reLAKSation 347. Callander McDowell
Not cheap enough!: Writing in IntraFish, former Marine Harvest CEO, Atle Eide relates a long story describing how he was accosted by a fellow passenger on a recent flight and asked the question ‘why is salmon so cheap’. He poses this question against a background of falling prices at a time when production growth has been curtailed by a variety of different factors. Added to this, protein prices are rising, and costs are going up. It would be natural to expect that salmon prices should also be on the rise, not the opposite, but yet this is exactly what is happening.
The fact that Mr Eide has written about the apparent cheapness of salmon is indicative of an industry which has become too obsessed by the price of salmon. Everything is governed by salmon prices from weekly price reports in the media to the price of shares on the stock exchange. There has even been a recent discussion as to whether the industry price reports are accurate enough. One of the reasons why the ‘price of salmon’ is judged to be so important is because much of the Norwegian industry operates through a spot market and it is in the interest of farmers to get the best possible price for their fish at any specific time.
Naturally, high prices are considered to be good whilst low prices are not. Thus, higher prices are seen as extremely desirable and the industry becomes increasingly concerned when prices are in free-fall. Yet, higher prices are not all good. Consumers are usually deterred when the retail price of salmon also rises. The long period of high prices that have preceded the current downward trend also saw a decline in consumer demand. High prices also affect added value processing since the high raw material price makes the finished products too expensive. Our own observations of the retail market in both the UK and France have witnessed the significant withdrawal of added value products from the retail sector. Salmon has simply been far too expensive for many consumers.
It would be expected that as consumers deserted salmon in favour of cheaper alternatives, higher prices could not be sustained. Salmon farmers have been fortunate that a sudden increase in demand from outside the European market has kept prices high. Russia has become a major market for Norwegian salmon and even though they continue to import large quantities of fish, inevitably, the Russian market alone cannot help sustain the higher prices and we are now seeing prices fall. In addition, the salmon market is seeing confidence return due to reports of the demise of the MIP. Whilst the MIP alone has had no influence on salmon prices, it represented concerns that whilst the measures remained in place, it was always possible that more stringent measures could still be imposed. This is now unlikely to happen.
Yet at the same time, food prices are rising, which should put price pressure on salmon. It would be logical to assume that as food prices rise then salmon prices would too. However, at present not all food prices are rising. The most pressure is on cereals and other grains. Demand for these outstrips supply due to the conversion of land to biofuel production; drought and rapid economic growth in India and China. The price of rice has now reached levels where some Vietnamese fish farms are being converted back to rice paddy fields.
The high cost of cereals and other grains has a direct influence on other foods such as bread and beef but this has little effect on the price of fish. Wild caught fish prices may rise in the near future but this is due to the high cost of the fuel used to get the fishermen to the fishing grounds and back again. Salmon prices are left to the more traditional market forces.
Low cost salmon may not seem so attractive to farmers but it is definitely more attractive to consumers. Gunnar, Atle Eide’s fellow passenger, told him that whilst producers will sell their fish so cheaply, he and his wife will eat much more salmon. This is certainly not a bad thing for the salmon industry as there will be increased potential to sell more fish into the marketplace. The fact that these fish will be sold at a low price is largely irrelevant but what is important is that they can be sold at a profit. We, at Callander McDowell, firmly believe that it is profitability, not price that is of paramount importance.
The challenge for the salmon farming industry is to maintain the profitability of salmon production yet keep prices at a level that makes Gunnar and other consumers continue to buy and eat salmon on a regular basis. The salmon industry is still too driven by production-led strategies rather than those that might take into consideration what consumers like Gunnar and his wife want to buy.
A salmon industry, which is not so focused on price, may turn out to be very different from the one that we have now. It may be even more profitable.
End in sight: One of the big stories of the week, but one which the English speaking fish-related news services appear to have ignored, is the news that the European Commission have finally decided to remove the Minimum Import Price on imported Norwegian salmon. Two newspapers that have published the story are the London Financial Times and the Aberdeen Press & Journal.
We, at Callander McDowell, have written volumes about these trade measures and the failings of all concerned to fully address the issue so instead, we would like to comment on the various reactions to this news as reported in these two newspapers.
The Press & Journal leads with the headline that ‘Thousands of job losses predicted for salmon industry’. The European Salmon Growers Association (ESGA) (is this another name for the EUSPG?) forecast ‘a catastrophe’ and Angus Macmillan of West Minch Salmon warned that ‘I can see anything up to half of the industry disappearing’.
Is this just another bit of scare-mongering and over-statement from the EUSPG? According to the Scottish Executive’s last official annual production survey which was for 2006, the number of jobs in the Scottish salmon industry totalled 1142 of which 143 were part-time. These figures cover both smolt and salmon production. Due to improvements in productivity, the current figure is likely to be even less and could be as low as a thousand. The possibility of thousands of job losses in the Scottish salmon industry therefore seems extremely unlikely.
