reLAKSation 117.
Practically
a certainty!: Atle Eide, Chief Executive of
Pan Fish, told IntraFish that ‘It’s practically a certainty that we WILL
earn money in 2005’.
We,
at Callander McDowell, would hope that Mr Eide’s optimism prevails, however at
the same time, it is a brave man who can claim to be so certain in an industry
dogged by so much uncertainty.
Since
his appointment to Chief Executive of Pan Fish, Mr Eide has embarked on a
rigorous programme of cost cutting. This has ranged from disposals to closing
those sites that have proved uneconomic to maintain. His intention is that Pan
Fish will be the most cost efficient salmon farming company in the world. He
told IntraFish that currently, all segments of the Pan Fish organisation, with
the exception of the Scottish segment, are now making a profit on their
operation. He hopes that a small rise in prices will bring the whole company
into profit. This may happen next year if salmon prices reach NOK 22.50 – NOK
23, but if not, Mr Eide believes he is definitely on course to make money during
2005.
We,
at Callander McDowell, would certainly not disagree with Mr Eide’s strategy to
become a low cost producer. We have argued many times previously that in order
to maximise the available margin, the future of salmon farming must lie with the
lowest possible cost production. Mr Eide hopes to be the industry leader in
terms of low cost production, but other farming companies have already
recognised that this is the only way forward. It is only that they do not have
the pressure of such heavy debt to prompt them to adopt this strategy.
However,
Mr Eide is not relying on a cost reduction programme to return
Pan Fish to profitability. He also anticipates a rise in prices to boost
the differential between production cost and sale price. He hopes that prices
will rise to between NOK 22.50 and NOK 23 next year. Reference to the IntraFish
price graph would suggest that this is not an impossible aspiration as it has
only been during the current year that average prices have fallen below this
level. Yet, we at Callander McDowell believe that any expression of certainty
about a return to profitability based on an expectation of higher prices is a
dangerous strategy, especially for a stock exchange listed company for nothing
in this industry is certain. Mr Eide should be reminded that his predecessor in
Pan Fish, Mr Arne Nore, made repeated forecasts that prices would rise to bring
the company back to profitability and clearly, none actually happened and the
only certainty that these forecasts brought was Mr Nore’s downfall.
Mr
Eide might well expect prices to rise next year, but only five months ago, he
began a freeze down of salmon to force a reduction in output and prices upwards,
even though an industry wide freezing programme was put on ice. The expectation
now is that the early harvest of smaller fish will reduce the overall biomass
next year. Production will therefore not be able to meet demand and thus prices
will rise.
It
is our view, at Callander McDowell, that there is too much dependence on biomass
figures as an indication of future price expectation. Whilst biomass can provide
an indication of production trends, they are not a reliable source of price
movements. This is because they do not take into account the rate of harvest.
Atle
Eide told IntraFish that prices are governed by demand and not the rate of
consumption. We are not quite clear what this means but we think it may be
related to the concept of biomass and the subsequent harvest rate. Simply put,
some commentators believe that if the total biomass can be reduced by 30,000
tonnes, for example, then this will bring about a subsequent increase in price.
This is exactly what would be expected from the relationship between price and
volume. The higher the volume, the lower the price and vice versa. However, what
this relationship does not take into account is that the biomass is harvested
over a year. If the rate of harvest is constant throughout the year, then prices
will remain relatively stable. However, if there is a sudden rush to harvest as
happened when the Salmon Agreement was removed, then the sudden surge of volume
coming to market, will force down the prices. It is therefore impossible to
forecast what will happen each week during next year and 2005.
There
is a suggestion that the biomass will fall over the next couple of years. This
is due to the excess harvesting of smaller fish earlier this year. In addition,
some farms have cut back on smolt placement, either because sites are proving
uneconomic to run, as in the case of Pan Fish, or because they simply do not
have the funds to buy in smolts. Mr Eide suggests that some Chilean farms are
suffering from disease problems and this may also affect the future biomass.
From this information, Mr Eide concludes that prices will rise, but we are not
yet convinced.
