28. What aspects of industry development did Professor Ritson fail to consider?
As previously mentioned, Professor Ritson describes the development of salmon farming as the introduction of new cost reducing technology into a previously high cost industry. This is a misinterpretation of the true development of the industry.
A common feature of all intensified aquaculture ventures, is that they produce high value species. This is necessary, because the cost of production tends to be high and the higher market price is essential to maintain farm profitability. Salmon farming is no different.
Salmon farming was perceived to be an attractive commercial proposition because the luxury status of the fish meant that high market prices could be obtained. The high selling price was required, to cover the high cost of production.
Prior to 1989, the salmon farming industry was permanently cost intensive. No attempt had been made to reduce the costs, simply because the farms were so profitable, that no one really thought to consider cost reduction.
It was the price collapse of 1989 and the subsequent loss of profitability, which started to focus the farmers attention on production costs, not the introduction of cost reducing technology, as suggested previously. After 1989, simple improvements in management made the most significant impact on cost reduction, although some new technology had been introduced. At that point in time, this was minimal and had little effect on profitability.
Professor Ritson also suggested the technology induced expansion of production seems to have been associated with a non-priced induced expansion of the market.
To some extent, this is correct. The market, and therefore production had expanded during the 1980's mainly fuelled by the general economic boom. The new wealth created a demand for all the trappings of luxury, including foods. Salmon farmers found that they could sell all that they could produce and expanded rapidly to satisfy the demand.
There is no doubt, that production would have continued to expand, even without the economic boom. However, it would not have occurred at such a rapid pace. This rapid expansion was the direct result of the increased demand for salmon at that time, ie a non-priced induced expansion. This was not associated with any technology induced expansion of production. In fact, the reverse is true. Farmers gave scant regard to excessive wastage and as a result, the cost of production remained high.
Professor Ritson also suggests that prices declined only gently during the 1980's which again, fuelled expansion. Any detected decline in market price, actually had little or no effect on expansion. The expansion of the industry can be singly attributed to the non-price induced expansion of the market, i.e. the demand for luxury products.
He also suggest that this continued expansion had lasted longer than expected. In a normal competitive market, falling prices would have deterred further investment in the industry. He still assumes, that the salmon industry is mature.
Every industry can exhibit distinct stages of development. These are infancy, growth and maturity. In many examples,maturity can also herald the end of the product life cycle. However, in the case of raw material food supply, this should never occur.
Professor Ritsons' interpretation of events and his possible solution to market disruption have been dictated by his view of the extent of industry development. Using the information presented by Chamberlain and Ritson, their view is clearly that the industry has reached maturity the events of 1989 are the beginning of the price and production cycles, which are an inherent feature of the agricultural sector whilst the true state of industry development in 1989 can actually be much better described as still being in its early infancy.
29. So, if the industry was still in its' infancy in 1989, what happened to cause the market disruption?
In 1989, the salmon farming industry was experiencing rapid growth, but because of the expansion of demand, little attention had been given to marketing. The price collapse, was a function of this apparent lack of marketing effort as the market became saturated. This does not mean that the industry was over-producing, but rather the localised market had been over-supplied.
Without the safeguards provided by active marketing, some aspect of the industry had to give. The result was a collapse in the price. However, this collapse was not a simple fall in price. Instead, the industry underwent a significant change.
Simply, what happened was that, the volume produced exceeded the amount of product, which could be absorbed as a luxury item. The price collapse heralded a change in industry production from one of high margins and low volumes, with a product aimed at the luxury market, to one of low margins and high volumes, producing a commodity food.
In effect, the product life of salmon farming, as originally conceived during the 1960's, came to an end and a new product replaced the one previously dominating the market place. Salmon coming to market after 1989, should be actually considered as being very different, to that of 1989 and before, almost a different product altogether.
30. Does Professor Ritson present any data, to confirm his views on industry development?
Writing in his 1993 booklet, Professor Ritson says that his 1991 report, seems to have been the first time that the possibility that the salmon industry might subscribe to the conditions of long term cyclical behaviour had been articulated formally. Although, he claims that some producers had already been using the terms boom and bust. He then goes on to say that this suggestion grew out of the argument that the salmon industry resembled more closely livestock production, than the fishing industry.
He then tries to say that he did not intend to suggest that it was an established principle that salmon production would exhibit cyclical behaviour, since cyclical behaviour is something which cannot be yet proved. For example, the cycle may be extremely long or it could be complex in nature.
Simply. he is trying to extricate himself from a view, which two years on does not seem to be appropriate to the salmon farming industry.
