75. So, what action should be taken?
The House of Commons Scottish Affairs Committee were clear in their recommendations that the industry should expand and diversify the markets and invest in innovative product development. Unfortunately, the industry rejected this suggestion.
One of the reasons why, is the confusion over the terminology of marketing itself. In discussions about the markets, some sections of the salmon industry, believe that the term markets refers just to different countries, ie a market for France, or a market for Japan.
However, this is a very simplistic view.
76. So, what does the term "markets" mean?
Markets can refer to any product grouping, irrespective of the country in, which the products are targeted. Therefore the market for fresh whole salmon is a different target market than that for steaks and fillets, which are different again, to that for canned salmon, and so on. Each market should be considered in its own right and not as part of a wider market for "salmon". This is exactly why the concept of Producer Organisations will simply not work. They are designed to consider the market for just whole, fresh salmon. However, as they form the basic raw material for all types of added value products, they cannot be evaluated in isolation.
77. Are salmon farmers able to access this market?
Salmon farmers have raised two key objections, in response to calls for a move to a market led strategy. The first is that they are only producers of raw material and lack the expertise or resources to access this market.
The second objection, is that most farms are not large enough to supply the requirements of the national and multinational retailers.
In addition, the Scottish Salmon Board will claim that several processors are already involved with such product development. This is certainly true, as the number of such products, now available in the UK, has risen from two to over 50 during the last three years. The problem for the industry, is that it is the processors, who obtain the benefits of the added margin, not the farmers.
78. So, does this exclude most salmon farmers from the new and expanding markets?
The markets have also undergone significant change for several years. The salmon industry has also dramatically evolved, however this is only the beginning of, what can be best described as, radical change.
In the early days, the salmon industry was perceived as being a supplement to the activities of fishermen. Farms were expected to be small one or two man enterprises. As the industry developed, the larger companies grew at a much faster rate, so the industry grew disproportionately. The large farms got larger and many of the small farms were absorbed into their structure. The remaining small farms have fought to remain competitive, but as the markets continue to change they will find it increasingly difficult to compete as separate ventures.
79. Does this mean that the future industry will be dominated by large farming groups?
Without any further change to the current industry structure, it is clear that with time, the largest farms will dominate salmon farming. These will swallow up the small farms in order to gain access to the sites. The increased tonnage will enable them the access to the largest markets, and it will also enable them to initiate product development.
80. How will the small farms be able to coexist with the industry giants?
Small farms will only be able to survive, in the face of the larger companies, if they adopt one of two strategies. The first is to develop their own niche market, i.e. local shops and restaurants, or even mail order, etc, of customers, who will buy due to the personal nature of the business.
The second strategy, and most viable is to co-operate together to form co-operative ventures, with a combined large volume of production. Thus, the small farmer can benefit from the economies of scale, such as bulk discounts on feed and also gain access to the large markets.
81. Have some farms, not already adopted this strategy?
Some farms, especially in Norway, have moved towards this position, but whilst they do obtain the benefits of bulk discounts etc, they tend to sell their production to a single company, who then primary processes and sells on the fish on their behalf. This is still a step away from a truly co-operative venture, in which the farmer is totally involved.
An example of this arrangement, can be found in Scotland although it is a co-operative of trout farmers. They have developed sufficiently that they have supplied at least one major retailer with secondary processed, added value products, under their own brand label.
82. Co-operation alone will not pay towards the high cost of added value processing?
The provision of a processing facility, especially of one of a sufficiently high standard to meet current health standards, can be extremely costly to establish. These costs may be well beyond the means of a large farming company, let alone those of a group of small farmers. Such costs are also of high risk, since the success of a new product is not guarantied, just because it seems to meet the needs of the market.
It is this high cost, which has deterred even the most progressive of large companies from pursuing this strategy. Yet, there is an alternative way of accessing this market and the financial rewards of extra margin. This can be achieved through contract manufacture.
83. How will contract manufacture, benefit the farming company?
Contract manufacture will enable the farmers to gain access to the consumer market, whilst retaining ownership of the product. The final margin may not be as great as could be obtained, however, there are no major over-heads other than the contract cost.
The contract manufacturer also benefits, since he will receive his payment, without the expense of the raw material cost, marketing costs and sales costs. These will be the responsibility of the farming company.
The product can be produced under a brand label or as the retailers private label. If the product, should prove to be a success, then there is no reason why at a later date, manufacture cannot be brought in-house. For a company or co-operative, contract manufacture enables access into a range of different product areas, expanding the potential for enhanced margins.
84. Is this the only option?
The choice is simple. The industry can continue to expand, and therefore the markets must also be expanded, in line with consumer demand. The model, despite the obvious differences in biology, is the intensive broiler industry.
Forty years ago, chicken was a special once a week treat. Production expanded to take advantage of this market and in doing so became extremely efficient. Inevitably, the market for whole birds became saturated and producers began to process the birds into portions. Every part of the bird was been offered for sale. Halves, quarters, breasts, breast fillets, wings, thighs, legs and even livers are all readily available.
As this market developed, portions were offered in different styles, such as Chinese, Tikka, etc
In parallel, development of products, such as Chicken Kiev, schnitzels and recipe dishes, has also progressed. The range of possibilities has yet to be fully exploited and so the list of added value products continues to grow, with the margin, benefiting the large integrated producers.
This is also the vision for the future of salmon farming.
The price of salmon must now remain low. With the volume of salmon now produced, it will be impossible to force up prices again. Therefore, without such added value development, farms will continue to operate on very low margins. The alternative is to continue to demand limitations on production so that the market is restricted. However, unless global agreement can be obtained, such controls can never become reality.
85. Are Producer Organisations a realistic option?
The answer is clearly no.
The Scottish industry has remained blinkered to alternative solutions for the last six years. It has pursued this strategy, without consideration of any other option despite the fact that their aspirations could be met in other ways.
Producer Organisations will be a bureaucratic nightmare, which are clearly unworkable. especially without global agreement and this is not forthcoming.
The only way forward is to address the needs of the market. Whilst, there are marketing initiatives underway, they fail to recognise the past industry changes. The modified industry, requires a new marketing strategy. The established marketing effort are no longer appropriate.
The European industry has the option to rise to the challenge of the unlimited opportunities, which now exist. The alternative is to condemn salmon farming to being a small, fringe industry, producing a limited volume of fish for a specialised, high value market.