reLAKSation 39.
Price special: Dutch bank Rabobank has told IntraFish that salmon prices are still showing no sign of any recovery. The bank has pointed out that the current price around NOK 15.2/kg is the lowest for the last three years and it may not yet have bottomed out. This is contrary to their expectation that prices would show a faster recovery averaging out during 2002 at NOK 22/kg.
Rabobank analysts now expect prices to remain low until the summer, although some signs of recovery might start at Easter. As a result, they have downgraded their forecast for this year to between NOK 18-19/kg.
We, at Callander McDowell, are not yet convinced. The traditional market for salmon used to experience two significant price rises during the year. The first was in the run up to Easter and the second, which tended to be the more sustained, in the run up to Christmas. It is therefore not surprising that Rabobank expect to see prices start to improve then and rise in the months leading up to December.
However, as production has expanded, these price peaks have diminished. This is because the traditional peaks of demand during Easter and Christmas have been eroded by falling prices. Instead of buying salmon for just these special occasions, consumers recognise that low prices mean that salmon is now an affordable every day meal option.
It is the low price of salmon, which is now driving the market and there is no evidence to suggest that the many consumers who are motivated to buy salmon because of the low price, will do so if prices rise as predicted. Prices of raw salmon can therefore only remain low.
Of course, we do not expect prices to show no variation on the overall downward trend. Prices will show some increase due to the influence of localised supplies. However, any changes will not be sustained.
Analysts at Rabobank have said that their expectation of price recovery is based on a healthy demand for salmon, a decline in the cost of production brought about by fewer larger producers and the destruction of up to 16 million smolts in Chile.
Yet, as we have already suggested, the healthy demand is driven by low prices and should the price rise, consumers may well be deterred from buying salmon so keeping prices low. Larger and fewer producers with low production costs indicate that these low prices can be better sustained into the future.
It is the third measure, which leads us at Callander McDowell, to express doubt about any recovery. The destruction of 16 million smolts in Chile may be viewed as a way of bringing the market back into balance, but it is one, which is unlikely to work. This is because fish, which are smolts now, are still a long way from market size and therefore will have little influence on the current market. This is not the first time that smolts have been destroyed to try to control the market. In 1996, the Norwegian industry destroyed 40 million smolts as Scottish farmers initiated their dumping action. This large-scale cull did little to help the market or defend the dumping action.
The destruction o f these smolts represents an example of trying to manipulate the price of salmon through production control. Ever since the price of salmon first collapsed in 1989, attempts have been made to return it to former levels. The main proposal aimed to establish a system of Producer Organisations, which would regulate production to a perceived market size. However, this idea remained just a proposal because it was simply unworkable.
Manipulating production to achieve a desired price level is a function of the pr oduction-led strategies, which dominate industry thinking today. These production-led ideas mean that whenever prices are judged to be too low, there are widespread claims of over-production. This is the foundation for which all past attempts to control production have been made.
Yet, whilst there is a direct relationship between production volume and prices, it is clear that the market demand also exerts an influence. This is supply and demand.
Various commentators have argued that the reason prices have fallen is because there is an imbalance between supply and demand. If this is viewed as being akin to a pair of balance scales, then one side is over weighted, the other is light.
This means that if the scales are weighted down in favour of production, then the industry may be perceived as over-producing and it is understandable that farmers might want to cut back to bring supply and demand back into balance.
However, as the industry is so production-oriented, it really never looks at the other side of this imbalance equation. For when production is weighted down, market demand is light. This translates to mean that over-production could equally be viewed as being under-marketing.
Any attempt to bring the supply-demand equation into balance could therefore be tackled from both sides. So whilst farmers believe that controlling production might bring about a price rise, it is also possible that a similar rise might occur if demand was to outweigh supply.
As the supply side of the balance equation is a function of the production-led strategies, the demand side refers to those, which are market-led.
The problem with the marketing concept is that it is not universally understood. Typically, marketing is seen as promotional activities such as TV and magazine adverts, the distribution of recipes and cookery demonstrations. Yet, promotion is just a small part of the marketing mix.
Marketing is really about producing the right product for the right consumers at the right price and at the right time and most importantly, doing it at a profit. The promotion aspect is simply telling these specific consumers about this specific product.
Unfortunately, most of the marketing undertaken by the industry is focused on the salmon they produce, irrespective of whether it is in a form that the consumers actually want or not. This has to change.
To illustrate the difference between the production and market-led approach, it is worth considering how the two strategies might deal with the current low prices.
It does not require any speculation as to how the salmon industry might use a production-led strategy to try forcing prices upwards. This is because some of the large farming companies have independently opted to stop harvesting until prices rise above NOK 20/kg. The problem for these farmers is that they may have a very long wait.
There is no evidence to suggest that prices will rise back up to NOK 20/kg this year. Even Rabobank believe that the average figure will not reach this level and that any real recovery will not occur until the summer.
In addition, these farmers have now made their position clear and public. Buyers know that although these producers aim to hold out, they are also sitting on stock which still require feed and management and will be getting larger and less attractive to the market. Unlike OPEC producers to whom some sections of the industry now allude, farmers cannot sit on their stock indefinitely. Buyers will surely be prepared to hang back in any future buying decision especially at this time of year when prices are usually lower.
In addition, demand for salmon could be obtained from other farmers who are prepared to sell for less than the NOK 20/kg target. For example, Chilean salmon is already on sale in the UK even though the Scottish industry has said that this was not the case.
By comparison, those sections of the industry, which are prepared to pursue a market-led strategy might adopt a totally different approach. There is no simple solution as profitable marketing requires a great deal of research and effort. However, we would like to offer one possible route, although there are no guarantees.
Our suggestion would be to harvest the fish now and send them to be canned. This would take some fish out of production, convert them into a form which is non competitive so exerting no influence on the price of fresh salmon. Equally, canned salmon would have a long shelf life so can be held in storage until required, although we would not recommend that canned salmon be kept as a salmon mountain as occurred back in 1991.
Yet, there is no reason why such canned salmon cannot find a ready market and as an added value product, cannot be sold at a profit.
Canned salmon made from farmed fish is already available in the UK market, even though there is a long and well-established market for canned wild pacific salmon. Currently, both Norwegian and Scottish salmon is available in cans in the UK retail sector. It may come as something of a surprise that premium canned Scottish salmon retails at NOK 236/kg, although this price falls to NOK 181/kg for a double sized can.
Norwegian salmon, canned either as a Norwegian or recognised UK brand, retails at NOK 140/kg.
At the same time whole salmon retails at NOK 56/kg and fillet at NOK 100/kg. However, retail prices are not a realistic reflection of the prices obtained by the farmer. This is why adding value this way is an important way in which margin can be regained. Perhaps other markets may not produce exactly the same returns as in the UK, but there is clearly a potential market to exploit.
Canned salmon is a long way from the question as to whether salmon prices will recover. For those who pursue a market-led strategy, the price of salmon is not as critical, since the salmon is just a raw material acting as a diverse vehicle for improved margins. This must be much more desirable than leaving all the eggs in one basket (or is it fish in one cage!).