reLAKSation 441
No change: There has been a great deal of speculation over the past year as to how US consumption of salmon might be affected by the reduced availability of Chilean salmon, although any anticipated difficulties have been offset in part by the resurgence of Norwegian salmon in the States. According to IntraFish, data from the US National Marine Fisheries Service shows that salmon imports in 2009 were largely unchanged from 2008.
However, whilst the overall volume of imports remained the same, imports of fresh salmon fillet fell from 86.2 to 71.2 million kilos despite increased exports from Norway (2.2 to 18.6 million kilos) and Scotland (1.7 to 4.6 million kilos). Imports of whole salmon from Europe also increased.
The key question for salmon producers is whether the volume of salmon brought into the US was set to match consumer demand or whether consumption was restricted by the amount of salmon available? This is fundamental to understanding what will happen to the salmon market once production of Chilean salmon recovers. If the size of the market is being dictated by the availability of salmon then the market should continue to grow as more and more salmon becomes available but if imports are set at as much as the market currently wants, then there will be real problems for salmon producers in the years ahead. Norway appears set to establish itself as a permanent supplier to the US market which has previously been dominated by the Chilean industry. As more salmon becomes available there will be an increasing possibility of a market clash.
The omens do not look encouraging. This is because whilst salmon imports have held relatively steady (not accounting for differences in the type of presentation imported), figures for all seafood imports have fallen to their lowest level since 2005. Total imports for 2009 were 2.3 billion kilos as compared to 2.42 billion kilos in 2008.
However what is of concern is that in the past there appears to be a correlation between import levels and per capita consumption. In 2005 when imports were 2.39 billion kilos, consumption was 16.2 pounds per person. In 2006, imports stood at a record 2.5 billion kilos and consumption rose to 16.5 pounds per person. Consumption fell to 16 pounds per person in 2007 as imports fell to 2.45 billion tonnes. However, in 2008 consumption rose to 16.3 pounds per person despite a further fall in imports to 2.42 billion kilos. IntraFish report that consumption figures for 2009 will not be released until the summer so it is not yet clear whether 2008 was an anomaly or part of a changing pattern.
Until 2008, it could have been said that as more salmon becomes available, then the likelihood would be that the market would expand but now it is not so certain. There is always the possibility that the salmon market might have grown as much as it can although price may have some effect. It was always expected that as salmon prices increased due to its reduced availability, the market would shrink. Once availability starts to increase, the expectation is that prices will fall. This will have a positive effect on demand and the market will grow. This will probably be at the expense of other fish species.
Currently, although imports have fallen, the retail sector is experiencing increased sales. Seafood Source report data from the Perishables Group that shows sales of fish have increased by 6% to November 2009 with tilapia sales up nearly 15%. However, these increases are attributed to consumers eating at home more and eating out less so any improvement is likely to be matched by a decline in food service sales. In the same way, the overall market appears to be static and wins on one area are countered by losses elsewhere.
In the case of salmon imports, it appears that future gain and loss balance will be between salmon of Chilean and Norwegian origin with salmon from elsewhere filling in the gaps. The market used to be dominated by Chilean fish but the problems in Chile have provided an opening for Norwegian fish. As Chilean fish comes back to the US in larger volumes, the battle of which origin will dominate will be fought over price…. unless the market can be further developed and expanded.
Past statistics suggest that the market is not showing any real growth. In our view, this is because most attempts to expand the market ignore the vast majority of US consumers, who in most cases don’t eat fresh fish We have argued in a previous issue of reLAKSation that the fish and seafood industry appears keen to persuade consumers to buy what it wants them to buy rather than ask consumers what they want and then consider producing it for them.
Many years ago, we suggested that if it means that we should put salmon into fish fingers in order to expand the market then we should do so. We were almost accused of heresy for this idea, yet now salmon fish fingers can be found in the freezer cabinet of supermarkets in both the UK and France. In the same vein, the salmon industry should be asking US consumers what sort of products they like to buy and produce similar offerings made from salmon.
The US salmon market in years to come is not about were salmon comes from. Most consumers don’t care anyway. Instead it will be about how the salmon industry can meet the demands of new consumers because it is clear that the alternative will be a shrinking market. It is only necessary to look at the current trends to see where the future is headed.
