52. Are there any other solutions to the problems of the salmon farming industry?
The Scottish Salmon Growers Association have repeated stated that there are no other solutions to the problems of the salmon industry, but those put forward by the Scottish salmon industry itself. Their position, is made clear, from the comments made by David Windmill at the 1993 Scottish fish farming conference, and often repeated in the fish farming press by the Chief Executive, William Crowe.
The suggestion that Producer Organisations are the only solution, which have been proposed, is nonsense, but the SSGA can be truthful, in stating that they are not aware of any other solution, by the fact that they simply refuse to discuss the matter outside their own organisation.
The industry is therefore, left with a short term policy of EC mediated Minimum Import Prices, which can be circumvented and a long term strategy of production control. Together, the imposition of higher tariffs and the possible formation of Producer Organisations, are seen as the only way to resolve variations in price.
However, at least one other solution has been proposed. This will provide a simple answer to the recurring market disruption.
53. What is this alternative solution to the industry problems?
Any solution, must address the actual problem affecting the industry.
54. What is this problem?
The recurring market disruption, which continues to plague the industry, can be best described as being due to "Too many farmers continue to aim too many fish at exactly the same markets, at exactly the same time".
55. Why is this a problem?
The Scottish industry claim that international salmon farmers are over-producing. What this actually means is that the traditional market is saturated with salmon and the increased competition that this creates, forces the price down, Basic economic principles clearly show that as volume production increases, the price falls. This is exactly what has happened, within the traditional salmon markets. This is not over-production, but saturation of the established markets. There is a major difference between the two.
56. Why has market saturation occurred?
The salmon industry has been built on the established view of salmon as a luxury fish. This has meant that all salmon farmers have aimed their production at the traditional markets. Prior to the inception of salmon farming, salmon were typically available from February through to the end of the summer. Salmon were seen as the food of summer "season". There was also a traditional market for smoked fish for the Christmas market, but many of the fish originated in North America and were smoked in Scotland.
Naturally, salmon farming enabled farmed produce to supplement, and eventually, replace the wild caught salmon used in these traditional market. As production continued to increase, these markets became saturated. This was the situation in 1989, when the price finally collapsed.
57. Is market saturation not the same as over-production?
When salmon farmers start to over-produce, then the result will be the appearance of stockpiles of unsold salmon, with the prospect of no potential sales. These stockpiles will remain until production is curtailed and the stockpile used to supplement the reduced production. Alternatively, the existing market can be expanded or further developed, to absorb this excess production.
58. So, if the market is saturated, how has production continued to expand?
In 1989, the price collapse changed the nature of the industry. Overnight, it evolved from an industry of high margins and low volumes to one of low margins and high volumes. Salmon metamorphosed from being a luxury product to one of the commodity markets. This transformation meant that the market itself underwent change and without any specific market effort, the whole market expanded. Economic principles clearly show that reductions in price, increase the size of the available market. Therefore, after the price collapse, suddenly, the market opportunities were much greater.
59. After 1989, were farmers able to take advantage of the expanded market?
After the 1989 price collapse, the industry was in disarray. The immediate effect was that every farm lost its' profitability. The cost of production was in excess of the selling price and the future looked gloomy. This was the situation when the Scottish industry submitted their first dumping complaint to Brussels. The industry was then faced with two possible courses of action.
1. It could be assumed that, since the industry was profitable prior to the price collapse, then a return to the situation prior to 1989, would enable the industry to regain its profitability. The aim would be to force the industry back to a position in which it was producing lower volumes, but receiving higher margins. The intent would be to enable salmon to regain its former position as a luxury product. The difficulty would be that, once a product has lost its luxury image, it would be almost impossible to regain, whilst the product remains available to the consumers.
2. The alternative strategy is to try to capitalise on the low prices and regain profitability by continuing to expand the volume produced, whilst at the same time, reducing the cost of production to below the selling price.
The difference between these two strategies can be illustrated mathematically by the following equation:
1. Production of 100 fish with a profit of 10 units each, gives a total profit of 1000.
2. Production of 1000 fish with a profit of 1 unit each, gives a total profit of 1000.
The acceptance of a lower margin, together with a significant reduction in production cost, can produce similar levels of profitability.
