reLAKSation
74.
Hoodwinked
or handicapped?:
Although the main focus for the Draft Strategy must be to ensure that
aquaculture ventures are economically viable, there has been a long running
debate as to whether Scottish producers are operating on a level playing field
with their overseas competitors. According to the Working Group, “the Scottish
industry contends that its costs are higher than those of its competitors in
other countries.” This is said to “relate to direct regulatory and rental
costs, as well as imposed inefficiencies of scale deriving from regulatory
constraints”. As a result, the Draft Strategy includes Action Point EC2, which
will address the comparative costs of aquaculture production. This study intends
to “either dispel the myths promulgated by inefficient businesses or would
confirm that there are competition problems to be addressed.”
We,
at Callander McDowell, believe that it is too simplistic to suggest that
inefficient business are promulgating a myth that Scottish businesses are
saddled with higher production costs than their overseas competitors. Most
Scottish aquaculture businesses cannot be considered to be inefficient. Instead,
the real issue is the continued inability to generate a price differential
between Scottish and imported salmon. This is because consumers are unwilling to
pay extra for salmon flesh, which they perceive to be no different from that of
imported fish. Rather than address this consumer behaviour, the industry has
blamed low cost imported salmon for eroding the differential. The industry has
argued that these cheap fish are produced at costs well below that of Scottish
salmon.
Unfortunately,
comparative data to either confirm or dispel the myth is extremely hard to come
by. The only publicised study to compare costs between Scottish and Norwegian
producers was undertaken by the Scottish Agricultural College back in 1994.
Comparison
of production costs between Scottish and Norwegian salmon farms during 1993.
Scotland
£/kg
Norway
Smolt
0.28
0.32
Feed
1.04
0.95
Labour
0.31
0.22
Insurance
0.04
0.06
Misc
0.37
0.36
----------------------------------------------------------------------
ex-farm
2.04
1.81
Packing
0.31
0.43
Freight
0.03
----------------------------------------------------------------------
FOB
2.35
2.37
Freight
to
Market
& sales
0.21
0.35
-----------------------------------------------------------------------
Delivered
2.56
2.72
Depreciation
&
Interest
0.30
0.31
------------------------------------------------------------------------
Total
costs
2.86
3.03
Source: Roy Sutherland,
Scottish Agricultural College, Aberdeen.
Interestingly, this data
was presented at an industry meeting in Inverness, immediately after which, a
leading industry figure argued that the data was incorrect. He said that
production costs in Scotland were actually much higher than those in Norway.
When pressed to provide accurate data, this industry spokesperson refused to do
so, claiming any such data was confidential.
Later in 1994,
representatives from the Scottish salmon industry appeared before the House of
Commons Scottish Affairs Committee, who conducted an inquiry into market
conditions in the Scottish salmon industry (HMSO no 370.
5th April 1995). The inquiry was far ranging and included
evidence presented verbally by the Chairman of the now defunct Scottish Salmon
Growers Association. The points raised merit further examination:
When asked how the
Scottish industry copes with competition from Norway in an open market, the
surprising reply was that “We believe that our costs of production are equal
or better than those of the Norwegians. We feel well able to compete with them
in the marketplace.”
When asked for evidence to
substantiate the claim that they were competitive and for cost of production
data, the reply was that “the competitiveness of the industry is well
documented in terms of cost of production in a report done by international
accountants Ernst & Young. This data can be supplied”. The industry
representatives were then asked whether they thought that an independent
analysis of industry costs of production, as takes place in Norway, should also
take place in Scotland? The reply was that the Scottish Agricultural College had
conducted such an analysis. The SSGA Chairman then went on to say that the
industry wished to control the use of these figures, which is not surprising
since they had already claimed that they were incorrect!
The Ernst & Young
report, to which he had referred, was due to be published qt the end of 1994,
but was withdrawn, leaving doubt over the accuracy of the figures it contained.