In the red corner!: The cod farming industry received some good news this week with the decision by Carrefour Spain to opt for farmed cod over wild. Carrefour buyer Angel Adrados Sanz told IntraFish that whilst wild cod is cheaper at the moment, farmed cod has a stable price, good quality and is available all year. Last year, Spain imported 700 tonnes of farmed cod from Norway.
However this news may not be as good for cod farming companies as it first seems. Mr Sanz said that sales of farmed cod will ultimately depend on the availability of hake, which is the most popular fish with Spanish consumers. If hake is in short supply then more consumers will be willing to buy cod. Unfortunately, Mr Sanz seems to suggest that hake catches are on the increase and thus sales of farmed cod may suffer as a result.
As we mentioned above Mr Sanz also referred to the stable price of farmed cod, yet cod prices have been very low during 2009 making the fish more attractive to buyers but certainly not to producers. The cod farming industry should be hoping for a price premium rather than stable low prices. Carrefour and other retailers may not be so willing to opt for farmed cod if prices should go up.
Mr Sanz said that Carrefour is very positive about farmed cod but he also expressed concerns about the future of cod farming. He is not the only one.
The recent cod conference ‘Sats på Torsk’ produced a lively debate between Karl Peter Mykleburst from the bankrupt Nærøysund AS and Hogne Bleie of Atlantic Cod Farms as reported by both Kyst.no and IntraFish.
Mr Mykleburst said that it will be ten years before the cod farming industry might be profitable. He thinks that whilst there have been huge improvements over the last ten years, the industry expanded too quickly and spent too much. Whilst farmed cod has been well received, the cost of production has been too high and the price received too low. The resulting lack of profitability has meant that further investment has dried up and therefore companies like his have become bankrupt.
By comparison, Hogne Bleie said that he had come to a conference not a funeral. He argues that never before have consumers eaten so many farmed cod that have been produced at such a low cost with more predictable production and harvested and delivered so consistently. Mr Bleie hopes that by maintaining their current strategy, Atlantic Cod Farms should be able to reduce production costs to just NOK 15/kg by 2014. He said that the company had no intention of changing its plans.
Before we discuss the implications of these views on the cod farming industry, we would first take a closer look at some of the facts and issues presented during the conference. IntraFish report that there are about 25 companies still farming cod but just five are responsible for 95% of the biomass. According to Tor Műhlbradt of Innovation Norway, the average cost of production is NOK 32.50/kg with Jørgen Borthen of the Norwegian Seafood Centre suggesting that it ranges from NOK 19/kg to over NOK 60/kg for some companies. By comparison, prices were down to around NOK 18/kg down from NOK 27/kg last year. It doesn’t take a mathematician to see where the underlying problem lies
Mr Műhlbradt added that in some countries, customers are willing to pay up to NOK180/kg excluding tax for farmed cod but that any profits from such high prices disappear throughout the supply chain. We, at Callander McDowell, have rarely seen cod selling at this price so do not expect it to be representative of what cod producers could receive. Back in 2008, we recorded Skrei cod selling at a similar price in Selfridges in London but this was during a special promotion of Norwegian produce in what is not a typical outlet for selling fish.
More telling is that Mr Bleie said that whilst he is optimistic for the future, the main problem is the spot-market with its current low prices. However, he said it is worth remembering how low salmon prices went in 2003 and 2004 and to consider where they are now. Mr Bleie implies that the low prices are part of a cycle which will eventually bring the return of higher prices. We are not so sure.
2003 and 2004 are certainly years that we remember not only because salmon prices were so low but also because they were used as evidence in the subsequent trade dispute between Scotland and Norway. The reasons why salmon prices dipped to such low levels in 2003 and 2004 are very different from the reasons why cod prices are currently so low. Salmon prices fell because artificial barriers on salmon sales imposed by the EU had been lifted. This caused a rush to harvest fish to bring in much needed cash and with too many fish reaching market at exactly the same time, prices collapsed. This is very different to the current situation for cod. Salmon prices eventually recovered after the trade war came to an end. We do not believe that there is such relief in sight for cod farmers.
The press reports from the ‘Sats på Torsk’ conference suggest that the main discussions focussed on the various issues as to why the cod farming industry is experiencing difficulties at the moment but failed to consider the fundamental reasons why the industry is in such dire straits.
