases seafood supply

•  Wild catch is fixed

•  50% of the industry needs to provide 100% of the growth

Demand drivers for fish meal: Aquaculture volume growth

Source: FAO FIGIS

Global aquaculture production (excluding aquatic plants) 1990 – 2013 per key species group

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Molluscs Carps, barbels and other cyprinids Other fresh water Crustaceans Salmons, trouts, smelts All other diadromous Marine fishes

1990-2013 CAGR Marine fish: 8.9% All other diadromous: 3.7% Salmon, trout, smelts: 7.6% Crustaceans: 10.0% Other fresh water: 9.9% Carps, barbels: 7.0% Molluscs: 6.5%

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Demand drivers for fish meal: Intensification of aquaculture production

•  Farmers can only expand their productivity by increasing intensification

•  At the moment the largest part of aquaculture is still artisanal and uses very little feed

•  Shrimp, Tilapia, Catfish and even the Carp species are farmed in an increasingly more intensive way

•  More intensity means more feed

•  So even with a very low FM content it means more demand for FM

Source: Rabobank 2013

Comment

Shrimp farm design evolution, an example of an industry switching to higher level of farming intensity

Intensive Farming

River Estuary Ocean

Shrimp ponds =

Semi-intensive Farming

River Estuary Ocean

Shrimp ponds =

Extensive Farming

River Estuary Ocean

Shrimp ponds =

2

1

3

More intense and modern aquaculture

More formulated feed

More fishmeal (in most cases)

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Demand drivers for fish meal: New premium aquacultured species

•  Marine fish: Groupers, Blue fin tuna, cobia, barramundi, amberjacks , flat fish ..

•  Tropical fresh water fish: Amazon species, snake head, mandarin fish ...

•  Crustaceans: lobsters, crabs

•  Shellfish: abalones use FM in the feed

•  Features –  Many are premium

products

–  Most are carnivores or at least need some FM in the diet

–  It will be long before formulations become sophisticated enough to substitute FM for emerging species

Source: Rabobank, Intrafish (photos)

Comment

New farmed species, key drivers of demand for fish meal and fish oil in the future

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Global supply of fish meal

But supply is declining (or at best stable), down by 1/3 in 15 years

•  Since 1997 FM production has declined over 2 million tonnes approximately 1/3

•  The IFFO 6 FM production has declined to 35% of what it was were back in 1997

WHY:

•  (1) Lower catch of small pelagics

•  Unsustainable harvesting in the past?

•  Climate change?

•  Other changes in the ocean?

And

•  (2) Pelagics are being used for direct human consumption, canning or freezing

Source: Rabobank, Kontali, Oilworld 2015

Comment

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

thou

san

d t

onn

es

Others

Thailand

China

USA

Nordic

Chile

Peru

-­‐  2  million  MT,  about  1/3  of  produc8on    

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Trimmings, now 1/3 of supply: debatable if more or less will be available for FM production in the future

•  According to FAO over 1.5 million tonnes of fish meal (above 35%) is now made out of trimmings

•  This has been a key source of additional fish meal in the last decade

•  BUT who will be the end user of trimmings in the future?

•  Next to fish meal producers there are two other potential buyers of trimmings:

•  (1) pet food producers - sold to affluent buyers and the ingredients list is key . And there are dynamics here that favour FM use

•  (2) human consumption based on trimmings – burgers, nuggets, fantasy shapes etc ...

•  In animal protein industries these products have long been considered the “fifth quarter” and have been a key driver of profitability for processors

Comment

Pet food The “fifth quarter”

Estimates by PFMA is that c. 0.8 kg of FM is consumed per cat per year… In EU alone there are 98 mln cats, so c.80k of FM

What happens when the Chinese have cats like we do in Europe?

The best performing seafood processors utilize 100% of the trimmings for human consumption products, or combine with pet food products

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Until recently there were still some animal protein users that could switch to other feed proteins. Very few of those are left

•  30 years ago the overwhelming majority of fish meal buyers were swine and poultry feed producers

•  Swine and pouty can easily digest vegetable proteins such as soy meals

•  Today aquaculture consumes close to 80% of the available FM

•  The rationalisation of users is occurring within the aquatic species with shrimp becoming the main user accounting for some 35% of FM consumption among aquaculture users

•  Marine species, where many newly domesticated species are is also increasing in share

Comment

50%

36%

20%

48%

50%

5%

10%

70%

2% 4% 2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1960 1980 2010

Other

Aquaculture

Poultry

Swine

In the past is was still possible to for aquaculture to “take” FM from the poultry and swine farming sector

Source: World Bank 2014

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Fish meal

Vegetable and nut meals

PAP & Animal by-products

Vegetable meal concentrates

Future alternatives

Trimmings

And good alternatives to FM are not available (yet) at sufficient scale or price

Source: Rabobank 2015

Comment •  Arguably the current

use and price of fishmeal is only justified by its functionality – “it is just a very good mix of amino acids”

•  But what else has this mix of amino acids and is available at the same scale and price?

