Salmon industry update
Recapping the cycle and developments of the most profitable fish in the sea.
It’s been almost two years since I shared my first industry primer on the salmon farming industry. Salmon farming is an interesting industry: commoditized and cyclical, yet highly profitable due to growing demand and structurally limited supply, constrained by environmental and regulatory factors. These constraints generate rents, which are appropriated by some of the industry players, large dominant companies with very good margins across the cycle.
Since I wrote the article, the industry has been experiencing a downturn cycle of low pricing power despite restrained supply. This is just a natural development of which the industry has seen several in the past decade alone.
I believe the industry is approaching the most negative phase of the current cycle. Salmon supply is expanding into a global market where consumer discretionary income is not growing that much.
Although this might be seen as negative, I wait with hope for that super-negative part of the cycle, as at that point, opportunities might emerge, with some of the quality players trading at attractive valuations.
In this article, I provide a short recap of the industry and an update on its cyclical position. I provide a synthetic model to understand the potential returns of the leading players (Mowi, Salmar, Bakkafrost, and Leroy).
I also cover some long-term risks in the industry that might not affect this cycle or the next, but that can shape the industry’s development in the next decade. These risks include the rise of land-based farming, especially if China emerges as a disruptive global player, the potential for increased taxation on industry rents, and the growing threat of tail-risk climate events affecting production.
Other articles covering commodity industries
Recapping salmon
For a more detailed view, please read the original primer.
Salmon was originally caught in the wild, primarily in its natural habitats in the North Atlantic. However, for decades, most of its supply (currently ~75/85%) has come from sea-based farming in large pens.
Salmon farming presents the classical attributes of cyclical industries related to natural products: lags between production decisions and capacity expansion/constraint of ~3 years, large capital requirements, and a commoditized product.
To this, salmon adds constraints caused by natural resource availability. Salmon farming is constrained to a few locations in cold-water fjords in Northern Europe (Norway, Scotland, the Faroe Islands, and Iceland), North America (Canada; plus Alaska, where it is forbidden), and the South Pacific (Chile, New Zealand, and Tanzania). The biological capacity of these fjords is limited by factors like lice infestations and eutrophication. Recent supply growth has been marginal, driven by technological improvements such as post-smolt facilities, vaccines, enhanced monitoring, and submerged pens, rather than by expanding farming area.
These natural constraints create economic rents, largely captured by the lowest-cost producers, which show consistently strong margins. Governments also capture part of those rents via license auctions (and in the case of Norway, the largest producer by far, in the form of extra taxes on the resource).
The cycles in salmon are mostly driven by demand rather than supply, because supply is hard to expand, and because most large producers are profitable even during downturns (meaning they do not reach the stage at which reducing supply is economically sound).
Because of the large rents, there is a widespread effort to farm salmon in land-based facilities. Salmon is currently farmed in freshwater pools during the hatching and smolt phase (in nature, salmon are born in freshwater and they migrate to the sea as they mature). The current efforts want to expand that process into the adult stage, which includes managing larger animals in seawater pools. So far, this kind of production is marginal and uncompetitive, but it may prove the undoing of the industry’s profits one day.
Where we are: demand-driven downcycle will meet higher supply
Global farmed salmon supply has been flat to declining since 2021, and wild catch has been more volatile than in previous years (see Salmon Farming Industry Handbook 2025 under ‘Supply of farmed…’).
Despite this context of restrained supply, the margins of the largest and most profitable producers (all from Northern Europe) peaked in 2022 and have been decreasing since.
In my opinion, the margin compression is entirely due to weaker pricing power. With lower global demand, buyers are less willing to bid up prices to secure the existing supply.
Like most commodity markets, demand has to equal consumption plus inventorying (of which there’s little in fresh salmon). If supply is fixed, as marginal demand falls, the price has to decrease.
To a context of weak pricing arising from not super strong demand (which does not seem to be about to turn given the global macro outlook), we need to add what seems to be higher supply in 2025 and 2026. In 4Q24, global farmed supply expanded by 3%, and by 1Q25, it was growing at 8%. The change in trend can be seen clearly in Norwegian (50/60% of global production) liveweight at sea. The salmon in the sea is the salmon that will be coming to market in the next 18/24 months. Further, 2025 should be a good odd-number year for wild catch salmon, increasing that supply from natural sources by 40/50% over 2024 (or 10% on the aggregate).
More supply and similar aggressiveness of demand mean lower clearing prices and lower margins for producers. The cycle will reach a more violent point.
In my opinion, this is not bad at all. As we will see, the prices of the leading salmon producers are already in what I consider a fair zone, so lower margins should lead to more attractive valuations.
Company valuations
Northern European leaders
When talking of farmed salmon, the companies deserving the most attention are in Northern Europe, particularly Norway. This happens because they are the lowest in the cost curve, and drive most of the world’s supply, meaning that they enjoy the rents. Further, their margins are protected from entering negative territory because there are many producers of more marginal regions that would remove supply before that happened.
The industry in these countries is also relatively concentrated, with the top 5 producers (Mowi, Salmar, Mitsubishi, Leroy, and AquaChile) supplying about 40% of the global market.
That is, we are talking of quality companies with strong (albeit cyclical) margins, very positive returns on capital, and a formidable natural resource barrier to entry.
For valuing these companies, I have used the framework from the DCF Napkin Model, which is based on assumptions about growth, capital requirements, and cycle-average margins.
For margins, I considered recent cycle averages, except for cases where the averages seem no longer representative. This means I am not valuing the companies based on whether margins will improve, but rather on the average between positive and negative periods.
