Guest Blog: Managing EPA/DHA consumption in a tight supply situation

GOED is pleased to present the following guest blog from Christian Meiniche, chairman of Chr. Holternmann ANS. Chr. Holtermann is an independent commodity brokerage house, based in Oslo, Norway, mainly brokering raw materials for the food- feed- and technical industries and with a particular focus on fish oils.

The fish oil market was “shocked” in October, with news from Peru that the marine biologists (Imarpe) estimated the anchovy population to be far below the minimum level to recommend a fishing quota for the upcoming November/January summer season. That report, combined with El-Niño prospects, even raised market concern that there might not be a subsequent (and main) April/July 2015 winter season in Peru. If so, that would be the first time in the more than 50-year history of this fishery without these seasons. Peru is not only the fish oil producer in the world, but produces oil with a higher content of EPA/DHA that oils of other origins — on average closer to 30% in a 10%-30% global range — adding to the concern.

So, will there be enough EPA/DHA for the current projected world consumption in 2015? If not, where and when will there be flexibility to adjust the consumption down to required levels to meet the reduced supply? The short answer is, the need for change will come during Q2 next year, in step with a typical seasonal increase in feed production, and the flexibility to change is strongest for the salmon feed producers, in particular in the two largest salmon producing countries Chile and Norway.

The growing aqua industry is by far the largest global consumer of fish oils, compared to the omega-3 industry and technical consumption (i.e. leather tanning etc), and also the largest consumer of EPA/DHA. From our current forecast for a (poor) 2014 production of just over 140,000 metric tons EPA/DHA (from around 800,000 metric tons of crude fish oil), we estimate that aqua feed will consume around 100, 000 metric tons, of which about 50% will be in the above-mentioned Chile and Norway for salmon. The omega-3 industry is expected to consume about 60,000 metric tons, with technical consumption around 10,000 metric tons, for a total around 170,000 metric tons of consumption. In other words, we forecast a stock reduction of about 30,000 metric tons of EPA/DHA during 2014.

Our EPA/DHA production forecasts for 2015 are around 165,000 metric tons in the case of historically normal fisheries, but only around 135,000 metric tons in the case of no winter season in Peru April/July.

We estimate the global average content of EPA/DHA in the salmon feed oil mix (mix of about 30% fish oil and 70% mostly vegetable oils) at or slightly above 6%. This EPA/DHA level seems in part market driven to reach desired levels of EPA/DHA in the salmon fillets, as current required levels to maintain fish health in the salmon itself may only be around half of this 6% (according to current science). Keep in mind extensive and continuous research on this topic is ongoing, as is developing alternative sources of EPA/DHA to reduce dependency on fish oil.

Converting these numbers into metric tons — keeping annual growth in the salmon industry at limited levels, and not considering potential marketing implications for farmed salmon — the two main salmon feed producers Chile and Norway could then have a potential to reduce their consumption of EPA/DHA from around 50,000 metric tons annually to around 25,000 metric tons and still maintain salmon health. If so, and given flat consumption in the omega-3 consumer segments (which is also a question mark), there could be a potential to reduce world consumption of EPA/DHA next year from around 170,000 metric tons to 145,000. This is still above “worst case scenario” production at around 135,000 metric tons, but not far from closing the gap.

These developments in tight supply/demand situations are also reflected in prices. While fish oils generally moved around “soft” vegetable oil levels (oils like soy and canola used in fish feed) up to 2012, they have since taken their own route to reach closer to US$2000 per metric ton before the recent news from Peru and now to new record levels well above US$2000 per metric ton (aqua grades).  At the same time, the content of EPA/DHA in the fish oils is increasingly important in the pricing of the fish oil, also for the salmon feed producers. The higher the content, the less quantity fish oil is needed to reach the required EPA/DHA level in the feed, and the higher amount can be substituted with other oils at less than half the price. We see this increased focus every day, in our cooperation with the industry to optimize their utilization of EPA/DHA.

To sum up, 2015 may be tight but manageable. On the other hand, whichever scenario is presented, fish oils with their EPA/DHA content look to be an increasingly scarce commodity in the years to come.