reLAKSation 70.

Licenced to produce:  The Norwegian Fish Farmers Association, FHL Havbruk, is not pleased that the Minister of Fisheries, Svein Ludvigsen, is planning to issue 50 new aquaculture licences in 2003. FHL Havbruk chairman Lisbeth Berg-Hansen has said that however well intentioned, the timing is utterly wrong. FHL Havbruk sent a letter to Intrafish outlining the reasons for their concern. This highlighted three key points:

- The industry is engaged in intermediate stage discussions with the EU about extension of the Salmon Agreement and the issue of new licences may suggest the intention to expand production outwith the agreement.

- The profitability of the industry is such that companies should improve profitability before considering new licenses.

Yet, it may be argued that these three points are interrelated, highlighting more fundamental and underlying issues. These may be summed up as the lack of any clearly defined market strategy aimed at establishing a route to profitable market growth. Yet, it may be the lack of such a strategy, which is the main reason why FHL Havbruk is so unwilling to welcome new licences. This is despite the fact that no one is forcing any salmon company to take up the licenses and put fish to sea. Clearly, those companies which opt to invest in these licence concessions must believe that they will have a market for their fish and that they can be profitable. The provision on new licences does not have to reflect the overall state of the industry, but rather the ability of individual companies to develop their own market strategy.

This is the underlying problem affecting the industry today. There is a reliance on selling raw salmon flesh, either as whole fish or fillets, yet these products offer little potential for boosting margin. Consumers are unwilling to pay extra for products that have no added value, but they are prepared to pay more for those products which do. However, to benefit from extra margin, salmon farming companies need to invest in market and product development. This is also relevant to the EU market, since value added products fall outside the EU salmon agreement. Expanded production could therefore be absorbed into the market without competing directly against salmon produced inside the European Community.

It is unfortunate that FHL Havbruk has expressed concern about the award of new licences for they come at a time when the salmon industry is facing many new opportunities. We, at Callander McDowell, have suggested before that the possible restrictions or even closure of white fish stocks mean that consumers will be seeking value for money alternatives. Salmon already fulfils this requirement as the huge growth in consumption has clearly demonstrated. The salmon industry needs to capitalise on this growth to meet changing consumer requirements. Hopefully, FHL Havbruk will capitalise on this potential rather than argue that the Fisheries Minister has misjudged the timing of the licences. Perhaps he should be credited with more vision than his critics would propose.

Panning the Pan! The recent financial problems experienced by Pan Fish could be providing some industry commentators with confirmation that the aspirations of some companies are just not compatible with profitable salmon farming. Certainly those who are pursuing dumping actions in Europe and the US would argue that salmon farming has grown out of control and that those expanding too rapidly into large multi-national companies are now starting to pay the price. However, those who are prepared to advocate such a view would be wrong.

Salmon are an ideal species for large-scale production and further expansion should be encouraged to provide consumers with a ‘value for money’ alternative to depleted supplies of cod and haddock. Large companies are able to benefit from the economies of scale and thus should be well placed to meet consumers changing demands, but clearly Pan Fish has failed to meet this challenge.

In this case, it is not that Pan Fish has grown too rapidly, but rather that they have failed to adapt to the changing marketplace. Companies like Pan Fish have sought to fund their expansion through stock market listing, but have failed to deliver the results to the shareholders. This is because they have based their forecasts on the expectation of higher salmon prices, but as we, at Callander McDowell, have repeatedly stated the overall price trend has been downwards and that higher prices are a thing of the past. With profitability forecasts based on much higher price levels, Pan Fish has seen its income drop.

Pan Fish Chief Executive, Arne Nore has consistently tried to talk prices upwards, but his expectation has never materialised.  Regular readers may be reminded that we highlighted in reLAKSation No 64 (see our website) that back at the beginning of July, Norsk Fiskerinaering reported that Arne Nore amongst others, tipped prices to rise strongly in the third and fourth quarters of 2002. They forecasted that prices would rise to NOK 26.14 and NOK 27.16 respectively but reference to Intrafish prices show that prices have just cleared NOK 20, far short of their fourth quarter expectation.

If Pan Fish survives its restructuring, what can they, and similar companies, do to ensure that this situation is not repeated? The answer lies in adding value. Salmon flesh has become a commodity product with prices remaining at a relatively low level. The solution must be to add extra value to the salmon to persuade consumers to pay a higher price. Of course, there is extra cost in adding value but if companies can find the right product, there will be plenty of margin available to boost overall profitability.

In the past, some salmon farming companies have argued that their expertise has been in rearing salmon and not in added value processing. Equally, they have argued that such ventures can be extremely costly. This could well be the case or not, but if such large companies want to remain profitable they must adapt to the changing marketplace otherwise risk following in the Pan Fish experience. There are several different strategies, which companies could pursue, some of which negate the arguments about experience or cost.

Whilst there might be a place for small salmon companies producing quality salmon flesh, the future of salmon farming is with the large integrators, but they must be prepared to take up the challenge, not just mirror the aims of the smaller producer, but on a larger scale.

Back to reLAKSation