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AbstractWe analyze fish pricing in the São Paulo wholesale market, the second largest seafood market in South America. Quantitative price analysis is complemented by interviews with participants in the value chain to answer how the multitude of fish products supplied in this market are related and the challenges facing future growth. The results reveal a clear separate pricing of domestically produced fishery species (whitefish and pelagics) from the internationally traded aquaculture species (tilapia and salmon). Tilapia and salmon are uniquely priced, less volatile and more persistent with a price dynamic more akin to local terrestrial meats. Fishery prices show large month-by-month fluctuations and compete more with each other. Participants in the different levels of the value chain corroborate the uniqueness of salmon and state a preference for stable availability and low prices, with less concern about the specific sourcing of fish (aquaculture/fisher, or domestic/imported).

A representative and unbiased fish price index is an important tool to measure price risk, as well as for production and marketing management. This paper investigates the relationship between one of the primary price indices of farmed salmon, the Fish Pool Index, and the stock prices of major publicly traded salmon companies. We document that stock prices reflect salmon price information earlier than the Fish Pool Index. Furthermore, this effect is shown to be greater for larger companies. This identifies a possible source of bias in the salmon futures pricing design that relies on the index, which can negatively affect the perceived unbiasedness of contracting. The results also point to potential company-size effects on salmon pricing.

AbstractThis study investigates potential economic reasons why the production of trout is maintained in Norway by analyzing prices and production for Norwegian Atlantic salmon and trout. The species Atlantic salmon dominates the global salmon market, but its two largest producers, Norway and Chile also farm in sea pens significant quantities of large rainbow trout (as opposed to portion-sized Rainbow trout farmed in freshwaters in other parts of the World, e.g., Iran, Peru, Turkey, and others). Suggesting that these trout have some attributes that make it a useful complement to Atlantic salmon. We investigate development in supply volumes of these species and conduct a cointegration analysis using monthly prices from 2000 to 2018. The results show that the markets for fresh and frozen rainbow trout are tightly integrated with fresh Atlantic salmon, and, where the latter is a price leader. This means that many consumers consider the two products as substitutes, with no clear preferences. There is no apparent productivity argument for the continued production of rainbow trout vis-à-vis Atlantic salmon. However, there may exist a fringe of consumers that prefer its characteristics, motivating firms to maintain its production as a means of diversification.

AbstractThis paper discusses how transaction data can be used to shed light on trade dynamics in seafood exports, with Norwegian salmon exports as the case. There is a large literature on exports and imports of salmon between countries, but less is known about how the heterogeneity of exporters and importers relates to the aggregate data. We utilize transaction data for all exports of salmon in the period 2010–2014 and show that firms involved in salmon exports holds several of the characteristics that are commonly found in the international trade literature, but differs in some important dimensions. Most exporters of salmon connect to relatively many importers and serve many different destination markets. Short-lived trade relations are shown to account for a large share of export values.

Inter-continental Liquefied Natural Gas (LNG) trade can facilitate the development of a global natural gas market. However, in addition to explicit shipping costs, such trade requires time commitments in shipping due to the long hauls of many shipping routes. We show that this time commitment adds an additional economic cost to LNG shipping, and creates a positive relationship between the economic cost of LNG trade and regional natural gas price spreads. Necessary time commitment therefore augments the other costs of LNG trade, and contributes to weaken the ties between global natural gas markets.

AbstractThis paper investigates how pricing efficiency of Norwegian salmon exports varies across destination market characteristics. Efficiency is defined as the rate at which individual transaction prices adjust to common market information, and is estimated by dynamic fixed effects panel models with parameters conditional on trade attributes using micro-level trade data. Our results show that contract type (Incoterms) used in transactions can be used to segment the Norwegian export markets into three types: (1) high-value trade to large distant markets, (2) medium-value trade to close high-income markets, and (3) lower-value large bulk trades to lower-income close markets. We find that pricing efficiency is lowest for committed trades over long distance using planes, and highest for less committed large bulk trades to close markets. Despite significant heterogeneity, the majority of salmon price variation (around ¾) is common, providing a clear justification for the representativeness of a salmon price index.

