21. Can Producer Organisations solve the problems of over-production?
The four price collapses, with their very different causes illustrate that Producer Organisations may not be the lasting solution to over-production, which Ritson and Chamberlain claim. The reason is obvious, if production figures are examined.
When the Scottish industry first complained about Norwegian over-production, Scottish production had reached 28,000 tonnes. This year, production is forecasted to top 80,000 tonnes. If Norway is over-producing, then so is Scotland. Scottish producers have made little effort to control their production.
Since 1989, Norwegian production has expanded by about 120%, whilst that in Scotland has expanded by 185%.
Scottish producers may argue that their market has also expanded, but so has that for Norwegian salmon. The Scottish industry claim that Norwegian production is out pacing the growth in market demand, but then so must that of Scotland. In fact, market demand has kept pace with production and this is demonstrated by the lack of any stocks of unsold salmon. If any salmon producer was actually over-producing, then a mountain of unsold salmon would be a very visible feature.
The reality of the international industry, is that no country is over-producing. This negates the need for Producer Organisations at all.
22. If over-production is not the problem, then what is?
Both the Scottish industry and the consultants have confused the problem. Salmon farmers are not over-producing, and never have been. The real problem is one of localised over-supply. Simply, too many farmers are targeting their fish at exactly the same market, at exactly the same time. The presence of excess fish at market at the same time, then depresses the price.
The solution is to spread the harvest throughout the year, and aim it at different markets. This reduces the competition for market share and lessens the pressure on market price. Of course, there is a natural reluctance amongst many farmers, to forgo the traditional, lucrative markets, when prices are usually higher. However, as production continues to increase, the price peaks will start to even out.
To illustrate the principle, the extra 90,000 tonnes of Norwegian fish, produced during 1995, should be considered. Clearly, if 90,000 tonnes of extra production should come to market on one day, the market would completely collapse. This equally applies, should the harvest period covers just a couple of weeks. The market would have to deal with an extra 6,500 tonnes a day. However, if the harvest is spread throughout the year, the market would need to absorb only an extra 250 tonnes a day, not such an inconsiderable amount.
23. Can Producer Organisations deal with market over-supply?
As the mode of operation for Producer Organisations relates to the number of smolts put to sea, the Producer Organisation would have extend its' control over its' members, if it also wanted to regulate the flow of fish to market. This would be almost dictatorial control, which is not a function of the Common Fisheries Policy.
For both production and marketing to be regulated by the Producer Organisation, the PO would require total control over non members. Otherwise, the markets would be impossible to regulate. Such a suggestion goes far beyond the remit of the voluntary body, allowed under the Common Fisheries Policy legislation. This would eliminate any vestige of a free and open market.
It is therefore clear that over-supply cannot be regulated by the Producer Organisation, unless the price falls. This would enable the Producer Organisation to gain short term control, but only by the withdrawal process, which has already shown to be extremely costly and unworkable. In the fisheries sector, localised over-supply would end as stocks become depleted and markets further afield are exploited. This could not happen in the farming situation, because of the continuing production of more fish. This would be made even more difficult under EC rules, because once a system of withdrawal had been initiated, it could not stop within the twelve month time limit. Farming Producer Organisations would need to operate throughout the two to three year production cycle. As this is overlapping with new stock, it would be incredibly difficult to manage.
24. Can Producer Organisations be made to work for salmon farming?
The mode of operation, for any Producer Organisation, is largely irrelevant, if the fundamental concept itself, is flawed. The main reason that the presence of Producer Organisations would clearly have not prevented the recurring collapse in salmon prices, in either 1989, 1991, 1993 or 1995. Therefore, it is necessary to consider the thought process, by which the consultants, Ritson and Chamberlain, arrived at their conclusions. It will be then possible to discover whether it is the concept of Producer Organisations itself, or simply, the mode of operation, which is at fault.
25. How did the consultants arrive at their conclusions?
Professor Ritson, writing in his 1993 booklet, states that it was very predictable that the high prices achieved for salmon during the 1980's could not be sustained, which was why by 1991, following three years of depressed prices, the industry was in a state of crisis.