He concludes that a free market for salmon is likely to be the subject of high and depressed prices, measured over a period of years. There are however, complicating factors and the term cycle should not be interpreted to imply a regular pronounced pattern. He says that the market is cyclical, in that part of the price stability, is the consequence of production plans responding to market prices.
Unfortunately, his attempt to limit his explanation of cyclical behaviour to prices, is undermined by his cyclical production forecasts.
A projection for production between 1991 and the year 2000 clearly illustrates the anticipated production cycle.
Production forecasts (x 1000 tonnes), showing cyclical behaviour. (from Professor Ritson. The behaviour of the farmed salmon market in Europe. A review.)
Anyone with any current knowledge of the salmon farming industry, can see that these forecasts are totally unrealistic.
By 1993, Professor Ritson seems to have back tracked on his view of production cycles and restricted his comments to those cycles, relating to price.
Yet, the actual average price figures, in the same format used by Professor Ritson, shows, that since 1989, prices have actually stabilised. Admittedly, the variations shown have been caused by the recurring market disruption, but it will be impossible to obtain a totally stable price. Even Professor Ritson shares this view.
31. So, if Professor Ritson failed to interpret the events of 1989, is his solution to the market disruption still relevant?
Professor Ritson expressed the view, that a well managed fish farming business should achieve long term profitability. However, he also believed that the future would be characterised by a greater degree of price instability. This would be manifested as a cyclical element to the market.
To control this instability, Professor Ritson proposed using measures within the Common Fisheries Policy to manage the market more effectively. This market management was developed into the concept of Producer Organisations.
However, as it is clear that if the industry is not exhibiting unstable cyclical behaviour, then it is also questionable whether Producer Organisations would be able to exert any influence over the future development of the industry. i.e. why try to stabilise something, which is not unstable.
32. Whilst Producer Organisations appear inappropriate for the industry, why have Scottish producers continued to pursue this strategy of production control?
The salmon industry may not be exhibiting either over-production, nor cyclical behaviour and therefore, Producer Organisations may not be the most appropriate solution. However, the Scottish industry continues to demand the formation of Producer Organisations, because it suits them to. A network of European Producer Organisations may not solve perceived problems of over-production, but they will address the current industry under-marketing as well as enabling the Scottish industry to persist with their own aspirations for the salmon market.
The Scottish industry want to see the formation of Producer Organisations, because it will help them retain their special vision, for the salmon market.
Prior to 1989, Scottish salmon was perceived to be a premium product, with a higher market value than any other salmon. This market positioning was built on the Scottish image, as found in other food and drinks, ie, Aberdeen Angus beef, Scotch whisky etc. How much of this perception was simply image and how much can be attributed to real measurable quality differences, is questionable, but certainly the industry benefited from this market perception. This was because the market paid such high prices for the finished product.
During the 1980's pricing was not an issue, because every salmon produced found a ready customer, willing to pay the high market prices. However, when the demand for high priced salmon, reached saturation, price then became a problem.
Under normal trading conditions, increasing volume always has a negative effect on prices. Consumers of luxury products, are usually prepared to pay a higher price, only because the product has a rarity value in the marketplace. If the product becomes widely available, as production increases, then consumers are not so willing to pay a premium price, and hence prices fall.
Using an example from the motor industry, customers of Rolls Royces would not pay such a high price for their cars, if they were made in the same volumes and by the same mass market production techniques, as for a Ford Escort.
The Scottish industry, hoping to benefit indefinitely from the Scottishness of their product, suddenly found that its' image was being undermined by the availability of volume production of salmon from other countries, especially that from Norway. Unfortunately, as consumers were unable to detect any difference between a Norwegian salmon and one from Scotland, they were reluctant to pay the higher price demanded for Scottish fish. As a result, and much to the disgust of the Scottish industry, the price of Scottish salmon fell into line with other salmon. Scottish salmon therefore, became indistinguishable from any other salmon and they lost the benefits of their image.
Logical reasoning suggests that, if excessive volume undermines the price and image of Scottish salmon, then any contraction of international production would enable Scottish salmon to regain its former position. Such a contraction would only occur if the international industry agreed to such controls. As a first step, an obvious vehicle to implement cross European production controls would be the system of Producer Organisations, proposed by Professor Ritson.
It is this limitation, on their marketing activities, and not the intention to minimise cyclical behaviour, which is the main rationale for the continued pursuit of the Scottish strategy to establish Producer Organisations.
