reLAKSation
206.
‘A
serious glitch?’: EU Trade Commissioner,
Peter Mandelson has had to admit that there has been a serious glitch in the way
that his department has drawn up and implemented import curbs on Chinese
textiles. According to the Daily Telegraph, there are 48 million sweaters, 17
million pair of men’s trousers, three million bras and four million T-shirts
stranded in ports and warehouses. The problem arose after restrictions on
clothing imports from China were lifted by the European Commission in January
this year. When imports subsequently rocketed, Mr Mandelson reintroduced quotas
in June after domestic textile producers in France, Spain, Portugal, Italy and
Lithuania applied pressure to the Commission. This has wrought havoc on the
retail sector who have warned that they may run out of stock as early as the
autumn and certainly by Christmas. Some of the quotas were breached within the
first month and a new quota is regularly being reached. The EU have identified
10 categories of clothing it would like to protect and quotas in seven of them
have already been exceeded.
The
problem is that the fashion industry works several months forward so that most
of the impounded goods were ordered and paid for under contracts were concluded
before the quotas were announced. The retail sector have warned that prices will
rise if the problem is not resolved quickly. Retail chains are desperately
seeking alternative suppliers but the long lead in means that they will be
unable to meet any immediate shortfall. UK retailers are scrambling to source
their clothing ranges from elsewhere including Turkey, Romania, Indonesia, Sri
Lanka and Bangladesh. However, the British Retail Consortium warned that these
producers tend to be more expensive and therefore prices will inevitably rise.
Stuart Rose, Chief Executive of Marks & Spencers said that the people want
cheap goods and EU countries simply do not make cheap clothing. This is why all
the alternative producers approached by the retail chains are in countries
outside the European Union.
Meanwhile,
the Guardian newspaper reports that European Trade Defence Director, Fritz-Harald
Wenig has been in Beijing trying to negotiate a compromise but has so far failed
to reach any agreement. Encouraged by the outcry in Northern Europe, the Chinese
are holding out for an increase in the quotas so that the impounded stock can be
released. These quotas will only remain in place until 2008 when under WTO rules
they must be totally removed. Until then the Commission wants to give domestic
producers sufficient time to allow them to adapt to the new competition even
though they had been aware that quotas were always going to be eventually
removed.
This
current dispute exhibits a number of similarities with the salmon case. In both
of these, the EU has shown little regard to the interests of the consumer. DG
Trade have acceded to the demands of a domestic industry that is unable to
supply consumers with what they actually want. Whilst the expectation that the
quotas will encourage the retailers to revert to the domestic industry for their
needs, the reality is that buyers have sought to source supplies from producers
based outside the EU. The European manufacturers are unable to compete in the
mass market and would be better placed to produce specialist products for
specific market needs. However, they appear reluctant to adapt to the changing
marketplace preferring instead to use trade measures as a way of gaining
business rather than use innovation and market-led strategies to guarantee their
business survival.
The
problem for manufacturers is that mass market consumers have become used to low
prices and thus are unwilling to pay more when prices do rise. The European
Commission may well believe that consumers should be prepared to pay a
‘fair’ price but when faced with the choice in store, they have the option
to say no and look elsewhere. In the case of salmon, it is clear that higher
prices are deterring some consumers which is why some supermarkets continue to
resist price increases, whilst others have increased the frequency of
promotional discounts. The European Commission may have opted to force prices
up, but if the price becomes too high, consumers will simply choose not to buy
salmon. This will not help those salmon farmers who claim to be suffering as a
result of the so called cheap imports. We, at Callander McDowell certainly
believe that the current textile dispute is not the only blunder that DG Trade
have made. They have also badly misjudged the salmon case. Perhaps, if they had
spent less time looking for evidence of salmon dumping and more time considering
the implications of their rush to reintroduce quotas for textiles, then they may
not have now to admit to this serious glitch. We would certainly hope that they
are just as ready to admit to a similar error of judgement in the salmon dispute
although we suspect that the admission of one blunder may be already one
admission too many.
