Future prices for salmon

Transcription

1 Future prices for salmon Terje Vassdal, Øystein Myrland and Sverre Braathen Thyholdt, Norwegian College of Fishery Science, University of Tromsø, Norway Paper presented at Farming the Sea Workshop, Refsnes Gods, August

2 Futures markets and futures prices have many functions Markets may be used for hedging prposes Markets may be used for ordinary forward trading (with physical delivery) Price prognoses Speculation purposes 2

3 Future prices vs futures prices Estimating salmon prices into the future have been a popular activity in industry and academics Most studies have tried to estimate the demand side of the market Demand price elasticity studies Marked integration studies Effects of market regulations, i.e. the EU Norway agreement 3

4 Supply studies have been more absent General knowledge of the supply side Annual growth capacity % Regulation of the aquaculture industry will influence growth potential Growth is due to 1. Increased use of inputs 2. Productivity imrovement Increases in quantity will, Ceteris paribus, reduce the market crearing price Only productivity improvement will reduce average production costs 4

5 Annual volume growth (%) Norw. Aquaculture salmon, from % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % -10 % -20 % Årlig vekst norsk atlantisk laks e

6 Production costs have been reduced to about 1/3 of 1987 level Produksjons-veide kostnader (prisjustert. 1998=100) Sibling (smolt) Feed Labour cost Cost of capitavarious othe Total

7 Relative costs:sibling costs and labor costs have largest decrease, feed is increasing Percentage distribition of costs Sibling (smofeed Labour cost Cost of capitavarious other % 28.4 % 13.4 % 19.5 % 16.0 % % % 27.6 % 12.8 % 21.6 % 16.0 % % % 33.4 % 10.8 % 18.1 % 14.3 % % % 39.6 % 10.2 % 17.3 % 16.5 % % % 39.0 % 10.2 % 16.5 % 19.2 % % % 35.5 % 9.8 % 15.3 % 25.0 % % % 36.0 % 9.8 % 13.8 % 26.0 % % % 38.5 % 9.6 % 11.1 % 24.9 % % % 41.6 % 9.5 % 9.4 % 23.4 % % % 41.7 % 8.5 % 8.1 % 24.7 % % % 42.7 % 8.3 % 9.3 % 25.0 % % % 45.5 % 7.8 % 8.5 % 24.5 % % % 47.0 % 7.3 % 8.6 % 25.0 % % % 42.7 % 7.4 % 9.6 % 27.8 % % % 41.3 % 8.1 % 9.3 % 28.7 % % % 42.3 % 7.7 % 9.5 % 28.8 % % % 45.8 % 6.6 % 10.1 % 27.2 % % % 46.5 % 6.5 % 11.4 % 25.8 % % % 46.3 % 7.8 % 8.5 % 26.8 % % 7

8 Feed factor rate

9 Input of capital (total assets in NOK per kg) Norwegian salmon

10 Production (kg) relative to licence volume, Norw.. salmon Produksjon per m3 konsesjonsvolum

11 Production per man-year Norwegian farmed salmon Tomm per årsverk

12 An example of an equilibrium model for fresh Atlantic Salmon A Model for fresh salmon (i.e. optimal storage is excluded from the model) A static one year model Four main markets EU Japan The U.S.A. Rest of the world, i.e. Eastern Europe (incl. Russia) Five producers Norway, Chile, Canada, UK (Scotland) and Faeroe Islands 12

13 The Equilibrium model Max s, d i j, x ij n m m n m n 2 2 ( α jd j 0,5β jd j ) ( γ isi + 0.5δ isi ) cij xij pij ( γ i + j s j ) : δ j = 1 i= 1 i= 1 j = 1 i= 1 j = 1 x ij Subject to : j= 1 i= 1 x n m ij x x, s ij ij i s 0, ( i d j 0, d 0, ( i j i = 1,, m) ( j = 1,, n) = 1,, m, j = 1,, n) 13

14 Futures markets for salmon Multiple futures markets are in the process of being organized i Norway now: 1. European Fish Exchange, Oslo ( ) 2. Fishpool,, Bergen, ( FishEx, Tromsø ( Fishpool and FishEx have both been granted licence as Authorized financial marketplace. 14

15 Futures prices Prices resulting from trading standardized futures contracts on an organized futures market Futures prices are derivatives, i.e. depends on the price of an underlying asset; in this case farmed Atlantic salmon Futures and forward contracts are similar, but not identical Futures prices and forward prices will normally be different 15

16 The possibility of using Futures Prices as a price revealing mechanism The futures price will converge to the spot price at maturity Futures prices may be related to expected spot prices in a systematic way. Do we know how? The traditional view (Hicks and Keynes): Futures prices will be above expected spot prices ( contango ) Modern finance theory: Futures prices will (normally) underestimate expected spot price ( normal( backwardation ), depending of type of systematic risk,, which is normally positive. 16

17 A small Research Issue: What is the systematic risk between salmon and the market Estimate the Beta of salmon Result ( ): 2007): Beta = 0.58 Systematic risk for salmon is positive Implication: Present Futures prices will underestimate expected spot prices 17

18 Complication A normal futures pricing procedure: No payment when entering the contract Daily marked to market revaluing, i.e. seller and buyer will loose or gain on daily futures price changes At any time up to termination day, the seller (buyer) can terminate his contract and take his loss or gain. On termination day futures price will be equal to spot price The seller has the option to deliver the underlying product Both the two Norwegian futures markets have defined an untypical futures market contract 18

19 Special elements in the Norwegian FishEx contract No physical delivery at termination (only cash settlement) All contracts runs until termination A Marked to market settlement against calculated Index Price only last month before termintion (standard: daily settlement against futures price) Looks like a forward contract with recalculation of margins with cash settlement at termination 19

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21 The reference price index is critical for the success of the markets Three alternatives The FHL price Custom prices (Statistics Norway) A special price constructed for this purpose Fishpool use FHL price with additional markets FishEx use Statistics Norway price with exemption rules 21

22 The Fishpool Index Permanent weighting in the calculation of the Fish Pool Index TM, starting week 9 March-07 (this( is the third revision for the last half year) Farmers index: : 21% FHL/NSL index: : 41% SSB index: : 31% Rungis: : 2% Mercabarna: : 5% 22

23 Simulated reference price for FishEx ( ) 2005) REFERANSEPRIS % % % 250 % 200 % 150 % 100 % 50 % % 00:01 00:14 00:27 00:40 01:01 01:14 01:27 01:40 02:01 02:14 02:27 02:40 03:01 03:14 03:27 03:40 04:01 04:14 04:27 04:40 04:53 05:13 05:26 05:39 05:52 ÅR:UKE 23 EURO ANDEL FHL-JUSTERT VERDI ANDEL FHL JUSTERT VERDI FHL SSB REFERANSEPRIS EU

24 05:26 05:39 05:52 Reference split into EU price and ROW price REFERANSEPRIS :01 00:14 00:27 00:40 01:01 01:14 01:27 01:40 02:01 02:14 02:27 02:40 03:01 03:14 03:27 03:40 04:01 04:14 04:27 04:40 04:53 05:13 ÅR:UKE EU ROW EURO

25 What will determine success? Commodity characteristics Homogeneous product Spot price variations No restrictions to free trade Does a well established forward market exist? Contract characteristics Balanced contract for hedgers and speculators Prices must mot be manipulated Use of the contract must reduce risk for hedgers 25

26 A contract that failed: Trading in shrimp futures at MSE 26