As a reminder, my investment thesis on aquaculture is simple: humans need to eat; humans have a growing demand for protein; we need a cost-effective, environmentally friendly solution for human protein consumption.
In Part 1 I shared some background and began the process of assessing and testing the aquaculture thesis. This was mostly focused on the demand side of the equation. Here, I will explore the supply side, specifically as it relates to salmonid fish, and how the demand-supply imbalance creates an attractive investment prospect.
Supply
According to Mowi ASA (the largest aquaculture firm globally)’s 2023 Industry Handbook, farmed salmon is only produced in ten jurisdictions globally due to the specific biological conditions required for efficient production. These include biological constraints, seawater temperature requirements, and other natural constraints (Mowi, 2023). Namely, these jurisdictions are Norway, Chile, Scotland, the Faroe Islands, Ireland, Canada, USA, Tasmania, and New Zealand (Mowi, 2023). Notably, Nordic Credit Rating reported that, in 2022, over 75% of the world’s global salmon supply came from Norway (approx. 50%) and Chile (approx.. 26%) alone, the two largest salmonid producers in the world (Kristiansen & Nilsson, 2023).
Furthermore, EY’s 2022 Norwegian Aquaculture Analysis indicated that the global supply of salmon is challenged to keep pace with growing demand as producers have faced production constraints, sea lice, and diseases (EY, 2022). This has resulted in a near tripling of salmon prices from 2012-2023
The increase in salmonid prices since mid-2022 coincided with new regulatory controls in Norway and Chile which, according to the FAO, have been designed to moderate supply growth despite the previously discussed growing demand environment. As a result, salmon prices have increased over 40% since the beginning of 2022 as global Atlantic salmon production decreased year-over-year for the first time since 2016 (Mowi, 2023).
According to industry research group Seafood Source, Norway’s recent proposals regarding a significant resource tax on aquaculture have led to a chilling effect on the country’s aquaculture industry, presenting risk to global supply (Chase, 2023). In September 2022, the Norwegian government proposed a 40% tax on aquaculture profits, incremental to the 22% corporate rate, in an attempt to share in private company profits earned from public resources.
The effects of this were immediate as Norway’s largest salmon farming companies, including Mowi, were absent from the first license auction following the resource tax announcement. According to Bloomber, a Mowi spokesperson said the company “cannot defend such investments [in aquaculture] with the tax model that is on the table” (Treloar, 2022). The company announced after the tax proposal was introduced that “investment plans were being put on hold” and that the tax increase would “put an end to many major investment plans” (Treloar, 2022). While licenses for 27,600 tons of production were awarded at the auction, 9,100 tons went unsold (Treloar, 2022). Norway Royal Salmon canceled their planned acquisition for additional farming capacity due to the unfair and unpredictable Norwegian aquaculture tax system (NRS, 2022).
Following these events and widespread opposition, the Norwegian government released a new proposal in March 2023 that reduced the proposed resource tax by 5% to 35%. While this was an improvement, it did not materially ease global supply concerns or improve the attractiveness of the Norwegian aquaculture industry relative to the pre-tax environment.
Continued concerns resulted in the Norwegian government reaching a deal with minor political parties to lower the proposed aquaculture effective tax rate further to 25% in May 2023. This announcement has been well-received by producers such as Norway-based Grieg Seafood, who said “this is significantly better than the original proposal” and that they were re-evaluating “all investments” that were put on hold in light of the final fax (Walsgard, 2023).
North American Demand + Supply Constraints = Robust Opportunity
There was a significant salmon supply gap in North America in 2022 as salmonid demand was 651,000 metric tonnes (“MT”) versus local production of 141,000 MT (Mowi, 2023). In fact, the North American supply gap widened in 2022 as demand increased while local supply decreased. Thus, nearly 80% of local demand was satisfied by imports from surplus countries such as Norway. This imbalance is expected to persist as North America is projected to be the fastest growing aquaculture market in the world (Vantage Market Research, 2023). Supply to the North American market is further constrained given the recent contractions in Norway.
Mowi’s 2023 Industry Handbook found that a relatively high price differential is required to justify the higher costs associated with the transatlantic transportation needed to fill the supply gap in North America (Mowi, 2023). This, it is implied that North American consumers pay higher prices for inferior product that is less fresh and with a higher carbon footprint.
Finding a salmonid producer in closer proximity to the North American market would present a unique opportunity – someone to fill the supply gap with lower cost, higher-quality, and more environmentally sustainable product.
The FAO expects that sustained demand and elevated prices gives stability and a clearer long-term growth perspective for the industry’s value chain. Thus, the global supply environment can support favorable salmonid price stability, if not price increases, in addition to opportunities for new aquaculture supply to hit the market to satisfy regional demand, fill global supply shortages, and increase security of supply amid recent events.
Aaron Wolfe Toronto 