ShrimpTails interviewed Gorjan Nikolik, Rabobank’s senior global seafood analyst, in Utrecht, and got an insight into a banker’s perspective on the shrimp industry.
When speaking about Rabobank, Nikolik explains that it’s difficult to indicate how big the bank actually is in seafood. Rabobank estimates it has about USD 2.2 billion (EUR 1.9 billion) outstanding loans in pure play seafood companies (fisheries and aquaculture combined). This amount is invested in about 40 large players, and another 150 to 200 small- to medium-sized companies – defined as companies with under USD 200 million (EUR 180 million) in sales turnover.
The bank's actual investment in seafood is even bigger, as Rabobank lends large amounts to big, diversified companies that are also active in the seafood industry, but it does not have species-specific data on what these companies actually use the loans for. Although Nikolik cannot put an exact figure on the importance of shrimp for the bank, Rabobank’s seafood portfolio includes major clients like China’s Guolian; Thailand’s CP Foods; and the Netherlands’ Nutreco-Skretting, Klaas Puul, and Heiploeg.
In his role as the bank’s senior global seafood analyst for the “Rabo Research” department, Nikolik supports the wholesale department in its bid to achieve the same status for the seafood industry within the bank as other sectors enjoy. Rabo Research plays a crucial role in the bank’s seafood activities, ensuring that it has a basic but thorough understanding of the broader industry and the various subsectors within it. This includes understanding the value chain, the key players, the profit pools where the money is made, and the volatility of those profit pools.
The department also ensures that all of the data necessary to better analyze trends in the industry is available to colleagues throughout the bank. With a strong network both within Rabobank itself and the seafood industry more generally, Nikolik’s team is involved in most seafood industry-related deals that the bank makes.
This sets Rabobank apart from its competitors. For Nikolik and his colleagues, seafood is their daily business. They have in-depth knowledge and understanding of, and a network in, the seafood sector, while most competitors have to manage much broader portfolios and often lack sector-specific knowledge.
A banker’s perspective
Nikolik predicts that shrimp will be the next animal protein sector to make big steps in terms of industry maturity. In terms of size, the shrimp sector is already massive. Trade can now be valued at over USD 30 billion (EUR 27 billion) annually, including aquaculture and wild shrimp trade. Nikolik emphasizes that it is an opportune climate for a bank to invest in this sector.
As a global seafood analyst, he is well-placed to observe that Rabobank’s clients are showing interest in the shrimp sector throughout the value chain: From feed to technology to processing, there are companies in the East and West alike that are keen to be part of it. For Rabobank, that’s important; there is less risk associated with investing in feed companies and processors, for example, than in a pure play farmer. This makes it more likely for the bank to invest in these areas.
Nikolik makes a comparison with the salmon industry, a mature and relatively stable sector that banks tend to invest in more easily, and illustrates that the sectors are very different from one another. In the salmon industry, production is consolidated geographically in a couple of countries and is strictly regulated, easily monitored and cannot be readily expanded. As a result, salmon production volumes are relatively predictable. Salmon farmers have also invested heavily in technology and the technification of farming systems.
By contrast, in the shrimp industry, there is almost no limit to supply. In recent years, shrimp production in India and Ecuador has expanded rapidly. In other shrimp producing countries, production can and will increase further over the coming years, as there are few regulatory restrictions in place.
At the same time, Thailand, once the world’s biggest shrimp producer, has seen its production crash due to disease outbreaks a couple of years ago and it has still not fully recovered from this. There is always a risk of the same happening in other producing countries. For Nikolik, these boom-and-bust patterns characteristic of shrimp production mean that the industry is in constant shift, and supply is therefore rarely stable. This type of supply volatility only happens in immature sectors. As such, Rabobank perceives the risk of investing in pure play shrimp farms to be too high.
Nikolik is hopeful, though, that this may change for some shrimp farming locations in the future. For example, in South America, there are few restrictions on land ownership and farmers therefore tend to own the land they use. Consequently, large farms are often more willing to invest in new technologies that are rapidly becoming available, much in the same way as the salmon industry has done. With the adoption of these new technologies, shrimp farmers should be able to develop long-lasting stability and profitability, as is now characteristic of the salmon industry.
According to Nikolik, the intensification and isolation of shrimp-farming systems from the external environment will play a crucial role in the desired reduction of supply volatility. But in many countries, shrimp farmers may never reach the same level of profitability as salmon farmers because, generally speaking, modernization to the same extent may just not happen. This can be partially attributed to restrictions on land ownership experienced in many Asian countries – farms are often leased or rented, but not owned – and this ultimately affects the willingness and ability of farmers to make structural investments in their farms.