The industry can discuss issues such as production costs, disease, production planning etc ad infinitum but none will solve the current difficulties. This is because the fundamental problem with cod farming now is the market and only a market based solution will bring any relief. Reducing production costs, minimising disease, improved planning all may help reduce the pain but they won’t address the underlying issues.
The mid 1960’s saw the birth of the modern marine fish farming industry with parallel ventures farming salmon in both Scotland and Norway. Cod was a much more popular fish than salmon with a much larger market potential yet salmon was selected as the first candidate species. This was because they were considered a luxury fish. They were perceived to be easier to grow. They required a much simpler hatchery system and could be fed dried much earlier in their lifecycle but most important of all, there were plenty of wild cod in the marketplace and they were cheap to buy. It just didn’t make economic sense to consider farming cod.
This view of cod farming didn’t really change over the next thirty years. Cod were abundant and cheap. During this time there were one or two attempts trying to ranch cod but there was no clear financial benefit to be had.
What changed everything for cod farming were the dire warnings of an imminent collapse in wild cod stocks. The various environmental groups repeatedly accused the fishing industry of over-fishing warning that continued fishing effort would bring about the early demise of wild cod. Consumers were told to stop eating cod and find more sustainable alternatives.
Suddenly, the economics of cod farming began to make sense. The disappearance of wild cod from the marketplace would force up the price of what little cod that could be produced by farming. The high cost of production would be more than offset by high market prices. Even if many consumers sought alternative fish species, there would still be a core market which would be prepared to pay a premium to continue buying cod. Cod farming got the green light.
What has gone wrong for cod farming is that the dire predictions of gloom and doom for wild cod never materialised. This could be in part due to the reduced demand for cod resulting from those who heeded the original warnings enabling cod stocks to recover much quicker than anticipated or it may have been that the original warnings were simply ill-conceived.
The problem for cod farmers now is that the market is little different from before the warnings were issued. There is still plenty of cod available and it can be bought for a relatively low price. If cod farming wasn’t economically viable previously, then why should it be now? The market is the same. The best cod farmers can hope for is that stocks of wild cod should still collapse but this is unlikely to happen, not least because demand for cod has fallen as consumers recognise that there are other fish in the sea!
No amount of cost reduction will make the stocks of wild cod go away. Cod is likely to remain a cheap fish in a competitive market for sometime to come.
We have repeatedly suggested in previous issues of reLAKSation that the only solution left to the cod farming industry is one that is market-led. As time has passed, we are not even sure that such a solution will work for what’s left of the industry although it still may work for one or two of the surviving companies.
Now Henrik Andersen of Cod Farmers agrees. He told a meeting at ‘Sats på Torsk’ that cod farming must have a clearly defined market strategy that differentiates farmed cod from the wild fish. Mr Andersen also said as it costs more to produce farmed cod it is important to get a better price for it. As we have repeatedly suggested, margins can be expanded at both ends. It is clearly essential to reduce the cost of production, but it is also key to improve the price. This would be part of the market strategy.
Whilst some cod farming companies are always in the news, some have kept a lower profile. We cannot say whether any company has adopted the right sort of market strategy to point them into the future. Current financial results would suggest not but we may be wrong.
By co-incidence Cod Farmers have just reported their fourth quarter results with a loss of NOK18.7 million as compared to NOK3.2 million in the same period last year. According to their financial report, Cod Farmers investment in product development and distribution should gradually take them out of the same spot-market that Hogne Bleie of Atlantic Cod farms sees as so negative. Meanwhile, Cod Farmers report that they have achieved an average sales price of NOK24.1 kg which is 8% above the average price for both farmed and wild cod and this confirms their marketing strategy.
We wouldn’t want to take anything away from anyone who can achieve a premium over the average even if their average price is well down on the NOK 31.3/kg that they reported in the same period last year. However, it is worth considering that the Scottish producers achieve a margin of around 25% for Label Rouge salmon. A similar margin would have brought the price of farmed cod to around NOK28/kg but this is not going to happen unless cod farming companies can successfully differentiate their cod from the wild fish so that buyers and consumers understand what benefits the higher price brings. Meanwhile Cod Farmers are hopeful that prices will strengthen over the next couple of years. This will only happen if either the wild catch declines or demand recovers.
Cod farming companies can continue to focus on the production issues as a way of relieving their current problems but they will never be resolved until the focus changes to the market. This is where any solution will be ultimately found.