Salmon price volatility has more than doubled over the last 10 years, and is now higher than many comparable commodities. This constitutes a challenge for the markets and consumers that salmon is targeting, and the continued growth of the industry. Reduced short-run elasticity of supply is the primary reason for the volatility trend. This is supported by the empirical evidence provided in this article. Three major developments in the salmon market supply-chain provide support for this hypothesis: (1) consolidation of the upstream supply chain into fewer and larger units, (2) a premium on fixed harvest schedules to satisfy retail demand for stability, and (3) restrictions on new production capacity in conjunction with strong demand promoting “race to raise” harvest policies. We argue for the importance of small, lean, and flexible production units to limit short-run price volatility. Price volatility rewards flexibility and provides entrepreneurial incentives for a subset of units.

A particle filter maximum likelihood estimator for the competitive storage model is developed. The estimator is suitable for inference problems in commodity markets where only reliable price data is available for estimation, and shocks are temporally dependent. The estimator efficiently utilizes the information present in the conditional distribution of prices when shocks are not iid. Compared to Deaton and Laroque’s composite quasi-maximum likelihood estimator, simulation experiments and real-data estimation show substantial improvements in both bias and precision. Simulation experiments also show that the precision of the particle filter estimator improves faster than for composite quasi-maximum likelihood with more price data. To demonstrate the estimator and its relevance to actual data, the storage model is fitted to data set of monthly natural gas prices. It is shown that the storage model estimated with the particle filter estimator beats, in terms of log-likelihood, commonly used reduced form time-series models such as the linear AR(1), AR(1)-GARCH(1,1) and Markov Switching AR(1) models for this data set.

ABSTRACTThis article tells the story of how fish oil has gone from an inferior to a premium oil product. With the growth of aquaculture, fish oil became a valuable feed component. Its value increased further as the belief in the health benefit of Omega-3 opened the market for direct human consumption through nutritional supplements. Strong demand, limited supply growth and weaker substitution between Omega-3 and Omega-6 has led to diverging trends between fish oil and vegetable oil prices, with fish oil now a premium oil product. We also investigated how the salmon aquaculture industry has responded to the challenge of rising fish oil prices. Concerted effort in nutrition and feed research is shown to have allowed a reduction in the share of fish oil in feed from around 25% in the early 2000s to around 12% today. This substitution effort has allowed salmon production to grow without using substantially more fish oil.

When natural gas prices are subject to periodic decoupling from oil prices, for instance due to peak-load pricing, conventional linear models of price dynamics such as the Vector Error Correction Model (VECM) can lead to erroneous inferences about the nature of cointegration relationships, price adjustments and relative values. We propose the use of regime-switching models to address these issues. Our regime switching model uses price data to infer whether pricing is oil-driven (integrated) or gas-specific (decoupled). We find that UK natural gas (NBP) and oil (Brent) are cointegrated for the majority of the sample considered (1997-2014). UK gas prices tend to decouple during fall and early winter, when they increase relative to oil consistent with seasonal demand for natural gas creating gas-specific pricing. When evidence favors integrated markets, we find that the industry 10-1 rule-of-thumb holds (the value of one MMbtu of natural gas in the UK market is one tenth the value of one barrel of Brent oil), while the overall relationship, including decoupling periods, is 9.2-1. The paper highlights that what relative value to use, depends on the purpose of its use.

This paper document that the commodities/equities beta is positive and hump shaped over shorter holding periods, but declines and becomes negative for longer, business cycle duration, holding periods. The shape of the beta can be understood as a result of common commodities/equities dependence on aggregate economic activity combined with the unique mean reverting component of commodities. Storable commodities behave like financial assets in the short-run, but investment induces mean-reversion that reduces the beta over longer holding periods. The beta is reconstructed theoretically using a novel combined storage and investment partial equilibrium model, and the hypothesis is explored empirically using a structural VAR model for the crude oil market. The findings suggest that a component of the positive hedging benefit of commodities in equity portfolios is due to commodity mean reversion, and that commodity wealth diversification is more effective over longer investment periods.