•  Veg. meals and PAP

are available and cost efficient but lack certain properties to fully replace FM

•  There is a long list of future options – non of which are currently available significant volume of have cost price that can compete with FM •  Krill?

•  Marine worms? •  Algae? •  Yeast based

ingredients? •  Insect-based feeds? •  Single cell proteins? •  Farmed fish? •  Synthetic amino acids?

•  Key alternative source so far

•  Logistics issues •  Not available in long

term?

•  Expensive? •  Lack minerals, amino

acid profile

•  Lack minerals, amino acid profile

•  Also limited in supply

•  Lower protein content

•  Anti-nutritional factors

•  Will not work for all species

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The most advanced aquafeed producers have done a great job, but it is increasingly more difficult to lower the inclusion further

•  The expectation is that the inclusion of FM and FO together could represent 10% of the formula in the future

•  This is 1/3 of current use but it will be very difficult to get to this point and it depends on the availably of “novel ingredients”

•  The role FM and FO have in the future feed formulas is strategic, not a bulk protein or oil

•  It will be used in larger inclusion levels in times of disease, for juveniles, for broodstock animals, when changing environment, etc...

Comment

Salmon feed formula evolution

Source: EWOS 2015

10%

31%

69%

69%

53%

12%

10% 11%

16%

19%

0% 20% 40% 60% 80% 100%

future?

today

1990's Marine Ingredients (fish meal and fish oil)

Plant Ingredients

Novel Ingredients

other (binders and micro ingredients)

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The balance: So far the dynamics are indicating towards further long term tightening of the marine proteins market

Long term price

support for FM

•  Supply contraction

(or stability at best)

•  Aquaculture growth

and intensification

•  Rise of new farmed

species

•  Protein demand

from human and pet

food markets

Long term price

erosion for FM

•  Technology in feed

formulation – i.e.

carnivores become

vegetarians

•  Development of new

ingredients (e.g.

PAP,SBM concentrates,

algae based...)

•  Production Cost

decline? (crude oil or

energy component)

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Fish oil and soy oil prices diverging already since 2012

Fish oil and vegetable oils price are moving in opposite direction since 2012, evidence of lack of substitutability

•  Since about 2012 fish oil no longer has any real relation with soy oil

•  For at least a part of the buyers of fish oil, (salmon feed producers and human consumption fish oil producers) vegetable oil is no longer a real substitute product

Source: Rabobank, Oilworld, Bloomberg 2015

Comment

0

500

1000

1500

2000

2500

3000

5/1/2007 5/1/2008 5/1/2009 5/1/2010 5/1/2011 5/1/2012 5/1/2013 5/1/2014 5/1/2015

usd

/m

t Soy Oil Fish oil, Peru, fob

16

0

100

200

300

400

500

600

700

800

900

1000

0

500

1000

1500

2000

2500

5/1/2007 5/1/2008 5/1/2009 5/1/2010 5/1/2011 5/1/2012 5/1/2013 5/1/2014 5/1/2015

soy

bea

n m

eal u

sd/

mt

fish

mea

l usd

/m

t

Fishmeal, Peru FAQ, fob Soy Bean Meal

Fish meal and soy bean meal prices, also diverging

How long will it take before FM also no longer has a price correlation with vegetable meals ?

•  Since early 2014 prices of FM and soy bean meal are moving in opposite direction

•  There may be a correction of FM prices if the April/May season is good, but we expect that in the medium to longer term FM and SMB meal will loose their traditional relationship

Source: Rabobank, Oilworld, Bloomberg 2015

Comment

No price relation Fairly close price

relation No price relation

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Implications for aqua feed producers

•  Key to develop the use of novel ingredients that are cost effective versus FM and FO but with out

comprising performance

•  R&D is a key success factor and has significant scale economies

•  This translates in a driver for consolidation.....

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Implications for new species development

§  Only fish that require low FM content can be

developed to commercial scale farming e.g.. Tilapia

or Pangasius

OR

§  Very high value niche species that can use a high

FM content and still be profitable to farm (e.g.

Groupers, Blue-Fin tuna or Sturgeon)

§  So it will be increasingly more difficult to find new

profitable species to farm. And some industries may

reach a dead end (e.g. Atlantic Cod)

§  Note: the issues of Atlantic Cod are more then

just high FM content in the feed.

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Implications for pelagics harvesters

§  With increasing FM & FO prices fishing rights should increase in value (provided fishing is

sustainable and cost of harvest is the same)

§  Some may even find FM and FO production assets of strategic value. It could crate more investor

interest this niche market and strategic M&A

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Implications for producers of alternatives

§  There will be increasingly more attention towards alternatives. The higher the FM price the more

likely a producer of the new raw material will make a profit

§  In a few years we are still unlikely to not have the perfect replacement of FM but feed companies

will have many more alternatives to choose from

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Thank you for your attention

“The financial link in the global food chain”™