The final recommendations
made by the Scottish Affairs Committee include:
- There is a need for
unambiguous and comparative cost of production and profitability data for
Scotland and Norway.
- Given the importance to
both the Government and the salmon industry of production cost data in policy
implementation, we strongly recommend that an annual independent cost of
production and profitability survey is established for the Scottish salmon
industry. The survey should be commissioned by the Scottish Office, Agriculture
& Fisheries Department.
This inquiry raised some
key questions about the cost of production data. Certainly, the Committee were
in no doubt that such data should be independently collected, yet seven years
on, there has not been any progress towards a national survey of production cost
data. One reason may be that there has been a reluctance to produce the
necessary figures, possibly because they do not support the case for higher
Scottish production costs.
The only other attempt to
ascribe figures to the cost of production was for an Economic Research Paper.
The investigation was conducted by Public & Corporate Economic Consultants (PACEC)
on behalf of the Scottish Office and Highlands & Islands Enterprise.
Although published in 1999, the data originated in 1996 and is grossed up for
the whole industry, rather than by the cost per kilo figures used by the
Norwegian authorities.
Cost structure of salmon
farming 1996
Total Cost £m
%
Feed 92 37
Staff
34
14
Capital
expenditure
24
10
Stock
22
9
Profit
12
5
Repairs
11
4
Distribution
10
4
Insurance
8
3
Fry
4
2
Vet
4
2
Ground
& Seabed rental
4
2
Fuel
3
1
Marketing
3
1
Rent
& rates
2
1
Other 13 5
----------------------------------
Total
248
100
PACEC/Stirling
Aquaculture. Scottish Office Economic Research Paper No 7.
The Economic Impact of Scottish Salmon Farming.
Not surprisingly, the
PACEC investigators were unable to draw any conclusions from this data,
remarking only that despite the obvious importance, very little data concerning
cost structures has been published.
By comparison, the
Norwegian authorities have been publishing detailed cost of production data for
many years. This data shows a consistent decrease in the cost of production with
improvements in economies of scale, management and feed conversion.
The key question, raised
by the Working Group, is whether the Scottish industry should provide similar
data. The probable answer should be yes, although it shouldn’t make much
difference to the Scottish industry. If such a survey shows that Scottish
producers do have higher production costs, then it makes little sense trying to
compete in the market for raw salmon flesh. Instead, the salmon industry should
invest in product and market development to sufficiently differentiate their
salmon to convince consumers to pay a higher price. If, on the other hand,
production cost data shows that production costs are lower in Scotland than
elsewhere, then the salmon industry should still invest in product and market
development to differentiate their salmon.
The only purpose that such
a survey will accomplish will be to demonstrate how Scottish production costs
data compares with that from overseas. This will aid transparency, but little
else. It makes little difference as to the specific cost of production, the hard
reality is that farms must be economically viable. If producers are unable to
compete in the mass-market production of salmon, then they must look out for
those markets where they can establish their own unique niche.
Open scrutiny:
International aquaculture consultant, Carlos Wurman has said that low salmon
process and oversupply could reoccur at any time. According to Intrafish, Mr
Wurman said that the only way to combat a similar situation is to permanently
scrutinise the market variables and have a good level of communication. However,
he does say that because of the time lag, it is difficult to halt production
that is already underway when evidence of a sluggish market starts to emerge.
This is not a new concept as it also formed the foundation for production control promoted by advocates for a system of Producer Organisations. The intention was to study market conditions then allocate production quotas based on future expectations. However, such a system is doomed to failure because the modern marketplace is simply too complex and diverse to allow accurate forecasts. This can be illustrated by the simple fact that the salmon industry is supposed to have over-produced for several years, but despite this assumed over-production, the industry has continued to grow year in-year out.
The problems of low prices
and over-supply arise from an imbalance between the expectation and the reality
of the marketplace. Continual scrutiny of the market variables will not provide
farmers with the answer as to when to harvest to elicit the best prices.
Instead, the way to ensure that margins are maintained is to invest time and
effort into developing the marketplace.