A futures market has recently been established for Atlantic salmon, and in this paper we examine the risk premium in salmon futures prices. Recent studies suggest that industry-specific production factors as well as the basis can influence the relationship between spot and futures prices. Using Atlantic salmon futures and spot price data from 2006–2015, we analyze the impact of the futures-spot basis, seasonality, industry-specific variables, and demand uncertainty on the risk premium and spot price change. The results suggest that the basis and seasonality significantly explain the variation in the risk premium. Moreover, in contrast to studies on other animal production commodities, the basis seems more important for determining the risk premium, than for the spot price change.

ABSTRACTThis study examines the Fish Pool salmon futures contract with respect to how well the market performs in terms of the futures price being an unbiased estimator of the spot price and whether the market provides a price discovery function. Using data for 2006–2014 and with futures prices with maturities up to 6 months we find that spot and lagged futures prices are cointegrated and that the futures price provides an unbiased estimate of the spot price. We also find that, with the exception of the front month, that the causality is one-directional. The spot prices lead futures prices between 1–6 months maturity. Hence, while the spot and lagged futures prices are unbiased estimates, we do not find support for the hypothesis that futures prices provide a price discovery function. Rather, it seems that innovations in the spot price influence futures prices. This finding is not uncommon in new and immature futures contracts markets. Hence, the salmon futures market is still immature and has not yet reached the stage where futures prices are able to predict future spot prices.

Using the Norwegian salmon aquaculture as a case study, this paper examines the relationship between input-factor prices and cost driven output prices. We hypothesize that as variations in marginal productivity in an industry falls, the relative importance of input-factor price variations on unit production costs increases. For maturing commodity industries, price trends will go from productivity driven to input-factor price driven. Our empirical results indicate that the correlation between salmon price and feed input-factor prices (fishmeal, soybean meal and wheat) has increased in recent years. Consistent with a period of increased importance of feed costs to developments in salmon production costs, we find evidence of an emergent protein cointegration relationship between salmon, fishmeal and soybean prices. The paper provides an empirical framework to analyze changing relationship between output and input prices, and highlights some limits to inference using price analysis.

Liquefied petroleum gases (LPGs) together with other natural gas liquids (NGLs) have played an important role in the current U.S. shale gas boom. Depressed gas prices in recent years have made pure natural gas operations less profitable. The result is that liquids components in gas production have become increasingly important in ensuring the profitability of shale gas operations. In this paper we investigate whether the shale gas expansion, which has led to an increase in associated LPG production, has also affected the historically strong relationship between LPG and oil prices. Revealing the strength and stability of the LPG/oil relationship is relevant when it comes to the future profitability and development of the U.S. natural gas sector. Our results suggest that the LPG/oil relationship has weakened in recent years with a move towards cheaper liquids relative to oil.This is consistent with developments in the natural gas sector with increased liquids production. A consequence is that U.S. natural gas operations cannot automatically rely on high liquids prices to ensure profitability.

Liquefied petroleum gases (LPGs) together with other natural gas liquids (NGLs) have played an important role in the current U.S. shale gas boom. Depressed gas prices in recent years have made pure natural gas operations less profitable. The result is that liquids components in gas production have become increasingly important in ensuring the profitability of shale gas operations. In this paper we investigate whether the shale gas expansion, which has led to an increase in associated LPG production, has also affected the historically strong relationship between LPG and oil prices. Revealing the strength and stability of the LPG/oil relationship is relevant when it comes to the future profitability and development of the U.S. natural gas sector. Our results suggest that the LPG/oil relationship has weakened in recent years with a move towards cheaper liquids relative to oil. This is consistent with developments in the natural gas sector with increased liquids production. A consequence is that U.S. natural gas operations cannot automatically rely on high liquids prices to ensure profitability.

Abstract We analyze the Gulf of Mexico brown shrimp fishery and the potential impacts of a large seasonal area of hypoxia (low dissolved oxygen) that coincides with the peak shrimp season. A spatial-dynamic bioeconomic simulation embeds three biological impacts on shrimp: mortality, growth, and aggregation on hypoxic edges. Hypoxia creates feedbacks in the bioeconomic system, altering catch and effort patterns. System changes propagate over space to affect areas that do not experience hypoxia. Areas that might otherwise be considered controls in a natural experiments framework are contaminated by the ecological disturbance through spatial sorting. Aggregate predictions from simulations are similar to empirical fishery data. Average shrimp size and total landings are negatively correlated, as are hypoxic severity and landings. Shrimp size and hypoxic severity are only weakly negatively correlated. Growth overfishing, which varies with recruitment success and ecological disturbances, is a key mediating effect.

