Monday, February 23, 2015

23/02/2015: The rise (and rise) of the aquatic ‘chicken’

by Lian Heinhuis, Analyst Seafood, Food & Agribusiness Research and Advisory, Rabobank International, The Netherlands and Gorjan Nikolik, Rabobank International, Singapore

First published in Internatiional Aquafeed, January - February 2015
Worldwide demand for seafood is growing and wild catch production cannot grow at the same pace, meaning that aquaculture is becoming key for the supply of aquatic protein. As the farming of fish—especially freshwater species—rapidly gains popularity around the world, opportunities increase for both farmers and players active in auxiliary industries.

Farmed freshwater fish species, consisting of different types of carp, catfish and tilapia, accounted for over half of the 66 million tonnes of fish produced in aquaculture in 2012 (see Figure 1). 
  Although carp is by far the largest subgroup (38 percent of total aquaculture production), it is predominantly consumed locally around the world. Like tilapia, pangasius has an export market and is popular among western consumers; yet its market share is still relatively small. Unlike the other species, tilapia has seen the greatest growth in production and widespread appeal in global marketTilapia is easy to farm and feed and has a neutral flavour that appeals to many, hence it is often compared to chicken. 

Global tilapia production volumes have increased from just over 100,000 tonnes in 1980 to 4.5 million tonnes in 2012, and the industry has an estimated total value of US$6.7 billion.1 The export market is currently dominated by China, while the United States (US) is the biggest importer. In the coming years, we expect China to focus more on its domestic market, which will create opportunities for other producers to emerge and increasingly supply growing markets, including the US. 

Latin American producers are in a strong position to benefit due to their location, access to feed and natural resources. Having already doubled output between 2007 and 2012, the region is expected to see further growth.

Tilapia is thriving thanks to biology and technology  
The whitefish sector has seen incredible growth rates in past years.

Tilapia is one of the main drivers of this growth, with farming having expanded to more than 80 countries and global production volumes having grown by an average of 11 percent per year. is farmed in small backyard farms as well as industrial compounds managed by multinational companies. Production methods range from simple cage systems to complex indoor recirculation facilities. Technology has played an important role in the development of the tilapia industry, and innovations such as the sex-reversal technology that allows farmers to grow only the faster-growing male fish have greatly contributed to better farming practices and output. 

In addition, tilapia’s biological characteristics provide further advantages to farmers worldwide: the fish is relatively resilient, has a low-cost diet, needs little dissolved oxygen in the water and reaches marketable size quickly. 

The main tilapia-producing country is China, which accounts for a third of all production (1.5 million tonnes annually). 

Chinese government programmes on farming—along with support subsidies and programmes focused on advancing technology and genetics—have resulted in a growing tilapia industry. Family-owned farms account for the largest share of production. 

Although volumes from China are larger than volumes from any other country, profit margins have been very low, and the industry as a whole has been making a loss. 

Subsidies have created competitive prices for the Chinese product, which is sold as frozen fillets in the US (almost half of total Chinese tilapia exports). 

However, they also pose a risk, as discontinuity could mean rising costs. Volumes in the global tilapia industry have seen strong growth, and—assuming no major disease outbreak or other negative event occurs—there is potential to double output again to nine million tonnes (live weight equivalent) by 2025 (see Figure 2). is America’s next top seafood item

The US is the most important market for tilapia. With import volumes of more than 228,000 tonnes (over 600,000 tonnes in live weight equivalent), Americans consume more than other major tilapia-eating countries such as Egypt or China (see Figure 3). 

Tilapia has risen fast on the charts of seafood popularity and now only trails salmon, shrimp and tuna as the most favoured seafood item in the US.

While originally presented as a low-cost alternative for wild-caught whitefish, the product is now consumed more than cod or pollock, and it dominates the broader whitefish category (see Figure 4). As tilapia is still priced considerably higher than chicken (on average double the price of chicken breast fillet), it is more relevant to compare it with other seafood products. 

However, in the longer term, this can also have an impact on the consumption of species in the broader animal protein segment—particularly on chicken—because of its similar neutral taste. 

