reLAKSation 90.
Solving solvency!: FHL Aquaculture fear that an increase in production capacity, through the allocation of 50 new salmon licences, will have an adverse affect on the cost and profitability of the existing industry and may lead to numerous bankruptcies. According to Intrafish, Chairman of FHL Aquaculture, Lisbeth Berg-Hansen said that she is disappointed that the Government has not grasped the seriousness of the situation and will continue to offer 50 new licences this year. They believe that the Government is more concerned about the short-term budget balance than securing the future of the entire industry.
FHL Aquaculture has asked that this licence allocation should be delayed and that when it does take place, it should be spread over a number of years. Any spread of the allocation would be less likely to upset the market by forcing a sharp rise in capacity over a short period. Such a rise could lead to a serious upset in the market, resulting in lower prices and the possible imposition of trade barriers.
We, at Callander McDowell, wonder whether FHL Aquaculture is over-reacting to the allocation of these new licences. Surely, if the industry suffers from reduced profitability, there is unlikely to be any spare cash available to buy new licences. An industry intent on addressing the problems of low margins is equally unlikely to want to expand production outside current production capacity. Lisbeth Berg-Hansen has suggested that the Government has offered the industry little in the way of help, leaving the industry to develop new initiatives such as leaving feed quotas at current levels and more importantly, destroying excess smolts. Even if the Government offers these licences for sale, why would an industry now destroying smolts consider buying in more production capacity?
Of course, these licences will be available to all and there is a possibility that new entrants might wish to buy up these licences. However, the large amount of negative publicity generated over recent years, together with the low prices and poor profitability are not really an incentive to buy into salmon farming together with all the associated risk. Money invested in a bank deposit account would probably generate a better return.
Finally, there is always a possibility that some sections of the existing industry may opt to buy these licences with a view to leaving the sites dormant in the hope of better times. They then would be better placed to benefit from any improvement in market conditions.
It should not be surprising that FHL Aquaculture have opted to focus on production related issues in response to the current market difficulties. The whole salmon industry has tended to rely on production-led strategies as the answer to the problems of the market place. So far they have yet to work. Perhaps, a more realistic answer lies with those solutions that focus on growing the markets and improving overall profitability.
Clearly, if any company, whether part of the existing industry or a new entrant feels that it can make money through the new licences, then they should be given the opportunity to do so. Any other option must be seen as a giant step backwards.
Conflicting opinions?: Lisbeth Berg-Hansen has already alluded to the various initiatives adopted by the Norwegian industry to help improve profitability. One of these is the destruction of this years smolts, with the aim of reducing future production volume and hence lift prices.
In an interview with Intrafish, Ms Berg-Hansen said that considerable numbers of smolts have already been destroyed on a voluntary basis without the need for an organised initiative. This follows a similar voluntary cull in Chile.
However, we wonder whether it is the fact that prices have remained low that has influenced the decision of many companies to reduce their smolt intake. This is not because it may force up prices in the years to come, but because these companies prefer to ease the burden of poor cash flow and hence reduce their overall costs.
Reducing smolt numbers as a way of firming up prices is not a short-term solution. It might take up to a couple of years before the effects of the lower smolt numbers are reflected in a reduced harvest. Even then, this effect can be quickly negated if too many fish are harvested at the same time, despite lower overall numbers. In addition, reduced volumes may not guarantee higher prices for many consumers buy salmon because of its low price. These consumers could well be deterred from buying salmon, if they think that prices are too high. The industry could find that reduced demand might then force prices back down.
Although FHL Aquaculture has not organised this smolt destruction, leaving it to individual companies to decide whether to destroy their fish or not, such destruction might be seen as an attempt to fix prices.
On the same day as their interview with Lisbeth Berg-Hansen, Intrafish also reported that the Tasmanian salmon producer Tassal and the Tasmanian Salmonid Growers Association have been accused of breaches of the Trade Practices Act. The Australian Competition & Consumer Commission have alleged that Tassal and other salmon farmers arranged to restrict salmon production in an effort to stop a continuing fall in prices.
Some companies are now beginning to realise that salmon prices will continue to remain low, perhaps indefinitely. Some sections of the international salmon industry have previously tried to implement production controls without success. It is unlikely that current attempts will be any more successful. Perhaps the time has come for a different approach?
Radical change: Ole Eirik Leroy, CEO of Leroy Seafoods told Intrafish that 2002 was an ‘annus horribilis’ for the whole Norwegian seafood industry but he believes that better times will come, although not without radical change. Mr Leroy expects sweeping changes to affect the salmon industry over the next 18 months.
We, at Callander McDowell, would agree with Mr Leroy although we cannot be sure about the time scale. We have always been convinced that change is essential to safeguard the future of the salmon industry, but the timing of any change is extremely difficult to forecast. However, recent events are likely to force change at a faster rate so that Mr Leroy’s expectation of eighteen months may not be too unrealistic.
Mr Leroy suggests that the industry will restructure but does not elucidate any further other then to say that this will involve reorganisation, consolidation and restructuring. We, at Callander McDowell, believe that we will see an increased move towards full integration with much more emphasis focused on the needs of the marketplace. However, we are not sure whether such change can occur within the space of 18 months. The salmon industry will continue to evolve of a much longer period of time.
However, not all change involves reorganisation or restructuring, there is also a need for a change in approach. The salmon industry still needs to move away from the production-led strategies, which have been the main cause of the continued market disruption and move to those which are much more market-led. This will involve the greatest changes of all, as it requires a completely different mindset. We have yet to see whether or not, this will be one change too far.