reLAKSation 116.
Gloom &
gloom: IntraFish reports that continuing
price gloom means that there will be fewer fish put to sea in Scottish waters.
Pan Fish subsidiary, Lighthouse of Scotland, is amongst several companies who
have decided to scale down the number of smolts that they are planning to put to
sea. Brian Simpson, Chief Executive of Scottish Quality Salmon told IntraFish
that the decision to cut back is disappointing, but it reflects the current
level of unprofitability within the industry.
We, at
Callander McDowell are not really surprised. We believe that low prices are now
a permanent feature of the international salmon farming industry, a fact that
many farming companies find difficult to accept. Instead, they believe that
prices must rise and when they do, their companies will return to profitability.
We think that this will be a long and forlorn wait, which could be avoided if
the question of profitability is addressed now.
We certainly
believe that any attempt to reduce production volumes will only harm the market,
as the many consumers who buy salmon because it is a low cost, value for money
meal choice, will simply stop buying it if the price becomes too high. Equally,
if prices rise, the market will simply such in cheaper imports from elsewhere in
the world. The only remedy for low prices is to capitalise on them and seek
extra value within the supply chain.
Mr Simpson
also expressed concern to IntraFish that the lack of confidence manifested by
the decision to cut back smolt placement will impact on investment. He said that
the industry has been trying to create an environment to make Scotland more
competitive and that the Scottish Executive’s strategic framework for
aquaculture should be a guide to how this can be achieved.
However,
this confirms to us at Callander McDowell that the strategic framework has
simply failed to address the basic economic issues as they now affect the
farming industry. Instead, the Framework considers issues, which in their own
ways are undoubtedly important to the industry , but are not crucial to their
commercial viability. Clearly, if farms are not economically viable, they cannot
remain in business. If they are unable to survive, then issues such as their
social or environmental impact will lose their relevance. The most important
issue to commercial aquaculture must be farm profitability. Clearly, the
Framework cannot tell farming companies how to run their businesses, but it can
create the right environment to help farms focus on profitability. We, at
Callander McDowell, are not sure that the current framework will do this.
The
Strategic Framework does pursue objectives which are classed as economic, but
whether they will help farms improve their profitability is doubtful. The areas
covered are extremely diverse and some do not appear sufficiently focused to
bring any immediate economic benefit.
The
first way highlighted by the framework for the Scottish industry to remain
competitive in a global market, is through investment. However investment alone
is unlikely to solve the issue of commercial viability. Investors are likely to
be deterred if farms are failing to make profits. It will take more than
investment in such aspects as new equipment or new technologies to break the
cycle of poor returns, since even the most advanced companies are now feeling
the pinch. Nothing much will change unless new strategies are also put in place.
Investment alone is not the answer.
The
strategic framework also sets out to establish the comparative costs of
aquaculture production, especially in relation to salmon. There is a contention
that production costs are higher than in other countries and therefore Scottish
farmers are at a disadvantage. It is unlikely that this knowledge will help make
individual farm more profitable since each farming company must already be well
aware of how much it costs to produce their fish. However, such information is
not in the public domain and therefore it is difficult to ascertain whether
there is any competitive advantage. When the Scottish Affairs Committee
investigated the industry several years ago, MPs recommended that the Scottish
industry should publish production cost data in much the same way as the
Norwegian industry. Until now, the only comparative date, produced by the
Scottish Agricultural College back in 1993, indicated that Scottish producers
held the competitive edge. Whatever the result of this investigation shows, it
is unlikely that it will make Scottish producers more profitable, it will just
confirm that either they are or are not.
The
strategic framework also recommends a number of economic objectives, which,
whilst interesting, are all unlikely to help salmon farmers address the issues
of profitability. These include the development of new species, polyculture,
avoidance of GMOs, training, the teaching company scheme, the introduction of
broadband, the development of public understanding and finally, the industry's
relationship with SeaFish. The salmon industry will find this last objective
most difficult to achieve since the Charter drawn up when SeaFish was
established, specifically forbids SeaFish from working with salmon. Instead,
they are only allowed to address issues relating to marine fish!
The
final objectives listed by the Strategic Framework possibly offer salmon farmers
more hope. The first of these is an export strategy. However, the salmon
industry have recognised for many years that exports are important to their
business. The Scottish industry has regularly targeted the French market,
especially through Label Rouge. The industry has already worked with government
agencies in attempts to improve the level of exports, such as in the recent
industry development project which aimed to increase exports from 46% of
production to 50%, an target, yet to be achieved. It is unlikely that increased
exports will solve the industry’s immediate problems.
