SFB Dec 2013

Originally published in Seafood Business Magazine

High prices fueled by a global shortage has shrimp buyers, importers stuck in a vise

Major world events now tend to unfold on social media. The global shrimp shortage is no exception.

“Why did you guys take SHRIMP off the line! My husband won’t let us come anymore,” writes Stacie Rutledge on the Facebook page for Genghis Grill, a Dallas-based fast-casual chain with 70 locations.

In October and early November Rutledge and other Genghis Grill customers took to Twitter and the franchise’s Facebook page after discovering they could no longer add their favorite protein to the chain’s signature “build your own stir fry” dish.

“Stacie, currently there is a global shrimp shortage because of problems with disease and years of over-shrimping causing a huge price increase,” wrote back a social media administrator for Genghis Grill, which is responsive to both positive and negative comments on the page (though not to reporter requests for interviews). “As a company we decided that we didn’t want to pass this cost on to our fans and instead opted to temporarily take it off the line. Until we are able to bring it back we encourage all of our fans to try one of our many other bowl combinations, with so many options the possibilities are endless!!”

But those endless possibilities are no substitute for shrimp. Several customers expressed their frustration in all caps and expletive-filled posts; others tried to find solutions to hasten shrimp’s return to the menu.

“Can you put the shrimp back by the grill and charge more for shrimp?” asked Kellie Einemo. “My family got shrimp there and now no one will go!”

This time, the chain’s Facebook administrator did not answer the question.

The shortage

The news that there was a global shrimp shortage didn’t reach most consumers until late summer or early fall when they discovered it missing from their Genghis bowls or read mainstream news stories about record-breaking prices.

By then the shrimp shortage was well under way. After more than a decade of growth, worldwide shrimp production dropped from its peak of nearly 4 million metric tons in 2011: Supply fell 5.7 percent in 2011-12 and another 9.6 percent in 2012-13, according to a shrimp production review presented by the World Bank’s James Anderson at the Global Aquaculture Alliance’s GOAL 2013 held in Paris in October.

But the most shocking numbers have been the prices. Back in May, an importer told SeaFood Business that prices had peaked after rising $1 per pound in the beginning of 2013. “I think these prices have seen their run,” he said.

He was wrong. Prices kept rising. In the fall they were $3 per pound higher on average than they had been in the beginning of 2013. In early November, the most recent numbers available, wholesale prices were in the low-$5 to high-$8 range for shell-on, headless shrimp from Asia.

The high prices this fall were a breaking point for some. In October, U.K. restaurateur Jamie Oliver dropped shrimp from his Jamie’s Italian chain. Average per-capita shrimp consumption in the United States has been dropping from a high of 4.4 pounds in 2006 to 3.8 pounds in 2012, the most recent year available, according to the National Fisheries Institute (see News Recap, page 8).

It’s not all bad news for shrimp, however. U.S. shrimp retail sales for 2012 actually improved in dollar value, according to Nielsen statistics. For the 52 weeks ending Sept. 28, 2013, shrimp contributed 27.4 percent to seafood department sales, a number unchanged from the previous year. Higher prices, though, caused dollars per store to increase 2.5 percent compared to the previous year. Volume per store remained steady.

“We’ve obviously gone through a year of rapidly increasing prices, but when you look at [imports] we’re down 6.24 percent; 6.24 percent is not that much when you take into consideration that selling levels are up over 50 percent,” says Nate Torch, a VP with Central Seaway in Northbrook, Ill.

Though India has made up for much of the loss in product from Thailand and China, there are still many holes and product is smaller, notes Torch.

“We’re definitely noticing end users downsizing to keep costs a bit lower, and so there’s a shift in usage patterns, and we’re also noticing a lot of end users are not happy about the cost of shrimp, and they’re going to revise their usage needs,” says Torch.

He adds that the shortage has taken a toll on some in the industry already.

“This is bad. This is not good, OK?” says Torch. “There’s a lot of companies that got hurt this past year. It just depends on what end of the business you were in and what kind of business you did because packers got brutalized and importers that had contract business, if they didn’t cover their obligations early, there were some very painful ordeals for companies. Companies took a hit.”

And it’s not over yet.

“Everybody’s shaking at the knees when they make purchases today,” he says. “They don’t want the chair pulled out from under them. I’m taking my business right now day by day. I’m more conservative now than I was six months ago. I’m buying what we need, and I’m not going to panic because I don’t see a significant upside right now.”

The market

“The past 15 months has been totally unprecedented. It’s been a relentless bear market for shrimp. It’s unbelievable.”

Those were the words of a Los Angeles shrimp importer in 2001, a year after disease caused a similar global shortage.

Shrimp’s volatility is not news to those who have been in the industry for more than a decade. In the late 1990s white spot disease ravaged farms in Ecuador, causing a spike in prices. Those high prices then fell off a cliff when countries in Southeast Asia — in particular Thailand and Vietnam — ramped up production just as demand dropped when the global economy slowed after the events of 9/11. The price of 36/40 shell-on white shrimp, for example, had gone from $6.75 a pound in August of 2000 to $3.70 in October 2001.

Since then Southeast Asia has been the global shrimp production leader until EMS began taking a toll, starting in China in 2009 and spreading to Vietnam, Thailand and Malaysia.

