reLAKSation 367. Callander McDowell
Challenge to cod?: The supermarket fresh fish counter offers a wealth of choice of fish and seafood, much of which is now farmed. Aquaculture raised fish often dominate counters, ranging from salmon to trout, sea bass, sea bream, tilapia, warm-water prawns, mussels and oysters, sometimes halibut and turbot and increasingly catfish. The one single common feature of all these species is that it is extremely difficult to find wild caught alternatives (although wild caught bream, bass, halibut and turbot are on occasion on offer and if one looks hard enough, it is even possible to find wild caught salmon now and then.)
In terms of economics, it makes very little sense to invest in the infrastructure and experience of aquaculture, if plentiful supplies of the same species can be caught from the wild, unless the market price is extremely high. This is why the intensive farming industry that developed from the 1960’s onwards selected high value fish that were not widely available as candidate species for aquaculture. Thus, research in Northern Europe was targeted at salmon, Dover sole, turbot and halibut of which only salmon has been really successful. Turbot farming technology was eventually transferred to Spain because it was claimed that it was too cold to economically farm turbot in Northern waters, although it would have been thought that this was one of the first questions that should have been answered. Adverse water temperatures were just a convenient excuse, the real reason being that there was little market in Northern Europe for turbot, whereas it was a favourite fish in Spanish Galicia. Halibut farming has remained small scale, for whilst it is not a cheap fish, its relative rareness in the wild has meant that there is also not a great market demand.
One species that is in great demand is cod. It is a favoured fish in many markets and therefore it would have seemed an obvious choice as a farmed fish. Yet, it is only recently that cod farming has been perceived as an economic proposition. This is because cod was not only widely available from the wild but it was also relatively cheap. Cod farming was therefore discounted because it was clear from the outset that it was never going to be a source of cheap fish. Farmed cod were never going to be competitive against fish caught from the wild.
This all changed when cod stocks, especially in European waters, began to collapse from over-fishing. Stark warnings were issued that this was the end of cod and not only were stringent measures needed to combat the diminishing fish stocks but consumers needed to change their habits and forego cod in favour of more sustainable species. Suddenly, there was a real opportunity for cod farming. Aquaculture could supply cod when the seas could not. As a result, there was a sudden expansion of interest in cod farming in both Scotland and Norway. The mood of the times is reflected in a headline from the ‘Independent’ newspaper in 2003. This referred to the now ill-fated ‘No Catch’ cod farm in Shetland saying that ‘Britain’s first commercial cod farm could save wild stocks from global decline.’
Five years on, ‘No Catch’ has long since disappeared and estimates of Norwegian farmed cod production indicate a harvest of only about 20,000 tonnes this year. Meanwhile, the stark warnings forecasting the end of cod have proved to be a little premature. Fresh cod is not only still widely available but it is still as cheap as ever, with fillet being sold in the retail sector for as little at £8.70/kg. This scenario now seems unlikely to change not only because demand for European cod has fallen, prompted by the substitution of cod for MSC certified Alaskan pollock in many coated products and through the increased import of MSC certified Pacific cod. At the same time, whilst some local stocks remain threatened, others appear to be recovering. IntraFish reports that Russia and Norway have agreed to increase their joint cod quota by about 20% to 525,000 tonnes. This is because ICES has assessed the stock situation as being far better than in previous years. The fishing pressure on stocks is estimated to be at its lowest level since 1991.
The advice by organisations such as the Marine Conservation Society, that consumers should avoid cod may have proved to be too pessimistic. Wild caught cod appears to be here to stay. The question is where does this leave cod farming? Or more importantly can cod farming still be profitable?
The question of profitablity can be addressed in one of two ways. Margins can be improved by cutting costs or through well-focused marketing i.e. increase the difference between cost of production and selling price by either lowering the cost of production or by raising the selling price.
Iceland is so much in the news at present that there was almost no coverage of the latest ‘Cod farming in Nordic Countries’ conference that was held at the end of last month in Reykjavik. One of the speakers, Lars Liabo of Kontali Analyse, looked at the question of production costs in cod farming. He estimates that the cost of fishing for wild cod is about NOK 10-15/kg for whole fish. He suggests that cod farmers need to get their production costs down to this level otherwise he says that cod farming will be a risky business. He calculates the current cost to produce a kilo of cod ex-cage is about NOK 25/kg or at least NOK 10-15/kg more than it should be.
