reLAKSation 126.
Gloom
or boom:
The situation in Shetland continues to make headline news. The on-line Shetland
News (www.shetland-news.co.uk)
paints a bleak picture with reports that the Shetland salmon farming industry
could lose up to 400 jobs over the next two years and that salmon production may
drop by as much as 50%. They suggest that the downfall of the industry comes in
reaction to low global prices, which has spurred on farmers to put even more
fish in their cages. Shetland News say that this strategy has now backfired on
the industry as worldwide salmon over-production with prices, often below the
cost of production, has meant that cash strapped companies are now unable to
finance further production.
However,
we at Callander McDowell, are not convinced that it is fair to say that this
strategy has backfired. Our view is that the industry has not really embraced
this type of strategy, this is why it has failed, and the Shetland farmers find
themselves in such a precarious position. Yet, it would not be fair to highlight
the Shetland industry in this regard, because salmon farmers throughout all the
main production areas have equally not fully taken this type of strategy on
board.
We
apologise for yet again harking back to the events of 1989 when prices first
collapsed, but they are at the root of the past and now current problems. Until
then farmers had received a high price for all the salmon they produced. Salmon
was then perceived as a luxury product and the industry had capitalised on its
unique rarity value. However, as farmers tried to capitalise on salmon’s
scarcity, they put more and more salmon to sea, which meant that it was no
longer rare. By 1989, the limited market for salmon as a luxury product became
saturated and prices collapsed. Farmers were faced with a stark choice. They
either continued to focus on salmon as a luxury product, which meant that they
put the brakes on production and kept volumes low and hence, margin high or they
instead recognised that the lower price created a brand new market for consumers
who wanted a lower priced, value for money everyday food. If they opted for this
route they then had to expand production, capitalise on the economies of scale,
reduce production costs and accept lower margins.
Unfortunately,
the international industry could not choose one or the other and tried to
continue with both strategies. This has led to the ongoing conflict between
various national industries because, as soon as some producers, irrespective of
their nationality, opted for higher volume, lower cost production, any attempt
to retain the image of salmon as a luxury product had been undermined.
So
has this strategy now backfired? We, at Callander McDowell, don’t think so.
What we do think is that some producers still have not made up their minds as to
what they want to be. They want to benefit from larger scale production, but at
the same time they want to also benefit from an enhanced market image and we do
not think that the two can go hand in hand.
Firstly,
if farmers are going to adopt larger scale production, then they must ensure the
lowest possible production costs. It is often said that the European producers
are unable to compete against cheaper imports because they have been unable to
achieve a similar cost of production. For example, the Shetland News report
stated that the downfall of the industry comes in reaction to global prices
being continuously below the production cost. Unfortunately, we don’t know
whether this is true or not. Whilst, the Norwegian authorities release annual
cost of production figures for their salmon industry, which may or may not
be a true reflection of Norwegian production costs, Scottish production
costs remain confidential. It is now 10 years since the Scottish Agricultural
College produced comparative figures of production costs between Scotland and
Norway. The researchers were never asked to repeat their investigation because
they showed that Scottish producers then had the cost advantage.
Subsequently,
the influential Scottish Affairs Committee recommended that the industry should
release their production cost figures prior to any further dumping action.
Although there was another dumping case in 1996, production cost figures remain
elusive.
Last
year, the current Scottish administration released their strategy for the
industry and one of the key actions was to determine production cost figures for
the Scottish industry. A year on, no such investigation is yet underway.
When
it is claimed that production costs are below the price of salmon, are they the
production costs of a low cost producer or are they the costs of a producer
hoping to benefit from a premium product?
In
the case of Shetland, are they hoping to compete with lower imports or are they
producers of a premium product aiming for a higher return. Explaining his
strategy to stabilise production at 37,000 tonnes, David Sandison, General
Manager of the Shetland Salmon Farmers Association told IntraFish that “the
quality of our fish is high, our production methods are sophisticated, we
operate to strict quality control standards, our growing conditions are ideal
and we have a skilled and motivated workforce. We have all the elements
in place to produce and deliver a premium product.”
The
key question is whether consumers actually want to buy such a premium product,
or are they just as happy to buy salmon which represents that best value for
money?
The
Shetland industry’s website (www.fishuk.net)
states that the bulk of Shetland salmon is sold and marketed fresh in exactly
the same way as salmon from other national industries. If this is the case, are
consumers able to identify Shetland salmon as a distinct product, which merits a
premium position in the marketplace. We are not so sure. After all it was only a
few months ago that Brian Simpson of Scottish Quality Salmon and Catherine
Stihler MEP took to the streets of Edinburgh to challenge consumers to tell the
difference between Scottish and other salmon. They said that once in the
supermarket most consumers are unable to tell the difference between salmon from
different origins unless it is labelled properly.
As regular observers of the marketplace, we at Callander Mcdowell, are only aware of one example of Shetland salmon being labelled as a distinct product from Shetland. This can be found in the leading British supermarket chain, Tesco, who in addition to their standard salmon products also retail Shetland salmon under their Finest label. Once removed from its packaging, we wondered whether our expert readers would be able to tell which is Shetland salmon and which is not?
Sample A Sample B
Unfortunately,
there is no prize for the right answer but we would be interested in hearing
from anyone as to which may be which?
Yet,
the Shetland industry should also be congratulated because their salmon merits a
place in Tesco’s Finest range. Tesco’s Finest is their premium range and is
available across the whole supermarket alongside Tesco’s Traditional and Value
ranges. In addition, they also produce organic and childrens ranges. Shetland
Finest salmon fillets are priced at £13.70/kg which is a premium price. By
comparison, an identical pack of salmon from their traditional range which comes
from either Scotland or Norway retails at £10.30/kg. However, these packs are
currently on long term promotion so customers who buy two packs get them for £9.61/kg.
Tesco also sell packs of larger fillet at £8.39/kg and loose fillets from the
fresh fish counter at £7.97/kg. This week, fresh salmon fillets have been
selling at half price, equating to £3.98/kg. Clearly, customers need to be
convinced to spend £13.70/kg when they can buy similar product, at least
similar to look at, for £3.98/kg. Yet, at the same time, if Shetland producers
believe that their product merits a premium status, it cannot be available in
the same volume as ordinary product. This is exactly what happens in store.
During our regular survey of British supermarkets, we noted that one Tesco
supermarket had displayed three packs of Finest Shetland salmon fillet and 35
packs of the identically sized standard product. Another store displayed 4 packs
of Shetland salmon fillet and 47 packs of standard product. This would suggest
that in Tesco the premium product represents about 10% of sales of this type of
pack (lower if all salmon sales are taken into account. This would seem to
suggest that the market is unable to absorb all of Shetland’s current
production of around 50,000 tonnes as higher priced premium product. The rest
must compete with lower cost imports and unless its cost structure is adjusted
accordingly, Shetland producers are always going to find it difficult. Clearly,
the Shetland salmon farming industry needs to reconsider its whole strategy. It
may then think about growth an job creation rather than job losses and farm
closures.