Where to go fishing for profits

IF you want to invest in the oil price it isn't hard to do: you go straight to the source and invest in the big producers, Shell and BP. If you want to invest in the boom in metals you invest in the big diversified miners, Xstrata and Rio Tinto, for example. But what if you want to invest in soft commodities in pigs, cows and wheat? Then it gets harder.

You can invest in firms tied to agricultural infrastructure (I've mentioned a few in past columns) and you can buy a farm, but neither of these routes gives you the direct access to the commodity as an oilwell or a copper mine would.

Buy a tractor company and you are a few steps removed from the basic product. Buy a farm and you can't just harvest cows or corn from it. No, you've got to put up with all the inconvenience and costs of growing your crops or rearing animals.

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However, there is one exception to this irritating state of affairs fishing. Buy ownership of a fishing quota, or shares in a company that owns a fishing quota, and you'll find it is a bit like owning a bottomless oilwell. You can keep on pulling out the resource year after year, pretty much in perpetuity (as long as you manage your stocks well).

This brings us to Peru and in particular to Copeinca, a Norwegian-listed fishing and fish-processing company. Peru is a great place to fish. Its fabulous climate and clean waters make for happy, fat fish sporting fishermen note, the deep coastal waters to the north are good for black marlin and yellowfin tuna.

Owning the rights to fish off these shores, according to Hugh Hendry, manager of the Eclec-tica Agriculture fund, is a bit like having not just a bottomless oilwell but an extremely high-quality one too. Simply because of your location you catch better fish and make better margins. Peru provides well over 30% of the world's fish meal and fish oil, as well as much of the giant squid consumed in Asia.

Copeinca, founded in 1994, has exactly what we want from a fish-related investment: perpetual rights granted by the Lima government to fish for anchovies. It has a large fleet of boats and seven processing plants which it uses to turn the little fish into fish meal and fish oil which are then used to feed farmed fish (about 80% of production) and Chinese pigs (the other 20%). This is a fabulous market to be in. Demand for pork is rising fast in China as the growing middle classes indulge in ever more barbecued pork and spare ribs, so after a year in which blue-ear pig disease has hit herds, we should expect the number of pigs being bred to rise fast.

At the same time demand from fish farms is growing fast. Salmon farming is one of the most efficient ways to produce protein and, while the industry is cyclical (salmon farmers are enthusiastic types and supply overtakes demand every now and then), its long-term growth is pretty much a given.

The same goes for the new varieties of fish farm springing up: sea bass farms are expanding and several companies are experimenting with farming Norwegian arctic cod (it isn't clear yet if this is going to work well).

It is possible to give farmed fish non-fish foods such as soya meal, but this isn't a complete replacement: it turns out that carnivorous fish don't much fancy vegetarian food. Over the years fish farmers have managed to bring down the ratio of fish-derived feed from about 70% to 50% but it can't fall much further the fish simply won't have it.

The upshot is that demand for fish meal from fish farms is rising at about 7%-8% a year and prices soon should do the same (quotas mean that supply can't rise at the same sort of speed). Meal prices have had an odd year so far, with flooding of Chinese shrimp farms temporarily hitting demand and prices, but things have now normalised. Most analysts suggest that all inventories will have disappeared by November and that prices should start moving up fast from then on. That's all good news for Copeinca.

More good news comes in a change to the quota system in Peru. At the moment the boats are only allowed out for 50 days a year. This means that companies have to catch all their fish fast and then process it all at once. However, 50 days will soon become 150 days. The result? Copeinca will need fewer boats and fewer processing plants and its costs will fall.

Combined with rising prices for its products, this should mean fast rising profits, said Hendry. The shares trade on a price/ earnings ratio of about 12 times.

There are risks to this investment, the main one being the oceanic and atmospheric phenomenon known as El Nio. When the weather doesn't suit them, anchovies dive deep and fishermen can't find them this happened in 1997, 1983 and 1972.

An interesting aside is that some analysts claim the great inflation of the 1970s was kicked off by the fast rise in the price of animal feed, and hence food prices, that resulted from 1972's El Nio. Even the concept of core consumer price inflation (measuring inflation without including food prices) which has caused so much statistical trouble was invented for the same reason. It'll be interesting to see what seemingly innocent side effects the rising price of fish meal has this time round a buoyant share price for Copeinca aside.

First published in The Sunday Times 16/9/07