What makes it even more unlikely is that the EUSPG’s definition of the Scottish industry is only those companies that do not have any connection to Norway. This equates to about 15% of the salmon farmed in Scotland. The disappearance of half of this industry would amount to about 85 jobs. This would mean that even a headline stating hundreds of job losses would still be a huge over-statement.
We certainly would not like to see any job losses at all and even 85 lost jobs would be a catastrophe for those concerned. However, we do not follow Mr Macmillan’s assumption that the removal of the MIP would necessarily result in the loss of any jobs. Although the MIP has been in place since 2006, it has not actually been enforced which makes it a relatively meaningless measure. Many of the independent farms in both Scotland and Ireland have now diversified into niche production of organic or high welfare salmon and appear to be expanding to meet growing demand. These farms are not competing directly against Norwegian salmon and therefore should not be under any sort of threat from these imports. The presence or absence of the MIP is therefore irrelevant.
Mr Macmillan told the Press & Journal that the MIP has maintained stability in the market for the last two years and to remove it would be pure madness. Yet, it seems to us, at Callander McDowell, that the salmon market has been anything but stable over this period. Prices have swung just as much as in previous years. What is different is that prices did not fall as low as they did in 2003 which is the period covering the dumping complaint. The reason this is why has nothing to do with the MIP, but is simply due to the fact that market demand has been more buoyant since then.
The ESGA told the Press & Journal that they have an open and shut case and will appeal to the European Court on the grounds that proper procedures have not been followed. This appears shaky ground indeed since the EUSPG piggy-backed their dumping complaint on the back of a safeguard application in order to avoid proper scrutiny of some extremely suspect data used to support their complaint. No-one has yet explained how, for example, the EUSPG managed to lose a total of 38 salmon farming companies from their submission in order to boost their level of representation.
Regardless, the ESGA have managed to garner the support of local politicians. Western Isles MP Angus MacNeil said that this will be a test of how successful London can horse-trade in Europe on Scotland’s behalf. Meanwhile, Orkney and Shetland MP Alistair Carmichael called on Westminster to use its influence to stop the EU Council of Ministers ratifying the decision next month.
Given that only the UK and Ireland voted against the removal of the MIP in the anti-dumping committee, the likelihood of any change of mind by the Council of Ministers would be nothing short of a miracle. One commentator reminded us of the UK’s success at the Eurovision song contest last week in which the lack of European friends (other than Ireland and San Marino) ensured that the UK was consigned to bottom place. It would require many favours to be called in and given the current healthy state of the industry, this may seem unwarranted.
The Financial Times has looked at the Irish aspect of the story because as we discussed in a previous reLAKSation, Peter Mandelson’s decision to seek the removal of the MIP may turn more Irish voters against the Lisbon Treaty. Mr Mandelson has said that there is now no reason to keep the measures. We would certainly agree but at the same time, we would question Mr Mandelson as to why there was any need to impose these measures in the first place. As the Norwegian Fisheries Minsiter, Helga Pederson, said, Norway has never dumped salmon and thus this is a victory for fair and free trade. However, it would have been an even greater victory had the Norwegian authorities actually challenged the EUSPG’s claims from the outset. Instead, they became distracted by legal issues and failed to adequately defend themselves. Had they succeeded and proved that dumping had not taken place, then the ongoing dispute would have been resolved long ago.
Whilst Mr Mandelson said that there is no need to keep the MIP, others believe otherwise. Alistair Carmichael MP said that fish farmers are already struggling with increased feed and fuel costs and the removal of the MIP will kick the feet out from underneath them at a time when they are least able to cope. However, the MIP and higher costs are totally separate issues. The MIP review was underway long before fuel and feed prices started to rise. In much the same way, the Irish industry has previously demanded the protection of the MIP whilst licensing issues are resolved. Fishupdate.com has just reported that the aquaculture branch of the Irish Farmers Association have only just met the Irish ministerial team to try to sort out the logjam of over 250 license applications. The fact that this internal problem for Irish fish farmers has yet to be resolved is no reason to further delay the removal of the MIP.
On the Norwegian side, Trond Davidsen of the Norwegian Seafood Federation told the Financial Times that the positive effect of the MIP’s removal is that farmers will be able to enter into more long-term contracts which should help stabilise the market. This is unlikely. The presence of the MIP was never a barrier to long term contracts and thus the Norwegian industry could have sought such arrangements long ago. The problem is that the structure of the Norwegian industry means that it will continue to be dependent on the spot market and therefore will continue to be subjected to the daily variations that are a feature of this type of market.
The only way to overcome the problems of fluctuating price variations is to move away from the production –led strategies that have dominated the salmon farming industry. The motivation behind the various dumping complaints has been to impose limitations on the quantity of salmon coming into the EU (effectively a form of production control). This simply masks the fundamental issue that the industry needs to address: that the industry must move away from production-led strategies to those which are more market-led. If production is tailored to what consumers want, then as a consequence the market will be become much more ‘stable’ as competition is reduced.