Tilapia is not as popular in Europe as in the US. With frozen tilapia fillet imports of only 19,000 tonnes in 2013 - barely 12 percent of US frozen fillet imports - the fish has not taken off anywhere near like it has across the Atlantic. 

Pangasius has established a much stronger position than tilapia in Europe, with frozen fillet imports of 142,000 tonnes in 2013. This can be explained by lower prices and tilapia producers focusing less on this region - so far. the years to come, freshwater whitefish consumption will continue to rise in the US. The focus on healthier diets will increase demand of both tilapia and pangasius. 

However, these characteristics are currently not exploited in marketing campaigns, with low price remaining the key selling point. European consumption growth will be more challenging, as farmed fish production has received some very negative media attention lately. 

Since 2011, the popularity of pangasius has declined somewhat, after bad publicity surrounding alleged poor farming standards in Vietnam.

China’s position faces challenges                

Asian producers - particularly China - have dominated the global tilapia industry in the past decades. With a share of nearly 74 percent in the US frozen fillet market and continuing growth (five percent CAGR between 2008 and 2013), China is in a strong position. 

However, there are reasons to expect the Chinese product to become less competitive over time, including rising input costs, currency, climate, limited resources and food safety. 

Input costs are driven up by rising feed and labour costs. This means that the product will become more expensive to produce. Average labour costs in China more than doubled in the period between 2007 and 2012. past years, average retail prices of pellet feed increased from RMB3260/tonne in 2006 to RMB4140/tonne in 2012.4

The currency will not benefit Chinese competitiveness, with the yuan having appreciated by 24 percent since 2005, to CNY6.14 per US$ in 2014.5

China has limited resources of fresh and clean water. Pollution is an important problem, and there is increased competition for water space from other agricultural and aquacultural products such as rice and shrimp.

Food safety issues surrounding the Chinese product have resulted in more negative market perception in the US, allowing non-Chinese products to be sold for US$1/pound more. If this image problem continues, Chinese frozen fillets could also become less popular.

These issues present a scenario of increasingly challenged competitiveness. 

Moreover, climate is an issue as tilapia need water temperatures of at least 27°C, and the consistent conditions found in more tropical areas of the world do not exist in China. the Chinese industry now heavily relies on subsidies to produce at low cost, changes in policy could have another negative impact. 

Combined, this could result in China exporting less tilapia and being forced to develop its domestic market. Tilapia sales in China are now mainly concentrated in the provinces where it is produced and where it competes with traditional food fish such as carp. 

Strong regional cultural traditions in the Chinese diet make the country a difficult market to develop. Tilapia in China has the most potential as a fillet, predominantly sold through retailers, especially in the country’s south where people live close to the farms. The live/fresh market is more difficult to enter, as people will first choose to purchase traditional fish. 

The other major challenge to Chinese dominance of the farmed whitefish export market is pangasius. Imports of Vietnamese pangasius - at a lower price per kilogramme (about 25 percent less) - are growing faster than those of Chinese tilapia and pangasius exports to the US between 2008 and 2012 were much higher than tilapia volumes from Latin America, showing increasing demand for pangasius. 

Vietnam currently produces around one million tonnes of pangasius per year, and the government is supporting the sector and has set a goal to expand it by 20 percent, to 1.2 million tonnes in 2015. 

Furthermore, there is a good possibility that other countries, such as Indonesia and India, will start large-scale production of pangasius. The fish is perceived to be very similar to tilapia, although its fillet colour is much whiter. Low prices and increased marketing efforts could lead American consumers to increasingly choose pangasius, although tilapia still has a distinct first-mover advantage and much wider recognition among consumers.

Opportunities lie in other parts of the world        

The challenges create room for other producers to become both exporters and more self-sufficient. 

Mexico, for instance, is now a big importer of tilapia, as it produces 70,000 tonnes, while consuming 130,000 tonnes. The remaining 60,000 tonnes are imported from China. Mexico has good production facilities and capabilities of its own, but farmers there have found it difficult to compete with Chinese prices, which have been about 30 percent lower than Mexican tilapia prices.