The
strategy also recommends adding value through niche markets such as the various
quality labels. Again, this is unlikely to provide any instant solutions as
illustrated by the fact that it has taken over 10 years for the industry to
achieve sales of 5000 tonnes of Label Rouge salmon, despite the incentive that
margins of up to 25% can be obtained. Finally the objective aimed at improving
downstream commitment is also unlikely to solve any immediate problems. The
major retailers already expect suppliers to be committed to the supply chain and
so this is unlikely to result in improved profitability.
The
Strategic Framework does help focus attention on many of the issues which affect
salmon farming today, but unfortunately, not those aimed at keeping farms in
business. There is no single industry wide quick fix solution, which is why the
Strategic Framework cannot provide any answers. Instead, individual farming
companies need to look to their own strategies, especially those aimed at the
marketplace, if they wish to compete in this global market.
Clarification:
We, at Callander McDowell, are always delighted to have the opportunity to
address a wider audience beyond our loyal, and much appreciated, readership. We
were therefore pleased to see that IntraFish had quoted our latest comments
about halibut farming. However, the IntraFish article sought other comments.
which merit further response.
IntraFish
repeated our view that the market for halibut is very small and which has been
mostly met by the wild catch. However, we also do accept that the market can
change. Our observations of the retail sector do indicate that as SeaFish
report, the market for halibut has grown over the last year or two. SeaFish say
that this growth was about 17% over the last twelve months representing sales of
about 500 tonnes of farmed halibut to UK consumers. IntraFish say this should
come as a message of cheer to Scotland’s halibut farmers following news of
Marine Harvest’s impending withdrawal from halibut farming.
However,
what was not discussed are the reasons why the UK market has undergone this
growth of 17% and the possible impact this growth has had on Marine Harvest’s
decision to stop farming halibut.
The
SeaFish spokesperson told IntraFish that halibut is a prime species at the top
end of the market, as illustrated by halibut’s presence in Marks &
Spencers stores. M&S are the main retailer of farmed halibut in the UK,
although at least one other supermarket chain does sell packs of farmed halibut
from time to time. In addition to the farmed halibut from Scotland, Marks &
Spencers also sell farmed Norwegian halibut, with both Scottish and Norwegian
fish selling for the same price.
When
the packs of farmed halibut first appeared on Marks & Spencers shelves, the
220g pack of two halibut fillets was priced at £7.99, which equates to £36.32/kg
and certainly places halibut at the top end of the market. By comparison, Marks
& Spencers sell a pack of two salmon fillets at £15.05/kg. However, within
a couple of weeks of the halibut pack launch, the packs were on promotion at £5.99,
a discount of £2 per pack, and a new selling price of £27.22/kg. Following
this promotion, the packs never regained their launch price of £7.99 and are
now a standard price of £5.99/pack.
Clearly,
Marks & Spencers customers found the £36/kg, too high a price to pay for
farmed halibut and hence, M&S have dropped the price. However, even this £2/pack
price cut has not been sufficient to stimulate the increase in demand. Marks
& Spencers have subsequently applied a further discount to these packs on
month long promotions offering farmed halibut at £4.99/pack, equivalent to £22.68/kg.
This means that for long periods of time, the price of farmed halibut has been
cut by about a third since its launch. This represents a greater price discount
than the attained market growth.
If
the salmon industry have any doubt about the way in which salmon prices affect
market demand, this very small niche market provides a clear example. We, at
Callander McDowell, still firmly believe that the market for halibut is small.
There are only a limited number of consumers who are prepared to pay a high
price to put halibut on their table. There was a balance in the market between
this type of consumer and the amount of wild catch. The arrival of farmed
halibut in the marketplace caused a market imbalance which could only be
rectified by attracting new consumers to the halibut market. Unfortunately,
potential consumers were simply not prepared to pay the traditionally high
prices and so prices had to fall and as a result, the market began to grow.
However, such low prices were not what the fledgling industry wanted to see at
such an early stage in the industry’s development. We believe that this was
one of the main reasons why Marine Harvest has decided pull out of farming in
Scotland. Only time will tell whether they reach the same decision about their
farms in Norway.
The
real message is that price and consumption are inextricably linked and any
desire to see rising prices must be paid by a fall in demand.