“Typically the situation is known to be a fairly elastic one from the supply side,” says Gorjan Nikolik, associate director of animal protein for Rabobank International. “Area can be expanded or converted from other farmed species such as tilapia or intensity can be increased. Largely speaking this is not a supply-constrained industry. It’s been mostly a buyer’s market. For a large part of the last 20 years prices have corrected downward because of oversupply.”

The exception to the rule is when disease comes along and creates a shortage like it did in the late 1990s and is now. Nikolik explains the nature of shrimp farming makes the industry particularly vulnerable to disease. Salmon farms, for example, have also battled disease, but those farms are owned by large corporations, mostly in developed countries that can better organize and respond to disease threats as well as marketplace needs.

In contrast, 80 percent of world shrimp production is concentrated in Southeast Asia, where mostly small-scale, and sometimes even subsistence farmers in developing countries raise the product for a global market.

“The way it’s set up, it’s just an inevitability that it’ll be susceptible to disease for a very long time,” says Nikolik.

In response to the shortage, other countries such as India, Myanmar and Bangladesh have ramped up their shrimp production. But the United States has a new competitor for its favorite seafood: China.

While demand for shrimp has been contracting in the United States and European Union, China has emerged as a formidable new importer because of rising consumption, willingness to pay higher prices and its own supply shortages caused by EMS.

“I’ve been told it’s not unlike what we saw back in the late ‘90s with the white spot issue,” says Daryl Miller, director of marketing for SeaPak in St. Simons Island, Ga. “I think the situation is a little different this time because you have China in the picture as a net importer at this point. That is the real wild card in the whole situation.”

What’s a major shrimp buyer to do? One of the biggest buyers of shrimp in the world didn’t seem to be too ruffled by the recent market volatility.

“A key element of Darden’s sourcing strategy is ensuring we have geographical diversity across our entire food basket, which helps limit our exposure to price and volume volatility,” says Joe Zhou, senior buyer for Darden Restaurants, the world’s largest casual-dining restaurant company and owner of the Red Lobster concept.

Being the big guy helps. Darden has been able to supply its restaurant brands without supply disruption.

“We are also fortunate to have strong supplier partners who help us deal with that volatility,” he says. “And given the scale and sophistication of our supply chain, we’re able to leverage Darden’s purchasing power to manage through changing market conditions.”

The future

All predictions about what will happen next with shrimp must allow for two major uncertainties: EMS and price.

With a price increase of 100 percent versus average prices two years ago, “we’re expecting the industry to respond with higher volumes, but there is also the possibility of [EMS] spreading and this is highly unpredictable,” says Nikolik.

He suggested three possible scenarios. The first — and he believes most likely — is that there is no spreading of EMS to unaffected areas and areas affected don’t immediately come back to what they had been producing but reach a low point and start to get better.

“We can consider that we have already passed the low point when it comes to supply and that from now on we will see supply expansion in 2014, a fairly gradual expansion, and we’ll probably have relatively high prices, but lower than now,” says Nikolik.

A second scenario could be very “bullish”; a more rapid recovery from EMS leading to oversupply. A third could be the opposite: a spreading of EMS and a longer recovery.

“What scared everyone was the fact that EMS appeared in Mexico. This was actually a shock to the industry because EMS has spread gradually to neighboring countries for close to three years,” says Nikolik. Theories behind how it spreads include through infected juveniles, broodstock or ballast water.

“Imagine if it spread to Indonesia, India or Latin America? Then you have another scenario of much higher prices and longer recovery,” he says. “Unfortunately we’re stuck guessing at this point but the most likely guesstimate is we’ve passed the worst point.”

On the price side, no one knows how much higher it will go, but some feel the ceiling has been reached.

“My feelings are that demand worldwide is going to come off and we’re going to feel it and see it, and at some point, even with less production, these prices are going to be too high,” says Torch. “It’s simple economics. The problem is that nobody knows that point, and we don’t because we’ve never been in a situation this radical.”

For retailers, the way forward is a risky one. They must decide whether to try to make better margins by selling at high prices for the holidays, which could either leave them sitting on a lot of inventory with low prices or trying to find product with prices still high.

“My guess is that we’re going to find demand isn’t going to be where it was if they’re going to try to make a big margin and the prices are high,” he says.

Morty Nussbaum of International Marketing Specialists in Newton, Mass., says price may get worse before it gets better.

“I think that what will happen between [December] and March is we’re going to see a much bigger shortage of shrimp in the United States and prices may go higher even though there’s resistance,” he says.

But even with other protein options and demand tapering off, for some, there is sometimes no substitute for shrimp.

“We supply a company that services seven airlines in the United States and 12 airlines in Europe. As the prices have gone up they kept telling us they’re going to have to look for an alternative protein,” says Nussbaum. “The prices are now up 80 percent in five months and they’ve conceded to us, ‘We have to have shrimp regardless of the price. That’s what our clients expect from us.’”

Nussbaum says some of the prices that he and other importers are being offered have been higher than what they can sell it for. In some cases, importers have been buying from each other, but shrimp’s popularity and uniqueness may mean that he and others along the supply chain may just have to “eat it” when it comes to prices for at least the immediate future.

“There is no substitute. You can’t use lobster. You can’t use crab. It’s shrimp,” he says. “It’s like someone serving New York steak, a prime steak. What are they going to give you, a lamb chop? It doesn’t work that way. People want what they want.”



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