We,
at Callander McDowell, have repeatedly suggested that consumers now expected the
salmon they buy to be cheap. It is unlikely that these consumers will be willing
to dig deeper in their pockets and pay more for their meals. If prices do rise,
demand will fall and so then will prices, irrespective of biomass or harvest
rates. Consumers now see salmon as a low cost; value for money, meal choice and
this is what the salmon industry needs to produce.
Low
cost, value for money, salmon can only be produced if production costs are also
low. This is why Mr Eide’s current strategy is not unique. He is right to
produce at low cost but he may need to look elsewhere than at future price
rises, for a return to profitability.
Mr
Eide told IntraFish that there is only one way to survive in salmon production
and that is by having low costs. This is not necessarily true. Another way is to
add value. Of course, low production costs are part of this strategy too, but
more importantly, adding value allows producers to take a better hold of their
own destiny rather than wait for a future price rise, which after all, may never
come. Certainly, those companies looking to the stock market for finance will be
better armed if they can forecast growth based on a more predictable margin than
by saying that they expect future profitability to be dependent on a future
price rise in two years time.
Small
is beautiful?:
According to IntraFish, Richie Flynn, Chief Executive of the Irish Salmon
Growers Association, has said that Irish producers must capitalise on quality
rather than seeking high output if they are to thrive. With production at about
25,000 tonnes, Mr Flynn said that they must rely on premium quality and
traceability across the board and must continue to produce a scarce and unique
product in what is a commodity market.
We,
at Callander McDowell , have always argued that much of the past disruption of
the marketplace has resulted because one or another sector of the industry has
been unable to realise its ambitions, which has then prompted a call for the
imposition of protectionist
measures in the hope that these ambitions can be met. For example, the European
Salmon Producers Organisation previously submitted a dumping complaint to
Brussels because their members found it impossible to compete against imported
salmon, even though they pursued a different strategy based on quality. The
problem was that consumers were unable to differentiate between this high
quality, locally produced salmon and cheap imported commodity product. Consumers
ignored higher priced quality product in favour of low cost value for money
salmon instead.
Over
the last decade, we have suggested that the only way to overcome such consumer
confusion is if the industry should adopt a multi-strand market-led strategy.
This would enable the Irish salmon industry to sufficiently differentiate itself
in the marketplace and retain its unique image. However, it cannot do
this if it relies on the production of raw salmon flesh alone. Any
differentiation must be sufficient for consumers to identify the product as
Irish and not just salmon. Some Irish shellfish producers have managed to
achieve this by adding value (see relaksation no 72). If Irish salmon farmers
want to remain as a small differentiated industry, then they must move on from
quality and scarcity and add the necessary value.
Large
is large! Some sections of the salmon
industry were surprised by rumours that Marine Harvest may join together with
Pan Fish. This would create a massive multi-national salmon farming company
which would dominate world production. Such rumours are not that unexpected.
Back
in 1989, we at Callander McDowell, predicted that the modern salmon industry
would consist of no more than 10 fully integrated operating companies. These
could either be stand alone companies or cooperatives of independent producers.
We see no reason to change this prediction. As production continues to expand,
and there should be no reason why it does not due to the increasing shortage of
wild fish supplies, then production companies need to become more efficient as
commodity producers. The larger the farm, the more it can benefit from economies
of scale, including fully integrated feed manufacture. Originally, we believed
that the largest companies might grow through the acquisition of the smallest
producers, but we have since changed our view. It makes little sense by growing
in such a piecemeal fashion, firstly because growth would be slow due to the
small production volumes acquired each time. It would require that several
different production cultures be absorbed and finally, it might be costly, as
individual owners hold out for the highest price. Instead, it makes more sense
to make one large acquisition, which could be merged with the minimum fuss, but
would result in a much larger and immediate output. Inevitably, this will mean
that the salmon industry will become polarised into the very large and very
small producer, with two very different production strategies.
Marine
Harvest/Pan Fish may not happen, but if it does not, it will not be long before
other companies will seek similar arrangements.