In May 2007, a Greenpeace activist clad in a survival suit and clutching a buoy emblazoned with the message “Stop Battering Cod” threw himself into the water in front of two fishing trawlers in the North Sea. The fishermen weren’t impressed. The stunt, said the Scottish Fishermen’s Federation, was an “idiotic” bid for “cheap publicity”. They were right on the cheap bit, but maybe not on the idiotic bit. The truth is that the world’s cod do need a bit of attention.
After decades of over-fishing, stocks of this prince of fish have fallen to only one tenth of their levels in the 1970s, an all-time low, while many scientists say that unless there is a complete ban on fishing in the North Sea, cod simply won’t survive. This puts the remaining cod in direct conflict with the majority of the UK population, who are eating more and more fish. During Seafood Week (which ended last Friday), 17% of people surveyed said cod and chips is still their “regular Friday fare” and 28% of people now say they eat fish twice a week. The overall consumption of fish is up by 8% since 2004 and there has been a 26% rise in the amount of fish eaten by the under-sixes in the same time period. Shellfish are also becoming increasingly popular – total consumption is up 8% since 2004, while the Scottish Shellfish Marketing Group (SSMG), described by the Shetland Times as “the UK’s premier producer of finest-quality shellfish”, recently announced a 20% year-on-year rise in sales of mussels. In the UK, much of this rise in demand is down to health concerns: the Omega 3 oils in oily fish are supposed to be good for almost everything and eating shellfish is clearly a good way to get low-calorie protein.
But it isn’t in the UK alone that fish consumption is rising. Globally it has consumption has doubled since 1973 and is forecast to rise by another 25% by 2015. The biggest rises in demand come, predictably, from the emerging world, where rising populations and the emergence of billions of people with extra disposable income to spend is already pushing up prices of most foods, both carbohydrate- and protein-based. On the face of it, this is very bad news for the globe’s remaining wild fish – there are, says the United Nations Food and Agriculture Organisation (FAO), already 30% fewer fish in the sea than there were 40 years ago. But the fast rise in demand, coupled with a static supply (the total global catch of wild fish has remained more or less unchanged at around 95 million tonnes) may well be bringing with it the source of their survival.
How? By encouraging the fast growth of the aquaculture industry. Think back to the threatened cod of the North Sea. If a small Scottish firm, No Catch, has its way, they will soon be free of both the embarrassment of Greenpeace protesters and the nets of irritable fishermen. No Catch has six million cod growing in cages around the Shetland Islands and has already had huge success selling them in fillets and as fish fingers across the country. Not everyone thinks farmed cod tastes as good as wild cod. Indeed, despite the firm’s efforts to use organic and sustainable methods to produce the fish, I visited a restaurant in Shetland a few years back that displayed a sign saying, “We don’t serve farmed cod” next to its serving hatch. Still, I can’t imagine the average Friday night chip-shop visitor cares much where his supper is reared.
And it isn’t just the farmed cod business that’s booming. After a nasty wobble in the early part of the decade (driven by overexpansion and falling prices), the salmon farming industry is back on form. The business has consolidated; global production is rising again; costs have fallen substantially, but prices should be up 8%-10% this year; 70% of salmon eaten globally is farmed; and the rise of organic salmon farms even means that salmon from some of the better producers is once again considered to be a luxury food. Analysts from SEB Enskilda expect demand to keep rising at around 8%-10% a year, driven in large part by the resurgent Russian appetite for the fish.
Trout and bream are also already farmed extensively, as are shell fish: think oysters in the Fowey River in Cornwall, huge fields of rope-grown mussels all down the coast of Croatia and the multi-million-pound shrimp-farming businesses in China. At the same time, aquafarmers are starting to experiment with other breeds. There are, for example, moves afoot to make halibut farming big business too: in September the Shetland Halibut Company took delivery of 16,000 halibut juveniles.