For growth, I considered long-term global volume expansion of 3%, with cycle-average price expansion of another 5% (consistent with inflation plus some pricing power). Technically, the pricing power should lead to higher cycle-average margins over time, but I have not considered this (bullish) assumption.
Finally, for capital requirements, I have considered constant financial leverage and asset utilization. On the leverage side, these companies are not very levered in most cases. On the asset utilization side, pricing power should also lead to higher utilization, but again, I have decided not to consider this (bullish) assumption. If utilization and leverage are constant, then for each percentage point of growth, equity has to expand by one percentage point as well, determining the capital requirements (CAPEX above D&A and net working capital).
The calculations are below. In my opinion, a 10%-ish return across the cycle is interesting for companies that have a natural moat (should we say pen in this case?), but it is not enough to make me jump out of my chair.
That’s why I believe another leg of decreasing margins has the potential to add fear to prices and offer more bargains. Still, I should warn that the cyclical dynamic in salmon seems to be ‘priced in’ for the main producers, with stock prices not moving that much when considering the downward cycle the industry is in since 2022/23 (the big correlated move down in October 2022 which actually explains most of the down move since the cycle started, is the introduction of a rent tax in Norway).
Chilean companies
Companies in Chile are more marginal producers, with sometimes negative margins during down cycles. The jurisdiction suffers from poor biological regulation, and more prevalent diseases or production-related problems. Growth has been fast overall, at about 8% CAGR for the past decade, similar to the Northern Europe players.
The more marginal position means they should be trading at lower valuations than their European peers. However Blumar and Salmones Camanchaca (AquaChile does not show trading in over 6 years) trade at more than 10x cycle-average operating income, before interest and taxes. This might have to do with the geography enjoying the positive part of its (in this case more supply driven) cycle.
Long-term considerations
There are a few long-term trends that, although they will not impact salmon this year or even this decade, can have an outsized effect down the road. These are regulation, climate change, and land-based salmon.
Regulations and taxes
In my previous article on salmon, I had commented on how Norway established a resource rent tax of 25% on the value raised at sea. This added a few percentage points to the aggregate tax rate of the industry (not all salmon is farmed in Norway, and not all value is produced at sea, as there are previous and posterior operations).
As salmon becomes more profitable with limited resources and consistent or growing demand, we should not be surprised to see this move to tax the industry continue. Most of the salmon companies operate in what can be considered welfare-state countries, where high taxation of rents is considered valid and even positive for society. Indeed, the right-wing parties of Norway ended up supporting the higher tax.
We should also consider that the environmental problems caused by salmon farming are very real, particularly the eutrophication of coasts. This is particularly true in countries with less developed control mechanisms, like Chile, where algae blooms are more recurrent. In these countries, or in those where the industry is not yet so large (Faroe, Scotland, Iceland), we could see movements in favor of banning farming.
Climate change
Salmon need a specific water temperature range to survive and to avoid the most common biological problems. This makes the industry very exposed to sudden, violent changes in water temperatures, which are becoming more common.
One tail-risk I have been considering recently is a large (positive) variation in water temperatures that makes all producers in a region (say the Northern Atlantic) drastically reduce the biomass at sea, therefore causing both a spike in prices and massive biological asset losses.
Land-based salmon, and China’s 年年有鱼
In Chinese, the words abundance/surplus (余) and fish (鱼) share the same sound, so saying ‘(Hope) Every year has surplus!’ or ‘(Hope) Every year has fish!’ sounds exactly the same (crazy right?). For that reason, people eat fish during the Chinese New Year.
But language jokes aside, China might become the most important threat to the global salmon farming market via land-based farming. The industry ticks all of China’s boxes, and I believe the country could make a move to dominate land-based salmon.
China is a big leader in aquaculture, probably as much as 60% of all global aquaculture, in both land and sea. The country already has experience adapting sea-based species like Turbot or Grouper to land-based RAS systems. This implies supply chains, experts, capital, and accumulated experience.
The industry intersects the core of Chinese competitiveness: an experience curve to ride down via massive scale, technological breakthroughs needed, massive capital requirements, and export orientation.
Land-based is not yet on par with sea-based farming costs, although some (like BCG) believe that it is getting closer as it scales. It doesn’t need to get fully on par because land-based can benefit from other factors to be more competitive: selling during off-season (Northern hemisphere summer), or locating closer to demand markets (saving on air freight).
By investing in expansion on a Chinese scale, and with Chinese-level innovations and competition, the country could jump to the forefront of this new industry. One of the most advanced producers, Nordic Aqua Partners, is already operating in China. Nordic is one of the few projects already harvesting salmon.
The harvest volumes of all land-based producers are still negligible (even the bullish BCG expects only 100k tons by 2030 versus 2.7 million tons currently harvested from the sea), but change might be non-linear if some breakthroughs are met.
I believe that the land-based industry will not receive much investment for the time being, but it will return to the fore when salmon margins go through another up cycle. It might be at that investment spree that the breakthroughs are actually achieved. The problem for sea-based is that IF (big if so far) land-based is unlocked, the rents from control of natural resources disappear, as the industry becomes capital-constrained, instead of resource-constrained.
The salmon-farming Doomsday Clock is not yet in a critical position, but it is a few minutes closer than last year.
Conclusions
Salmon is one of the very few ‘quality’ commodity industries, where even downturns are well-behaved. It is an industry I am following closely for that reason, but the stock prices of the best operators are not yet where I want them to be.
I remain patient and happy to wait, knowing (believing?) that I understand the industry’s long-term drivers and risks and that I will be able to become greedy when others are fearful.