He suggested that the salmon industry resembled closely, a textbook example of a competitive industry, because i. there is a relatively free market and ii. there are a large number of small businesses.
Whilst it is true that the salmon market is relatively free, salmon farming cannot be described a being an industry of a large number of small businesses. There is actually a very diverse spread of business types. This was the just the case in 1991 as it is now.
However, it was wrong to base any conclusions on one specific view of the business types. This was because the type of farming company operating in Scotland was undergoing change and continues to do so. The largest companies can gain some advantage in the market place because they can produce salmon at a lower cost, than their smaller counterparts. This puts increasing pressure on the smallest businesses, who cannot compete. To survive, they must either integrate with the larger companies, making these even larger or integrate with one another.
The Scottish industry could not then and cannot now, be described as one of a large number of small businesses. In Scotland now, the production from 50 farms in Shetland is still only half that of one mainland company. The impact on the market of these many farms is therefore, becoming increasingly negligible. Eventually, the salmon industry will evolve into one of a small number of very large businesses, operating as individual companies or co-operatives. This change was predictable, well before 1991.
Professor Ritson goes on to say, that the development of the farmed salmon industry can be interpreted as the introduction of new cost reducing technology into a previously high cost industry. However, even this is not quite true. Certainly after 1989, farmers had to start to address the question of costs, but this was mainly through improved management, rather than being technology based. Reductions in stocking density had much more impact on cost reduction, than any new technology. This brought about improvements in growth rates and reductions in mortality.
26. So, salmon farming is a classic textbook example of a competitive industry?
Actually no, it is not. Having stated that salmon farming is a textbook example of a competitive industry, Professor Ritson, then contradicts his view.
He admits that the salmon farming industry does depart from the textbook case in respect of the number of years over which prices were sustained and the suddenness and extent of the price collapse.
The fact is that Professor Ritson has simply failed to appreciate the differences between the events of the salmon farming industry in 1989 and the wider agricultural sector, with which he is usually involved. He has made a fundamental error in assimilating the evidence, because he relied on his experience of the agricultural sector, rather than by looking at what really happened to the salmon industry.
When prices collapse in the agricultural industry, the blame can be usually attributed to over-production. This is because most examples of agricultural production represent mature industries. Production has usually reached a maximum average level about which there is some cyclical fluctuation. If prices rise, farmers try to produce a little more to gain some financial advantage, but when this extra production comes to market, the prices fall again. This situation continues ad infinitum, since demand for the raw food material is relatively stable, unless either a promotion is instigated, or there is a food scare, which then deters consumers.
Naturally, a Professor of Agriculture, who is asked about a price collapse in a food producing industry, will assume the that production and the market will follow all those other industries of which he has experience. This was exactly what happened, when he was asked to comment on the salmon farming industry. He assumed that salmon farmers must be over-producing, since this is the usual explanation for falling prices.
However, the salmon industry in 1989 was not, and still is not, a mature industry. It does not follow the typical displays of basic agricultural foodstuffs, such as beef and pork.
Salmon farming is still an industry in its' infancy and the recurring market disruption is nothing more than infant growing pains, aggravated by those farmers who wish to fight against such growth.
Yet, Professor Ritson fails to recognise this difference and accounts for the collapse in other ways.
27. How does Ritson account for the differences?
To account for this divergence from the classic examples, Professor Ritson claims that unusually, the technology induced expansion of production seems to have been associated with a non priced induced expansion of the market.
His view was that real prices declined only gently during the 1980's, fuelling a sustained expansion programme, whereas in a normal competitive market, a fall in market prices, would have discouraged investment at an earlier stage. He then notes that the long period of low prices since 1989 has been sustained longer than should have been expected, but he suggests that this may not be inconsistent with the experiences of the agricultural sector, which is prone to cyclical disturbances.
Again, Professor Ritson has tried to fit the experiences of the salmon industry to his preconceived model, rather than look at salmon farming as an independent industry.