Porkies:
There can be few people working in the salmon industry in Europe who remain
unaware of the massive investment made into the industry by two Norwegian
shipping magnates. The lesser known of the two is Jens Ulltveit-Moe, who is now
the second largest shareholder in Fjord Seafood. When interviewed by the
IntraFish newspaper, Mr Ulltveit-Moe refused to comment on whether he plans to
increase his involvement in the aquaculture industry but he did say that he does
see clear parallels between shipping and salmon. The paper reports that he had
previously related that the products are homogenous. Both have a long production
cycle; demand varies independently of production; there are major price
fluctuations and there is major consolidation in the industry. Finally he said
that both require a great deal of capital, which is riddled with risk. Mr
Ulltveit-Moe also compared the waves in the salmon market to those in the
volatile pork market.
Whilst,
we at Callander McDowell, agree with most of Mr Ulltveit-Moe’s view, we are
not so convinced by the comparison with the pork industry, at least not at this
stage in salmon farming’s development.
Pork
is a archetypical example of a mature agricultural industry which exhibits
cyclical production. When prices are high, producers invest in production which
soars. Eventually production exceeds demand and prices collapse. Low prices mean
that some producers are unable to compete and go out of business. This creates a
shortfall in production , which encourages prices to rise leading to a repeat of
the cycle. The overriding reason for these cycles is that the market for pork is
saturated. A lack of innovation, the absence of market development and a change
to healthy eating have all contributed to a stagnation of sales. This means that
when production starts to grow, there is no parallel growth in the market which
means that inevitably the industry will reach a state of over-production
It
is natural that any agricultural observers watching the development of salmon
farming would immediately assume that falling prices are an indication of a
cyclical mature industry. This was certainly the case in 1989 when the then
Scottish Salmon Growers
Association called on the services of Professor Chris Ritson, an
agricultural economist to explain why salmon prices had then collapsed. His
description mirrored the example of the cycles in the pork industry but
experience has shown that his forecasts of how the salmon industry would
subsequently cycle have failed to materialise. This is because the price rises
and falls in salmon farming are not the same as those that occur in the mature
agricultural sector.
Whilst
it is true that the initial price falls in 1989 were an indication of a
saturated market, the subsequent events were quite different. This was because
it was only one form of the salmon market that became saturated; that was the
market for salmon as a high priced, luxury food. What was different was that as
prices fell, they created a whole new market for salmon as a value for money,
every day meal choice. This market has since shown unabated growth and continues
to do so.
However,
Mr Ulltveit-Moe might point out that the industry has exhibited cyclical
behaviour since 1989 and this is true. Yet, these cycles are not the same as
those found elsewhere in agriculture. Instead, they can be attributed to
specific interference in the market, mainly by Scottish producers who are
unhappy in producing salmon for the value for money market. They always
perceived that their salmon were too good for this wider mass market and have
wanted to manipulate the market so that it could be refocused on the luxury
sector. Their strategy has been to restrict production either through voluntary
controls or by the use of trade measures enforced by the EU. Every time they
have turned to Brussels, the market has been destabilised and either forced too
much salmon to market causing price slumps or by restricting supply, forcing
prices up. The overall effect has been cyclical patterns which do mirror the
typical agricultural examples, but have little else in common. The simplest way
to stop these cycles is to focus on the marketplace but so far there appears
little will to do so.
The
big question is whether the salmon industry will ever see real examples of a
saturated market. We, at Callander McDowell are not convinced that we will
because the availability of production sites will probably be a limiting factor
on the size of the industry long before market saturation becomes an issue.
Five
years!!: The General Secretary of the Irish
Salmon Growers Association, Richie Flynn has told Intrafish that he will push
for a five year minimum price agreement when talks on the issue resume. He said
that what will benefit processors and producers is a period of stability where
everyone gets a fair share of the margin. He added that a long term agreement is
what everybody wants. Well, we at Callander McDowell, are not convinced.
Mr
Flynn’s proposal is exactly the type of market interference which we have
described above and which has undermined the continued development of the salmon
market. He believes that the current MIP offers long term stability but it
doesn’t. Certainly previous experience of the MIP suggests that it actually
destabilises the market because it is an minimum import price not a minimum
market price. If buyers cannot obtain lower priced fish from Norway or
elsewhere, they will place increased pressure on European producers to provide
them with what they need. It is interesting that nearly all the fish currently
used to provide promotional discounts in five UK supermarket chains is of
Scottish, not Norwegian origin.
The
only way to ensure the type of stability that Mr Flynn desires is ensure that
producers are at the cutting edge of market and product development. The use of
trade measures will not and cannot achieve the same outcome. Instead, Mr
Flynn’s proposals will simply lead to five years of market stagnation
and shrinking demand.