reLAKSation 99.
Frozen
to distraction: Intrafish report that a
consortium of seven salmon farming companies in Norway are willing to freeze
substantial amounts of salmon in order to bring the market back into balance.
However, the group want the banks and the feed companies to foot the NOK 90
million bill that the freezing programme will cost. Tarald Sivertsen, spokesman
for the initiative, said that they aimed to begin by freezing 15,000 tonnes and
see what effect such a volume would have on prices, although he was unable to
suggest how high prices might go.
We,
at Callander McDowell, have already expressed our views about this scheme and
these can be found at www.callandermcdowell.co.uk/relaks98.html
. We believe that the low prices which prompted Norwegian producers to consider
this action are due to the unique circumstances resulting from the removal of
the EU salmon agreement. We also believe that given time, the markets will
settle down and prices may strengthen on their own. In fact, this appears to be
already happening. Reference to the Intrafish price guide already shows that
prices have risen to NOK 17.75 without resorting to using
the waiting deep freezers. Possibly, the industry might find that by they
time they reach agreement with the banks and the feed companies, prices may have
reached more acceptable levels. However, we would point out that we are not in
the business of predicting salmon prices and equally such a price rise may not
happen for some time to come.
Should
the freezing programme go ahead, it must be viewed as being nothing more than a
quick fix solution. It does not address the underlying problems which have led
to the current low prices. The producers involved in this initiative told
Intrafish that production grew by 10% a year, whilst salmon consumption had only
increased by 1.5%. They said that “Immediate measures are therefore needed to
achieve a better balance between supply and demand in the traditional market.”
We, at Callander McDowell believe that this statement illustrates the
real problem for the industry for what is the traditional market for salmon?
This can vary considerably from producer to producer. Some might think that this
refers to geographic markets, whilst others believe the traditional market means
the supply of high value luxury product. The problem is that the
‘traditional’ market for salmon has undergone significant change. When the
pioneers of the salmon farming began to put the first fish to sea, they could
not have foreseen by how much the salmon market would change as a result of
their action. If the industry today aimed to supply just the same market as
those pioneers then the market would be suffocating under, not just a mountain,
but a whole mountain range of salmon. Yet, this is not the situation as we find
it. Instead, huge volumes of salmon have been bought by new consumers, who were
never part of the traditional market. The industry has had to respond to these
changes, but many producers who are distanced from the markets, both physically
and emotionally have been slow to recognise the opportunities which the changing
market could bring. Had more time and effort been previously invested in market
development, then the industry may not have had to consider a quick fix today?
Willing
or grovelling?: Tarald Sivertsen, spokesman
for the seven Norwegian salmon companies pushing for a freezing programme, told
Intrafish that action must be taken soon or else risk further dumping
allegations.
He
said that it is absolutely vital that the Norwegian industry demonstrates a
willingness for more efficient market adjustment. If salmon farmers do not make
a concentrated effort to
demonstrate that they want to create a better balance between supply and demand
then they may face new dumping allegations and possible sanctions against low
priced exports.
Yet,
experience prior to earlier dumping complaints has shown that a demonstration of
any willingness to react to what they perceive the European Commission might do,
is a total waste of time.
In
the run up to the 1996 dumping complaint, the Norwegian salmon industry
undertook a number of measures to demonstrate a responsible approach to reducing
the then claimed market imbalance, just as the seven companies intend to do
today. At the time, the Norwegian industry stressed that they were the only
producing nation to take such action.
In
March and April 1995, the Norwegian industry imposed a voluntary stop on feeding
which reduced the production volume by 12,000 tonnes. In November 1995, another
voluntary stop on feeding was undertaken, this time on feeding fish of more than
4kg in weight. This reduced production by a further 10,000 tonnes. From December
5th to 31st, the Norwegian authorities imposed a mandatory
stop on feeding of all fish over 2kg in weight. This reduced production by
another 18,000 tonnes making a total of 40,000 tonnes.