The price of farmed Atlantic salmon from Norway has increased in recent years. This new regime follows several years of consistently falling prices. At the same time price volatility has increased substantially. This article models the volatility of salmon prices and establishes empirically that volatility is on an increasing trend. Further empirical analysis suggests that the volatility trend is largely accounted for by the common trend in other food prices relevant to salmon, including meats, cereals, oils and fish meal observed in recent years. Other potentially contributing factors to volatility are also discussed. This includes the role of the 2005 maximum total allowable biomass restriction, the 2006 introduction of the Fish Pool ASA futures market for salmon, the Chilean Salmon crisis and the increasing use of bilateral contracts.

Abstract Recent supply shocks in the Gulf of Mexico—including hurricanes, the Deepwater Horizon oil spill, and the seasonal appearance of a large dead zone of low oxygen water (hypoxia)—have raised concerns about the economic viability of the U.S. shrimp fishery. The ability of U.S. shrimpers to mediate supply shocks through increased prices hinges on the degree of market integration, both among shrimp of different sizes classes and between U.S. wild caught shrimp and imported farmed shrimp. We use detailed data on shrimp prices by size class and import prices to conduct a co-integration analysis of market integration in the shrimp industry. We find significant evidence of market integration, suggesting that the law of one price holds for this industry. Hence, in the face of a supply shocks, prices do not rise; instead, imports of foreign farmed fish increase.

Abstract The short-term relationships between the supply of farmed salmon and its market and biological determinants are not fully understood. In this article an econometric model of salmon supply is estimated exploiting monthly data on Norwegian salmon aquaculture. Our estimates indicate that supply has shifted over time due to innovations in several areas. We find that the price of farmed salmon has a limited effect on supplied quantity, giving a highly inelastic short-run supply elasticity. The biomass and seasonal factors are the main determinants of shifts in salmon supply in the short term.

Salmon farming companies face risks in both production and their markets. These risks provide incentives to diversify production spatially. A spatial diversification strategy can reduce production risk and contractual obligation risks. In this paper, we investigate the feasibility and consequences of geographically diversifying production in Norwegian aquaculture. Our analysis suggests that diversification can significantly reduce fluctuations in returns and reduce sensitivity to local risk factors.

A factor state-space approach with stochastic volatility is proposed for modeling and forecasting the maturity structure of future commodity contracts. The proposed approach builds upon the dynamic 3-factor Nelson-Siegel model and its 4-factor Svensson extension and assumes for the latent level, slope and curvature factors a Gaussian vector autoregression with a multivariate Wishart stochastic volatility process. A computationally fast and easy to implement MCMC algorithm for the Bayesian posterior analysis is developed, which exploits the conjugacy of the Wishart and the Gaussian distribution. An empirical application to daily prices for contracts on crude oil with stipulated delivery dates ranging from one to 24 months ahead show that the estimated 4-factor Svensson model with two curvature factors provides a good parsimonious representation of the serial correlation in the individual prices and their volatility. It also shows that this model has a good out-of-sample forecast performance.

This paper examines spillover effects among markets of crude oil and ten major agricultural commodities by employing the Diebold and Yılmaz (2009, 2012) spillover frameworks to returns and EGARCH filtered volatilities. We account for structural variations in data by dividing the data into two subsamples: from July 1986 to December 2005 (pre-2006 subsample) and from January 2006 to June 2016 (post-2006 subsample). Our findings indicate that there is minuscule information transmission among crude oil and agricultural commodities over the pre-2006 subsample, however, crude oil becomes the net receiver of information over the post-2006 subsample. Second, our findings indicate asymmetric and bidirectional flow of information among crude oil and agricultural commodities that intensifies during periods of financial and economic turmoil. Last, net volatility spillover increases in periods of large declines in the crude oil price, such as in 2008 and later in 2014. Overall, we document a more detailed insight into channels of connectedness among the underlying commodities, which may assist developing policy recommendation, portfolio designs, and risk management decisions.