reLAKSation 147.
Postponing
the inevitable: Fishupdate.com have reported that the independent smolt
producer Kinlochdamph has gone into administration.
This sad news will only confirm to those supporting the application for
safeguards, that such protection is absolutely essential. We, at Callander
McDowell are not so convinced.
David
Hunter, head of corporate recovery at accountants Campbell Dallas said that the
terms on which smolts were being sold was
the main problem as this led to difficulties with cash flow.
He concluded that the terms of sale were very, very poor and in effect
the company has been financing many of its customers
by giving them extended credit for smolts so that in many cases payment
was not received until the relevant salmon had been harvested and sold to
market.
Clearly,
Kinlochdamph have followed the example of the feed companies by providing
extended credit to help overcome the difficulties of the marketplace.
However, we, at Callander McDowell wonder how much this policy of
extending credit is misplaced because all it does is postpone the inevitable, as
Kinlochdamph have sadly discovered.
The
underlying problem for salmon producers is that as volume production has
increased, the industry has needed to change to remain viable. The Scottish
industry has fought hard against this change, as illustrated by their recurring
attempts to seek trade protection from Brussels. The failure to obtain such
protection, together with their failure to adapt to the changing market has
meant that many farms could be in fact financially unsustainable. Without the
provision of extended credit from their suppliers, it is likely that more farms
might have gone out of business. This is the price they would have paid for
trying to maintain their perceived image of Scottish salmon.
Their
extensive resources has meant that the feed companies have been able to finance
this extended credit, irrespective of whether they wanted to or not. However,
Kinlochdamph found that without the support of a multinational parent company,
the provision of such credit was unsustainable. They have paid the ultimate
price for supporting an industry unwilling to adapt to a changing market.
However well intentioned, suppliers have contributed to the continuing market
disruption because they have inadvertently helped their customers avoid the
realities of the marketplace as well as their financial responsibilities. This
can only damage the industry's long term future, as eventually, these credits
will have to be met and this is unlikely to happen unless something changes. In
some cases, farms unable to meet their credit commitment have seen the credit
converted into shareholdings thus bringing about the change anyway.
Sustained
low prices will be eventually reflected in an industry dominated by large fully
integrated companies. Unless the small and medium sized companies adapt and
learn to live without extended credit, their futures cannot be assured anyway.
Their future security lies in the market, not through the protection of extended
credit.
Hopefully,
Kinlochdamph can also have a future. The administrators
are confident that the buyers can be found for the company so that the
supply of smolts to the Scottish industry will remain uninterrupted. Seemingly,
there are already three expressions
of interest so smolt production looks set to continue.
Squeezed
out?: David Hunter, the administrator for Kinlochdamph told
Fishupdate.com that the smolt producers failure is yet another example of the
changes now occurring within the salmon farming industry. He thinks that there
is a move in the industry by the large players to try to make sure that the
independent companies are quietly squeezed out. He said that this was a view
that he had heard expressed at a recent fish farming conference.
We,
at Callander McDowell are not in the business of defending the large players,
but we do consider Mr Hunter's comments to be absolute nonsense. He may know a
great deal about corporate recovery, but he clearly knows very little about the
fish farming industry.
In
1989, the salmon farming industry underwent radical change brought about by a
unexpected collapse of prices. This sudden price fall then firmly established
the route for future industry development. This was both predictable and
inevitable.
The
rapid expansion of production placed a continual downward pressure on prices.
Lower prices reduced potential margins. Farmers faced a choice if they were to
maximise what margins were available. They could either put the brakes on
production and hope that prices would rise or they could try to capitalise on
the low prices by expanding production further and reducing production costs.
The industry opted for the second route although this was more out of
necessity then design.
Once
production continued to expand, the days of the smaller independent farmer were
always numbered, even though the exact timescale was then, and still is
uncertain.
The
only way the salmon industry could develop would be through the growth of major
international players benefiting
from economies of scale and extensive market access. The small independent
farmer would always find it extremely difficult to compete against such dominant
players unless they too adapted to
a changing industry and a changing market.
Unfortunately,
Scottish farmers in particular have resisted such change and this is why the
industry is now experiencing difficulties.
However,
the future of the smaller independent farmer does not have to be so bleak. Those
farming companies that are willing
to adapt can still have a future, but adapt they must. The most likely route is
through cooperation, emulating the large producers, but this is not the only
option. Small farms which develop a niche specialisation may also be able to
avoid succumbing to the competitive pressure of the major farms.
The
pre-eminence of the major farming companies has been evident for several years
now. Their dominance is clearly not associated with any attempt to force out the
independent producer. If any proof
is required that the independent farmer is not the object of a conspiracy by the
largest players then it is only necessary to consider two of the leading
companies, both of which are also
major feed suppliers. It makes no sense if these companies squeeze out the small
independent farmer as they would also be squeezing out their own customers.
Eat
more, but not that much more!: According to IntraFish, cabinet ministers
from Norway, Chile, Ireland, Canada, Holland and Scotland as well as
representative from the EU have all recommended that the public should eat more
salmon. This unique international ministerial meeting was integrated into the
recent AquaVision conference. This advice
comes at the same time that the UK's Food Standards Agency have upgraded their
recommendations for the consumption of oily fish such as salmon. The FSA now say
that adults should eat four 140g portions of oily fish a week.
Against this background, it cannot make sense that the European Commission has been trying to limit supplies of oil rich salmon through its attempt to impose safeguard measures on imports from non EU countries. Yet, clearly, European producers cannot produce sufficient salmon to satisfy current demand so the public could well be thwarted in their attempt to improve their diet as there may not be enough fish to go round. Equally, shortages may put up the price making oil rich salmon unavailable to those who most need to eat it. Low income families always find it difficult to eat healthily because of the higher costs. Salmon currently represents real value for money and there is a real risk that if prices rise, consumption might actually decline. The EU needs to look hard at the question of safeguards so that the health conscious consumer does not lose out. Perhaps, with ministers present from all the salmon producing nations, this is a question that they should have considered before advocating wider consumption.