Add it all up and this $60bn business already supplies us with well over 45 million tonnes of fish a year. That’s nearly 50% of the total consumed around the world every year – up from 19% in 1990 – and is a number most analysts expect to see grow at between 7%-10% a year for the next decade at least. Note that, according to the FAO, wild fish stocks are in such a shocking state that just for the world to continue consuming the same amount of fish as it is right now, fish farms are going to need to produce another 30 million tonnes a year by 2030.
At first glance, you might think this should cause no real problems. After all, while it is easy to make a case for there being a shortage of agricultural land to meet the growing need for other kinds of food, even I have never come across a doom-monger who could claim that the world is short of sea. But it isn’t that simple. For starters, not all fish lend themselves to being farmed. It took No Catch a long time to figure out how to raise cod in captivity, for example – they are now provided with a variety of toys to keep them busy and bathed in artificial light to help them mature – and many experiments end in disaster. The Contrary Investor newsletter tells of a Floridian bid to raise Mahi Mahi fish. A “very large amount of money” was spent creating the appropriate conditions for the fish, but they hated them so much they “would launch themselves out of the tanks in which they were held and die rather than be held in captivity”. The venture was “a complete and utter failure”.
The second huge problem with fish farming is finding something to feed the fish. It is possible to give them non-fish foods, such as soya meal, but this isn’t a total solution: carnivorous fish don’t fancy a purely soy diet, and who can blame them? Farmed fish need protein, and in particular marine protein. The solution so far has been to mix vegetable-derived foods with fish-protein foods, but it hasn’t yet been possible to get the ratio down much below 50% – try it and your fish just stop eating. Demand for fish meal is rising at about 7%-8% a year, but it might be reasonable to expect prices to rise a little faster in future. Why? Because the availability of fishmeal is dependent on the catch from the sea. This, as already discussed, is fairly static – which suggests demand is soon to outstrip supply and that anyone with a quota to fish for the kinds of fish that can be made into meals (such as Copeinca, see below) is likely to end up quids in.
Of course, environmentally speaking there is a flaw in all this: fish farming doesn’t do much for the future of wild fish stocks if farmed fish have to be fed on wild fish. The good news is that there might be a solution to this. A great many farmers are, I’m told, coming around to the idea that it might not be a bad idea to feed fish krill meal (krill are the tiny crustaceans at the bottom of the oceans’ food chain). Krill are high in protein and antioxidants and are particularly good for feeding to salmon larvae when distilled into an oil: more krill-oil fed larvae make it into adulthood than those fed on other foods. Better still, they are plentiful. Krill is mainly trawled for in Antarctica, where it is estimated there are 400 million to 500 million tonnes knocking around. At the moment, only around 100,000 tonnes are picked up every year: I can’t see Greenpeace activists bothering themselves jumping into the freezing sea to protest the near-extinction of krill anytime soon.
Krill oil also comes with another nice advantage – its colour. Wild salmon are naturally bright pink. Farmed salmon are not. This means that farmers habitually stuff them with nasty chemicals (chosen with reference to a colour book, a bit like the ones the rest of us use when we are choosing paint colours) to make them look more like consumers expect them to. This is where krill oil comes in – it is red, so if you feed it to your salmon you can end up achieving the right kind of pink, chemical free. That’s got to be a good thing. Below we look at a variety of ways to buy into the fish-farming business, but those interested in the krill-oil story could look to Oslo-listed Aker BioMarine (AKBM). It’s small, currently loss-making, and hence risky. But it’s active in a fast-growing market and has developed a new vacuum technology for harvesting krill, which leaves the sea bed intact and ups their yields substantially. All this is good news.
Australia’s tuna millionaires
Port Lincoln is one of the most isolated towns in Australia; it takes most of a day to drive there from the closest major city, Adelaide. It’s a traditional agricultural town – as you approach it the first thing you will see is its most prominent building, says Tim Treadgold in Forbes – a huge wheat silo. But there’s more to Port Lincoln than grain. It is dotted with opulent villas, upmarket restaurants and boutique shops. It is also home to Australia’s largest per capita concentration of millionaires. And they all made their money from fish – specifically bluefin tuna. How have they done it?