33. What is the Scottish strategy?
The Scottish proposals were that each industry form a recognised Producer Organisation. In Norway, there could be more than one, reflecting the larger size of the industry there. Each Producer Organisation would have a representative who would together form a voluntary working body, The European Salmon Industry Forum. This in turn, would appoint an independent consultancy company who would monitor the salmon market. Based on their findings, the ESIF would determine the level of future salmon production. This body would allocate a production quota for each producer Organisation, which would then spread this allocation through their membership.
The theory would be that by linking production to the market, prices would be stabilised, ending the continued market disruption. Equally, the Scottish industry could see these controls as a way of restricting production, to enable them to regain a premium image for Scottish salmon.
34. How have the Scottish industry pursued this strategy?
Once the proposals had been passed from Marine Harvest to the executive of the Scottish Salmon Growers Association, the SSGA began to approach other European salmon farming producers to persuade them of the benefits, which could be gained by adopting this system.
In July 1992, an extraordinary general meeting of the Irish Salmon Growers Association voted 14 to 0, with one abstention, to pursue discussions towards the formation of an Irish Producer Organisation.
In August 1992, a general meeting of the Shetland Salmon Farmers Association decided to proceed with the formal incorporation of the Shetland Aquaculture Producers Association Ltd. Preliminary discussions had been underway since May 1991.
On August 17th, following preliminary discussions earlier in the year, 178 Norwegian salmon farmers voted to establish a Norwegian PO. 27 farmers of the 206 attending the meeting said no. This was out of a total membership of 580, with only 450 actually paying fees.
During November 1992, the SSGA announced that the Scottish PO, which was then being set up, is to be called the Scottish Salmon Producers Ltd. This was despite the fact that the Scottish industry had not yet voted in favour of the formation of this company. This vote was not taken until early in 1993, when Scottish farmers then said yes to POs. In an industry poll, 83% (78) of farmers, representing 77% of the industry voted in favour of POs. The choice was just yes or no.
In September 1992, the inaugural meeting of the European Salmon Industry Forum took place. This voluntary body, was established to coordinate the collection and dissemination of production and marketing statistics, against the background of a Europe wide system of Producer Organisations. It comprises of representatives of salmon farmers from Norway, Scotland, Shetland, Ireland and the Faroe Islands.
35. The Scottish industry appear to have gained widespread support for their proposals from farmers, but what about from politicians?
Whilst, the formation of Producer Organisations are permitted under EC rules, the process of formation must be monitored and approved by the Member State. The Scottish industry have not received such support from the British government. The concept had been explored with the Scottish Office soon after the proposals had been put forward. However, discussions, between the SSGA and the Department for Fisheries, always reached a stalemate over a single issue. This related to the industry demands for an Extension of Discipline.The Governments view was clearly stated in Parliament (HC Deb 5 May 1993 c164w) by the then Fisheries minister, Sir Hector Monro:
"I have welcomed the salmon farming industry's proposals to establish producer organisations. These will help create a more stable and better informed market. However, I do not accept the industry's case for giving such organisations compulsory powers to determine stock levels and minimum prices for members and non-members.
This has since remained the Governments view.
The Scottish industry have been unable to appeal to the EC for assistance, since the power over Producer Organisations clearly lays with the Member State under EC rules.
The SSGA could only ask the EC to amend the current rules and regulations, as they claim that these were more geared to fish catching than fish farming.
The Scottish industry also had another problem to overcome at the political level. Norway was not a member of the EC although negotiations on their entry were underway at this time. It was unclear as to how EC rules could be applied to Norwegian farmers, if they remained outside the EC.
36. What was the Scottish reaction to such opposition to the Extension of Discipline?
The then Chairman of the Scottish Salmon Growers Association working party on Producer Organisations, David Windmill, gave a presentation to the Scottish Fish Farming Conference in February 193 and again later that year at Aqua Nor in Norway. This was the first real opportunity for the wider public to hear the views of the Scottish industry on the issue of Producer Organisations.
The paper, entitled "The value and aims of Producer Organisations" clearly states the SSGA position on a voluntary system, which they do not believe will work. However, a compulsory arrangement will require an Act of Parliament, which will never be forthcoming, simply because of the relative unimportance of salmon farming to the UK economy.
The SSGA clearly believe that compulsory Producer Organisations are the only solution to continued market disruption. Mr Windmills frustration with the Government and other critics of the concept can be seen in the following comments.
"The system has its critics and yet all of them - from senior politician to junior pundit - have one thing in common. While they all agree that we have a problem, no-one but the fish farmers themselves have even suggested a solution. We would have more respect, certainly for the politicians, if they were to be positive, imaginative and constructive instead of critical and negative in their approach."
He went on to say that "this is not just the best show in town, it is the only show in town.
These comments should be considered, in the light of later developments.