Can production costs be reduced to Mr Laibo’s recommended level? Whilst there is no doubt there is scope to reduce the cost of production, the challenges to do so are much greater than they were for salmon farmers. This is because the whole reproductive strategy for cod is much more complex than for salmon. Cod Farming companies may struggle to get the cost down to a similar level as the cost of catching wild fish.
If production costs cannot be reduced sufficiently enough to compete directly against wild fish, there may be more scope to boost the selling price. Although during the course of the history of cod farming, this may not be the best of times to talk about boosting prices. Yet, in this time of the credit crunch, there are still many people who are prepared to pay for premium food.
The Icelandic cod conference included four presentations that focused on marketing and it is probably worth taking a closer look at them:
Agust Torfi Hauksson of the Icelandic company Brim hf looked at the current approach taken to sell Icelandic farmed cod. This is to market farmed cod alongside wild fish with the view that neither is better than the other. The intention is to provide a year round supply to ensure that cod is always available.
The main problem with this strategy is that if neither wild nor farmed is better than the other then, then no-one in the supply chain is likely to want to pay any more for farmed and this means that either production costs must be slashed or that the farmed fish are sold at a loss. This may be acceptable if supplies remain uninterrupted but Iceland is not the only supplier of cod and thus any gaps in supply are likely to be filled from elsewhere. Alternatively, many consumers are now familiar with the idea of ‘previously frozen’ fish enabling any gaps to be filled with ‘thawed’ cod instead. We, at Callander McDowell, cannot see how this strategy will work in the long run.
The second presentation was made by Karin Olsen of the Norwegian Seafood Export Council. Although Ms Olsen’s presentation was entitled ‘the marketing of cod’ its main message focused on a generic approach with a tag line of ‘Norwegian Fresh Cod – The taste of Norway’. Ms Olsen highlighted that there were four distinct types of cod, wild – caught in the cold clear waters of Norway, farmed – farmed in the cold clear waters of Norway, ranched – sea ranched in the cold clear waters of Norway and Skrei - cod from the Barents Sea that becomes the Miracle fish. Unfortunately, Ms Olsen didn’t seem to elucidate as to how these four types of cod would be distinguished in the marketplace nor how they might generate any necessary premium.
The problem with generic promotion is that most consumers don’t particularly care whether their cod comes from Norway or Iceland or even Scottish waters. Cod is cod and just a block of fish flesh irrespective of its origin. This is why Scottish salmon farmers were so reluctant to join in a generic salmon campaign. They believed it devalued their product.
The next presentation was made by Per Gunnar Kvenseth of Villa Organic. This mainly dwelt on all the requirements necessary to produce organic cod. Mr Kvenseth did make the point that these extra requirements added 20-30% to the production cost and there might be concern that consumers would not be willing to pay the extra, especially in the current economic climate. He is right to be concerned. The indications are that some consumers are forgoing the organic principles in favour of cheaper, but still ethical, foods. There must also be a concern about what happened to organic cod producer ‘No Catch’ but it is safe to say that ‘No Catch’s demise was not necessarily due to either the organic ethos nor the higher price and more about their marketing ambitions. Organic cod does however present different challenges to those facing traditional cod producers, but at the same time, challenges that head down a specific marketing route.
The final presentation considered the wider strategy for cod farming including marketing and was given by Sturle Skeidvoll of leading Norwegian cod farming company Cod Farmers ASA. Mr Skeidvoll suggests that generic marketing of an established standard, combined with company/brand marketing telling an individual story, is the winning formula. We, at Callander McDowell, are not so sure however we do agree with Mr Skeidvoll when he added that ‘Going from the production of a basic raw material to customer satisfaction requires the cod farming company to think and act differently’ (if not very differently).
The real problem facing farmed cod is that the cod industry is perhaps being lolled into an almost false sense of security about cod prices. According to Lars Liabo, since 2003, farmed cod have consistently generated a price premium over wild fish as can be seen from the following table.
However, we wonder whether this premium is due to farmed cod’s initial novelty value. This premium may continue whilst volumes sold are so low but if cod farming does take off and large volumes comes to market, we are sure that this premium, based on its farmed origins, will disappear. Certainly, consumers have so far shown little interest in paying more for farmed cod and in every other example of aquaculture, where wild fish do exist, it is they that generate the premium price, no doubt helped by the negative image of aquaculture spread by the environmental lobby. Currently, farmed cod volumes are really too low to make a significant impact on the market so such considerations do not come into play.
The key challenge facing cod farmers will be when volumes start to increase. Does the industry want farmed cod to be perceived as being the same as wild cod or different and, if different, then will the differences provide sufficient incentive to persuade consumers to pay more for farmed cod so it can be produced at the necessary profit?