They’ve found a way to rear tuna in captivity. From December to January the town’s fleet nets vast shoals of tuna and slowly (at around 1 mile an hour) tows them – still alive – back to cages near the shore. Then for the next five months or so “it’s nothing but the best for the captive fish.” They feed on an expensive imported diet of pilchards carefully chosen to maximise the tuna’s oil content and bring out a pink to red colour: and to double their weight from an average of 35 pounds when caught to 70 pounds when harvested. Once killed, the fish are packed into trucks and sent to Tokyo where they will soon become very expensive sashimi.
Not everyone is sure this is an ethical or sustainable way to catch fish. But one thing is clear: it is very lucrative: in Port Lincoln permits that allow the holder to catch one tonne of fish change hands for as much as a quarter of a million dollars, and an average sized tuna of 75 pounds is worth around $2,500. “If I could be 30 again, I reckon I’d give Bill Gates a shake,” Hagen Stehr, 62-year-old chairman of Clean Seas Tuna (CSS) told Forbes. “The future is not the internet, it’s aquaculture.”
Seven prize catches in the aquaculture sector
One of the better ways into the aquaculture market is probably by way of the fish-meal market. You can do this via Aker BioMarine (AKBM), but hedge-fund manager Hugh Hendry of Eclectica suggests an interesting alternative, Peruvian company Copeinca (COP). The company, one of Peru’s largest, owns the right in perpetuity to fish for anchovy off the fertile coasts of Peru. This, says Hendry, should be seen to be a bit like owning a bottomless oil well filled with top-quality oil.
Peru’s fabulous climate and clean, deep waters make for happy, fat fish. And owning a quota means you can keep on pulling out anchovies every year: as long as you manage the stocks reasonably well, you’ll never find you have exhausted your resource. Copeinca has a large fleet of boats and a portfolio of processing plants it uses to turn its anchovies into fish meal and fish oil. About 80% of this then finds its way into fish farms and the other 20% ends up in Chinese pig feed. Both of these are fast-expanding markets.
More good news for the firm comes from a change expected to be made to the Peruvian quota system. Currently, fishing boats are only allowed out for a limited number of days a year, but that is likely to change to allow boats to catch their quota at their discretion over the season. This means they will be able to cut their costs substantially, reducing both the number of boats and plants they need (they can spread the work over the year, rather than squashing it into 50 days). Copeinca shares are listed in Norway and Hendry puts them on a p/e of around 12 times.
Of interest in the farming sector itself might be Australia-listed Tassal Group (TGR). The company is Australia’s largest salmon producer (its fish are marketed under the Royal Tasmanian Salmon brand). It supplies supermarket chains, such as Coles, and also exports fish to Japan. It trades on a relatively pricey looking p/e of just over 17 times, according to Bloomberg, but its price-to-earnings growth ratio of 0.66 times makes it look cheap relative to its growth rate.
In Norway, the real home of fish farming, and salmon farming in particular, Cermaq (CEQ) is one to look at. It controls 15% of the salmon market, currently trades on a p/e of 8.6 times and has recently been rated a buy by Goldman Sachs. Also listed in Norway, but much smaller, is Marine Farms (MAFA), which, while more expensive than Cermaq on a p/e of 11.7 times, may be worth a look as it could end up a victim of the wave of consolidation ongoing in the industry.
Clyde Milton, writing on Seekingalpha.com, suggests Omega Protein Corporation (OME). This is a small, Houston-based firm that harvests an oily fish called Menhaden (which are apparently no good for human consumption) and processes them into oil. The oil is then used in human dietary supplements and in feed. Milton does not go so far as to suggest buying the shares at this point (they aren’t quite cheap enough), but assuming they keep catching the fish and consumers carry on downing fish oil, he considers it worth watching. Finally, a tiny UK-listed micro cap, Kiotech (KIOLN). Kiotech, which is still what brokers like to call “pre-revenue”, has developed a “fish-attractant technology” that can apparently increase the productivity of tilapia and shrimp farmers. This is another one to watch, rather than buy.