In
January 1996, another compulsory stop on feeding fish of over 2kg in weight was
imposed from 1st to the 15th of the month. By March, this
had reduced production by another 25,000 tonnes making 65,000 tonnes in total.
In March, the Norwegian Government imposed feed quotas of 516 tonnes per
standard fish farm. This removed another 120,000 tonnes out of production during
1996 which ensured that Norwegian production volume decreased from an estimated
405,000 tonnes to 290,000 in that year.
In
total for both 1995 and 1996, Norwegian production volume was deliberately
reduced by 185,000 tonnes and yet the European Commission still imposed punitive
measures against the Norwegian industry in the form of the EU salmon agreement.
Their so-called responsible approach accounted for nothing.
Some
may argue that the reduced volume ensured that the Norwegian industry faced just
the salmon agreement and not more draconian measures, but these were unlikely to
have been imposed because Norwegian salmon imports were so important to the
Danish processing industry and their removal would have been extremely damaging.
The
real problem for the Norwegian industry is that even if they opt for this
freezing programme, there is no guarantee that prices would stabilise. It is
claimed that the reason why prices have fallen is that Norwegian farmers,
released from the constraints of the salmon agreement, have harvested fish to
improve cash flow. What’s to stop farmers elsewhere in Europe, who have
experienced similar problems, from releasing large volumes of fish onto the
market? This would ensure that prices remained low for some time to come. The
Norwegian industry may have now forgotten that salmon prices remained low, long
after the introduction of the salmon agreement, even though Norwegian salmon was
subjected to a minimum price and other export controls. This was due to a the
continuing flow of salmon to market from other European farmers.
A
willingness to adjust production may not enough to either convince the European
Commission of their good intent, or to manipulate prices upwards. The freezing
programme may not be quick fix, which the industry actually want.
No
cod-ing?: The July issue of ‘Fish Farming
International’ contains extensive coverage of a report produced by KPMG Centre
for Aquaculture and Fisheries on behalf of the Norwegian Ministry of Fisheries
evaluating the potential for cod farming. The report concludes that the cod
farming can be profitable, but only under certain circumstances. Does this mean
that the potential for cod farming may have been over-stated?
The
analysis conducted by KPMG appears to suggest that cod farming can only be
profitable if farming companies aim to produce fresh cod of the highest possible
quality which can be sold to the restaurant market. This is estimated to be a
small market sector, yet it is the only sector apparently willing to pay the
high price necessary to offset the high cost of production. In many ways this
emulates the salmon farming industry, which set out to supply fish to the luxury
markets. Unfortunately, there is a significant difference between cod and salmon
farming in that whilst wild stocks may be under threat, there are still
sufficient supplies of wild caught cod to meet consumer demand. By comparison,
salmon was considered to be a luxury species because it had limited supply. The
market for salmon developed in line with the growth of production.
The
KPMG team developed a model for cod farming which they used to calculate
potential profitability. Working on
a sales price of NOK 17/kg, they found that a large production unit could turn
in a result of NOK 5.5 million, however, if the price fell to NOK 14/kg this
positive result would rapidly turn into a loss of NOK 7.2 million. KPMG say that
this emphasises the importance of being able to sell to a high end segment of
the market.
This
may be acceptable if cod production remains small, however, we at Callander
McDowell are concerned that if all the hype is correct, then production will
actually grow. Increased production is a certain guarantee that prices will not
be sustained at the top end of the market and will start to fall. The salmon
industry has demonstrated that there is a clear link between production volumes
and prices. Cod farming will be no different.
One vital lesson learnt from salmon farming is that financial predictions should not be based on the best case scenario, but instead should be calculated using a more realistic vision of the market. Cod are already an established part of the fish market and estimates for the potential of cod farming should really be based on wider consumer market. If cod farmers want to retain their profitability, they must be able to compete against wild caught fish. Any extra obtained from the high end market is then a bonus.