60. Which strategy have salmon farmers followed?
Since 1989, all salmon farmers have pursued the same goal. This is to attain a reduction in the cost of production to below the selling price and so regain their lost profit margin. This has been the only course of action open to them, since it would have been impossible to convince any farmer to take the opposite approach. No farmer would be willing to curtail his production when the future of his business was at stake.
Fortunately, farmers have had plenty of scope to improve their production costs, as prior to the collapse of prices, these had been artificially high. This was because profits had been so great, that any potential improvements in margin, which could have been attained, were considered negligible. Farmers had been too busy reaping the rewards, to consider such issues as production costs. This is why mortality rates were often in excess of 40% and feed was regularly wasted through inefficient administration.
Since 1989, production costs have been drastically cut and this is reflected in the official annual cost figures released by the Norwegian Department of Fisheries.
Whilst, specifically targeting a reduction in costs, farmers had also realised that they could benefit from an economy of scale and therefore production has soared.
The overall picture of the industry, since 1989, is one of diminishing costs and increasing production. Yet, against this background, the Scottish industry has been demanding the opposite scenario, i.e. that production should be cut and prices pushed upwards. This has resulted in the conflicting messages which have confused the market and caused the continued market disruption.
61. If the market had become saturated in 1989, how could production have continued to increase?
As previously stated, the industry underwent an evolution in 1989. This change should not be underestimated. The most significant outcome was that salmon prices were much lower. This created a whole brand new market, which the industry has continued to exploit. Lower prices have had a direct effect one sales, which have kept pace with increases in production.
62. If the lower prices have created a new market for salmon, why has the price continued to show significant and sudden variations?
Firstly, even though the market has, and continues to expand, this will never be a smooth process and it is inevitable that at times, the market will be over-supplied. After all, the capability still exists for too many farmers, to supply too many fish, to the market at exactly the same time.
Secondly, market disruption will remain a feature of the salmon farming industry, whilst sections of the industry continue to issue dire warnings of likely market disruption. These only undermine market confidence and inevitably exhibit a knock on effect on prices. If these merchants of doom and gloom started to talk up the industry, instead of being so negative, they may find that buyers respond in a much more positive way.
Thirdly, although the industry is engaged in some marketing efforts to further expand the market, these marketing activities still reflect the previous image of salmon. Salmon are now supplying a totally different market to that of before and the marketing efforts should be adapted to take the new markets into account.
Finally, despite the claims by the Scottish industry that they need stabilised prices in order to remain profitable, no other food producer can depend on a stable and predictable price. In the mature agricultural sector, price swings are a regular feature of the industry. These are linked to the relationship between supply and demand. No form of intervention really provides a solution to this continuing problem. In those sections of the industry, which do receive support, farmers are usually critical that payments are too low. Unfortunately, these farmers are supplying a world commodity market and can do little to alter their position.
However, salmon farmers could do more to help themselves address the problem, instead of looking to the politicians for solutions.
63. What can salmon farmers do to change their situation?
It was clear in 1989, that whilst the industry claimed over-production, the underlying problem was under-marketing. The industry must move away from its' production led philosophies, i.e. to produce what the market believes it wants, to one which is more market led, i.e. producing exactly what the market wants.
64. How can this be illustrated?
The difference between an inward looking, production led industry and one which is outward looking and market driven, can be simply illustrated.
A farming company, which is production led, might adopt a decision process, similar to:
Salmon have a high value.
Lets' grow them.
Lets' produce 250,000.
Lets' charge £10/kg
Lets' sell them.
By comparison,a market led company, would adopt the following approach:
Lets' investigate the market for fish.
Lets' see if we can produce the fish that consumers want.
Lets' see what consumers will pay for our fish.
Lets' see if it is profitable to grow them.
Lets' grow these fish.
65. But, surely the industry has investing in marketing?
The Scottish industry certainly has a marketing budget. The Scottish Salmon Board, which acts on behalf of 14 companies, had a marketing budget of about £1.7 million during 1995, half of which, comes from British tax-payers. This money used to underwrite the Tartan Quality Mark scheme and pay for a small number of promotions.
However, these promotions do little to expand the market, since they still focus on a preconceived idea of salmon. The main market growth can be attributed to the widespread availability and value for money price of salmon.