In Africa, we can also expect further investment in fish farming industries in order to meet local demand. Ghana is a good example of this: the country has witnessed growth rates that have averaged 39 percent annually over the past five years. This comes from a very low base, with production volumes of 26,000 tonnes in 2012. Local demand has been increasing, and there are many initiatives to use small-scale fish farming of tilapia as a way to alleviate poverty. 

The key consumer and producer in Africa is Egypt, which is the second-largest producer worldwide, with 768,000 tonnes in 2012, and growing rapidly by 15 percent per year (based on the CAGR between 2008 and 2012). 

Other Asian producers such as India, Thailand and Malaysia are also growing (albeit from a low base) and have export potential. 

Indonesia is already a sizable exporter to the US, with 11,000 tonnes of exports in 2013 (from 717,000 tonnes total production) and the unique position of being the only Asian country that sells a high-value product, produced at high-quality standards (see Figure 5). The country is also home to the largest production facility of the world’s leading tilapia-producing company, Regal Springs. 

Latin America is poised to take a bite out of the market     

There are several factors putting Latin American producers in a good position to obtain a bigger share of the international tilapia market: the region has lower feed costs (soymeal prices in Brazil are below prices in China, with an average difference of 11 percent since 2010); labour costs are increasingly competitive compared to China; the region is close to the current key consumer market; the climate is right; and both freshwater and brackish water resources are sufficient.  

In 2012, Latin America produced only 453,000 tonnes of tilapia, which makes up about 10 percent of global production. Although this is only a fraction of Asian production, there is good potential for growth. In recent years, the tilapia industry in Latin America has already shown strong growth rates, doubling in size from 2007 to 2012 - and exports to the US are increasing. The Latin American tilapia product is sold fresh in the US, for a premium price (about US$1/pound higher than frozen). 

To grow the industry, Latin American auxiliary businesses such as processing, feed and logistics will need further development.  

Rabobank projects Latin American tilapia volumes could rise to at least two million tonnes by 2025, with more than half of future production in this region expected to come from Brazil. The country is already the largest Latin American producer and is especially resource-rich. Countries such as Mexico and Colombia are also expected to strongly increase production. 

However, in some countries tilapia is facing competition from other species, as is the case in Ecuador. Due to high prices in the shrimp sector (due to a disease in Asia and Mexico), many Ecuadorian farmers have left the tilapia business to pursue shrimp farming, resulting in a decline of exports. 

In conclusion
The tilapia industry has shown incredible growth rates. In all production regions, volumes at least doubled in the period from 2007 to 2012. 

Of course, biological risks are always present in any type of farming, and climate change or disease outbreaks could seriously harm the industry, setting back production volumes.

Nevertheless, the characteristics of the industry provide cause for optimism. Tilapia is amongst the easiest fish to farm, and - at least to date - no global disease outbreaks have occurred. 

Moreover, tilapia requires a relatively low investment in the farm structure. Due to low-cost feed, it has a competitive price point in both developed and developing markets. Tilapia are resilient, they grow fast and are increasingly popular among consumers. The current leading consumer market in the US is far from saturated, and consumption in local markets is also expected to increase.  

While China will remain a key producer in the foreseeable future, Latin American producers like Brazil, Colombia, Ecuador and Mexico are well positioned to produce high volumes that could supply both domestic and international markets. 

Other Asian producers such as Thailand, Indonesia, India and Malaysia are also expected to strongly increase tilapia output in the coming decades.  

Although no fish-farming business is risk-free, the future for tilapia looks bright. 

As a source of affordable animal protein, tilapia could (continue to) feed the masses and become a key commodity in the animal protein market. What chicken has been for the poultry industry, tilapia can be for aquaculture. 

Low-cost feed, simple farming structures and fast growth contribute to its popularity among farmers, while its neutral taste makes it popular among consumers - characteristics that make it much like its terrestrial equivalent, the chicken. 

The aquatic chicken industry will continue to rise, which will bring some interesting new business opportunities for farmers, but also for companies in secondary industries such as feed and processing. 
Read the magazine HERE.

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