reLAKSation
77.
Banking on a
restructured industry: Norway’s salmon industry has never lost as much
money as it has in 2002 and consequently many farmers are turning to the banks
for additional financing. According to Intrafish, many of the banks are not
particularly eager to help and as a result, this may lead to extensive
restructuring as companies seek collaboration and partnership. However, if any
shake-up does occur the industry cannot blame the banks because such ensuing
industry restructuring has been both predictable and inevitable.
We, at Callander McDowell, have
previously argued that as the volume of salmon production increases, prices will
inevitably decline. As they continue to do so, it is of little surprise that
many farmers have experienced problems with liquidity and shrinking equity.
Unfortunately, as the potential to cut production costs has shrunk, this has
become an increasing problem.
Back in 1989, when prices first
started to fall, there was significant scope for cutting production costs. High
prices meant that farmers had little incentive to cut production costs, but as
prices began to fall after 1989, then cutting production became a priority.
Significant attempts were made to improve mortality rates, feed conversions,
wastage and general management techniques and as a result, production costs fell
considerably so that farmers were able to maintain their margin as prices
declined.
In addition, farms grew in size
as companies took advantage of the economies of scale. This occurred through
organic growth or by absorbing the smaller uneconomic farms into the larger
companies.
As the continuing decline of
salmon prices starts to reach the point that no further improvements in
production costs can be made, farmers need to seek alternative ways in which
they can maximise their profitability. Certainly, further industry restructuring
will be a priority as companies look for additional economies of scale. It is
likely that the small to medium sized companies will be unable to survive unless
they collaborate to form competitive units or develop their own niche
specialisation. However, the greatest scope for improved profitability must come
by moving operations further along the supply chain. This is a subject we have
discussed before and one which will be discussed again and again.
Learn by example:
“Many farmers have said that there is not enough profit to stay
in business” so reported the BBC TV programme Countryfile. However, this
referred to farmers within the wider livestock sector than those working in the
aquaculture industry. Beef farmers are unhappy that topside beef is retailing at
£6.50/kg whilst they receive only £1.70/kg. Middlemen are taking up to 75% of
the available profit.
Some farmers have begun to
recognise that they cannot wait for changing conditions to occur if they wish to
remain in business and that they must start to take hold of their own destiny if
they want to survive. The programme looked at one farmer from Powys in Wales,
who had learnt to become a butcher so he could process his own meat. As a
result, his profit had increased by a third.
A representative from the Farm
Retail Association said that there was a sea change in attitude as farmers began
to recognise that they had to control supply from “pasture to plate”. He
reiterated the early view that farmers who processed their own pigs were making
as much money from slicing up and selling one leg of pork at a farmer’s market
as they would from selling a whole pig to a wholesaler.
Of course, it is not easy to make a direct comparison between a single livestock farmer and the multi-national salmon industry however, lessons from the intensive broiler producers have clearly shown that farmers cannot rely on selling salmon flesh to make a profit. There is no simple answer as to what individual producers should do, as every farm is different. Yet, there is a clear lesson to be learnt from this Welsh farmer that the best way to increase profitability is to become proactive in the marketplace. Surely, it is better that he controls his own destiny rather than allow market forces to dictate the viability of his business.
The salmon
industry has experienced similar problems of low prices and poor
profitability as the livestock farmer, but any suggestion of adding value to
salmon has largely been resisted or ignored. Prices are likely to continue their
downward trend and the key question will be how far will prices decline before
the salmon industry begins to recognise that future profitability does not lie
in selling whole fish.
Extinction or
Proliferation: Angus Grains, Chairman of the European Salmon Producers
Group, claims that the Scottish industry now faces “extinction” unless the
European Union urgently reinstates dumping controls. According to Intrafish, Mr
Grains said that the European market would be flooded with cheap imports from
Chile, Norway and the Faeroes.
This is a recurring complaint,
which the EU now appears to consider unjustified. Certainly, evidence of cheap
imports are hard to find in the retail sector for when price discounting does
occur, as it does at present, imported salmon is not being sold below the price
of Scottish fish, but rather at exactly the same price.
However, even if a price
differential between imported and Scottish fish was apparent in the marketplace,
the Scottish industry has little to complain about for they have always argued
that consumers are prepared to pay a premium price for Scottish salmon. This
implies that imported salmon will always be cheaper than Scottish fish. The fact
that most Scottish producers are unable to generate any premium is one of the
main reasons why they believe that they now face extinction.
However, demands that dumping
controls be reinstated are not the answer. Such controls are an artificial
attempt to regulate the market price, but they are not a long term solution to
low prices. The reality is that the market for salmon is changing. The retail
sector today is very different to that when salmon were first put to sea back in
the 1960’s. It continues to evolve in line with changing consumer needs and
the fact is that the salmon industry must evolve with it. The call for the
reinstatement of dumping controls is simply an attempt to resist these changes,
retaining salmon’s former image.
Instead of using trade
legislation to help improve profitability, the salmon industry may be better
served by following the example of the Welsh livestock farmer and seeking to add
value to their salmon flesh. Certainly, evidence from the retail sector shows
that sales of added value products is increasing rapidly as consumer seek to buy
foods that increasingly reflect their changing lifestyle. These changes
represent an opportunity to develop the marketplace rather than any threat of
extinction.