Is there “one” global shrimp market?
One of the main questions facing Nikolik is whether it’s possible to say there is just “one” global shrimp market. Shrimp market experts tend to say this cannot be stated due to the complexity of the shrimp industry and its incomparability with other commodity markets.
However, ShrimpTails expected that, from a banker’s perspective, the market nuances would be acknowledged, yet in the end – and from a macro perspective – the different products would all be seen as one and the same, making shrimp not so different from other commodity markets. But Nikolik’s response to our question was surprising and pointed to a slightly different opinion on the matter: For Nikolik, the shrimp market lies somewhere between these two poles.
ShrimpTails wanted to put this question to a banker because when, in 2018, the industry was confronted with a clear oversupply of Pacific white shrimp (L. vannamei), everyone warned that the market would not be able to absorb this surplus shrimp without seeing prices crash even further. And yet that did not really happen over the course of 2019. Over the last two years, it has become clear that if you look at prices and trade data in detail, there are different supply, demand and price dynamics for certain product types, certain sizes and certain origins of Pacific white shrimp. This is particularly true of the Ecuador-China head-on, shell-on trade and the India-U.S. peeled and further processed shrimp market, which have started to behave completely differently. And these nuances are also observed and acknowledged from a banker’s perspective, as Nikolik’s response reveals.
So while Ecuador increased its production in the first nine months of 2019 by about 26 percent, this has not resulted in a price collapse in North America. Almost the entire increase in production of Ecuador was absorbed by the Chinese market, where buyers sell these volumes easily into new and existing markets within the country. Meanwhile, Asian suppliers to the U.S., especially India, have even seen a small increase in the U.S., as supply from Asia has not increased that much this year.
Consequently, the U.S. market has not really been in an oversupply situation. These dynamics become even more complicated when looking at sizes. There seems to be a slight oversupply for the smaller sizes of Pacific white shrimp but an undersupply of the larger sizes. This again results in very different price trends for the two size groups.
Nikolik concludes that for any other commodity, the market would not allow diverging price trends, but for shrimp, it seems that this is indeed happening. For now, the Ecuador-China and India-U.S. product/market combinations should be considered separately. In the long-run, Nikolik expects that this market divergence will disappear when Ecuador tries to copy the success of India in the U.S., and India tries to imitate the success of Ecuador in China. However, to the surprise of many bankers, this is not happening as quickly as it has happened in other commodity markets, such as sugar cane.
Passionate shrimpers
For Nikolik there are two things that make the shrimp industry so attractive to work in.
First of all, the structure and dynamics of the industry force players to specialize in what they are really good at, as do the conditions and (natural) resources surrounding them that are often country or region-specific (think of the availability of land or cheap labor). In the case of the shrimp industry, the theory of classical economics actually seems to work, and instead of everyone doing exactly the same, companies in the Americas take a different strategy to countries in Asia. And by focusing on what they are good at, profits are often much higher than if everyone were to do the same thing; in the long run, an industry will be more profitable when its people are specialized.
Second of all, when working in this industry, you need to be a people person, and Nikolik is just that – although he did jokingly claim his best friend is a spreadsheet. Contrary to many other commodity sectors where people from outside the industry run the businesses, the aquaculture sector in general but the shrimp sector specifically is still dominated by family-run businesses where the company owners themselves actually run the companies. And for Nikolik, this is what makes it so satisfying to work in this industry. For Nikolik, it’s not about good or bad, but about the passion and commitment of shrimp people, and that this sets the shrimp industry apart from other commodity sectors.
Rabobank’s agri-history
Rabobank has a long history as a financer of agri-food sectors. Originally a cooperative bank focused on Dutch farmers and agri-businesses, the bank developed knowledge and specialized in this area. The bank grew with its clients, and it ultimately assisted in the development of the Dutch agri-food sector into what is now one of the world’s most innovative, productive and profitable sectors. Rabobank is one of, if not the, biggest financers of agribusinesses worldwide. As for the seafood industry, the bank understands the structure and dynamics of the industry, and is positioned to strategically advise seafood clients on potential areas for growth, mergers and acquisitions, and risks.
Photo courtesy of Paul Campbell-Aquaculture UK/ShrimpTails Magazine
